What Was the Glass-Steagall Act?

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The Glass-Steagall Act (GSA), passed through Senate in 1933, instituted the FDIC and bank reforms that gave the Federal Reserve more regulatory power. The act especially targeted imprudent financial speculation. Many provisions of the Glass-Steagall act were repealed in 1999.

The Act was a part of President Franklin D. Roosevelt’s first hundred days in office, commonly called “The Hundred Days.” The Great Depression and accompanying bank failures served as the direct impetus to the Glass-Steagall Act. Commercial banks were charged with unwisely investing depositors' money and engaging in faulty financial speculation. Financial speculation means that the investment includes a risk of loss, such as investments in the stock market or money exchange.

Speculation is a standard financial process, but in pre-Depression era, banks were taking big risks and investing depositor’s assets in unstable stocks. The Glass-Steagall Act sought to correct this practice by separating commercial banks from investment banks. After a year, banks would have to choose whether to assume the role of an investment, or a commercial bank, in which case only 10% of their income could come from securities.


The Federal Deposit Insurance Corporation (FDIC) was added to the bill in order to pull Representative Henry Bascom Steagall on board with Senator Carter Glass, the main proponent of the bill, in approving the Glass-Steagall Act. The FDIC insures checking and safety deposits up to $100,000 US Dollars (USD) per depositor in each member bank. This was particularly relevant to Depression times, as it protected depositors from losing all their money in the event of a run on the bank.

Despite charges that the Glass-Steagall Act’s regulations were too severe and simply reactionary to the Great Depression, the Congress passed an extension to it in 1956 called the Bank Holding Company Act. A bank holding company is any company that owns one or more banks. The Bank Holding Company Act obligated these companies to register with the Fed and gave the Federal Reserve board power to inspect and regulate their activities, especially if such a company owns 25% or more of a banks voting rights. Further restrictions were tacked on to the Act in 1966 and 1970.

The Glass-Steagall Act was in large part repealed in 1999 with the Gramm-Leach-Bliley Act. The Act was pushed through Congress by Representative James Leach and Senator Phil Gramm and made it possible for commercial and investment banks to merge. The Gramm-Leach-Bliley Act also allowed banks to underwrite insurance. Supporters of the bill argued that this diversification of money made loans and investments less risky and that banks would not abuse depositors money because so much of a bank’s success depends on reputation.


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Post 1

As far as I am concerned the repeal of the Glass-

Steagall act in 1999, is in large part responsible

for the financial mess we are now in.

This was like putting the banker fox in the depositors henhouse.

Jerrie Allen

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