The History and Impact of the Glass-Steagall Act: Separating Commercial and Investment Banking.

Glass-Steagall Act

separated commercial banking from investment banking

The Glass-Steagall Act, also known as the Banking Act of 1933, was a governmental response to the Great Depression that aimed to limit the risks commercial banks took with their customers’ deposits by separating commercial and investment banking activities. The act was passed in the aftermath of the stock market crash of 1929, when banks invested heavily in the stock market and exposed their customers’ savings to the excesses of speculative trading, which contributed to the collapse of many banks and a sharp decline in economic activity.

The Glass-Steagall Act had several provisions. The most important ones were:

1. The separation of commercial and investment banking: The act required banks to choose between being either commercial or investment banks since they could not engage in both activities simultaneously. The rationale behind this provision was to prevent commercial banks from engaging in high-risk activities that could potentially jeopardize the safety of depositors’ funds.

2. The creation of the Federal Deposit Insurance Corporation (FDIC): The act established the FDIC to prevent bank runs by insuring deposits up to a certain amount, thus restoring public confidence in the banking system.

3. Restrictions on bank lending: The act placed limits on how much banks could lend to a single borrower and prohibited them from investing in certain types of securities, such as corporate stocks.

The Glass-Steagall Act remained in effect until its repeal in 1999 when it was superseded by the Gramm-Leach-Bliley Act, which allowed commercial banks to merge with investment banks and other financial institutions. Critics of the repeal argued that it contributed to the financial crisis of 2008 by allowing banks to engage in risky investments with depositors’ funds. However, supporters of the repeal argued that the Glass-Steagall Act had become outdated and that the separation of commercial and investment banking was no longer necessary given changes in the financial industry.

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