Table of Contents
- What Is the Glass-Steagall Act?
- Provisions of the Glass-Steagall Act
- Effects on the Banking Sector
- The 1999 Repeal and the Gramm-Leach-Bliley Act
- Financial Crisis After Repeal
- Explain Like I'm Five
- What Was the Purpose of the Glass-Steagall Act?
- Is the Glass-Steagall Act Still in Effect?
- Why Was the Glass-Steagall Act Repealed?
- The Bottom Line
What Is the Glass-Steagall Act?
Let me explain the Glass-Steagall Act directly: it's the 1933 law that made commercial banks stop doing investment banking to shield your deposits from stock market gambles. I see it as a response to the 1929 crash and the bank failures that followed, aiming to keep things stable.
President Franklin Delano Roosevelt signed it on June 16, 1933, as part of the New Deal, and it became permanent in 1945. We repealed it in 1999, but parts like the FDIC, which insures your individual deposits, still stick around.
Key Takeaways
- Passed in 1933, the Act split investment and commercial banking due to stock market involvement.
- Mixing the two was seen as too risky and a key cause of the Great Depression.
- Banks had to pick one: commercial or investment banking.
- The 1999 Gramm-Leach-Bliley Act removed those barriers, and some say it helped cause the 2008 crisis.
Provisions of the Glass-Steagall Act
Before the Depression, banks were diverting your money into risky investments, so the 1933 Act built a wall between commercial and investment banking. Named after Senator Carter Glass—who started the Federal Reserve—and Representative Henry Bascom Steagall, it set clear rules.
Banks had to specialize in either commercial or investment banking, with commercial ones limited to 10% of income from securities, except for underwriting government bonds. It created the FDIC to insure deposits, let the Federal Reserve regulate retail banks, introduced the Federal Open Market Committee for monetary policy, and pushed banks to lend rather than invest in stocks.
Effects on the Banking Sector
Big players like JP Morgan had to slash services and income sources because of this law—it stopped them from using deposits for speculation or bad underwriting. By the 1950s, bank holding companies popped up to dodge branching limits, and the 1956 Bank Holding Company Act defined them as owning 25% or more in multiple banks, giving the Fed more control.
The 1999 Repeal and the Gramm-Leach-Bliley Act
The Act's restrictions sparked debates: some say diversifying reduces risk for you, while others think it held back growth. Economists argue it either stifled banks or stabilized the post-war economy.
In 1999, Congress repealed parts via the Gramm-Leach-Bliley Act, ending bans on commercial-investment affiliations. The FDIC stayed intact.
Financial Crisis After Repeal
Many economists point to the repeal as fueling speculation, like subprime lending, leading to the 2008 crisis. Others say it was minor, blaming $5 trillion in bad mortgages instead.
It came up in Senate hearings after Silicon Valley Bank's 2023 collapse, where heavy investment in insured deposits caused liquidity issues from withdrawals. The Fed stepped in with the Bank Term Funding Program for emergency loans, which ended in March 2024.
Explain Like I'm Five
Think of the Glass-Steagall Act as a 1933 rule stopping banks from mixing everyday banking with risky investments to avoid another 1930s mess. Banks picked one side. Clinton repealed it in 1999, letting them mix again, and some say that helped cause the 2008 crash.
What Was the Purpose of the Glass-Steagall Act?
The purpose was to split investment and commercial banking so banks wouldn't bet your deposits on risky stuff, right after the 1929 crash.
Is the Glass-Steagall Act Still in Effect?
No, the key separation parts were repealed in 1999 under Clinton, but FDIC and some bits remain.
Why Was the Glass-Steagall Act Repealed?
It got repealed because people thought the limits were bad for banks and that mixing activities would cut risks.
The Bottom Line
The Act stopped banks from risky speculation to dodge another Depression, capping investment income at 10%. Critics led to its 1999 repeal under Clinton.
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