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What Is the Glass-Steagall Act?

What Is the Glass-Steagall Act?

In 1933, in the wake of the 1929 capital market crash and during a nationwide commercial bank failure and the Great Depression, two members of Congress introduced an act, distinguished today as the Glass-Steagall Act (GSA), that would separate investment and commercial banking activities.

At the time, improper banking vim–the overzealous commercial bank involvement in stock market investment–was deemed the main culprit of the financial crash. It was allowed that commercial banks took on too much risk with depositors’ money.

Additional explanations for the cause of the Accomplished Depression evolved over the years, which led many people to question whether or not the Glass-Steagall Act hindered the establishment of fiscal services firms that could equally compete against each other.

Key Takeaways

  • The Glass-Steagall Act was passed in 1933 and codified investment and commercial banking activities in response to the commercial bank involvement in stock market investment.
  • This mixing of commercial and investment banking was considered to be too hazardous and speculative and widely considered to be a culprit that led to the Great Depression.
  • Banks were thus given the mandate to settle upon either commercial banking or investment banking; however, an exception allowed commercial banks to underwrite government-issued cements.
  • The Gramm-Leach-Bliley Act eliminated the Glass-Steagall Act’s restrictions against affiliations between commercial and investment banks in 1999, which some dissuade set-up the 2008 financial crisis.

Glass-Steagall Act (GSA)

What Did the Glass-Steagall Act Do?

Commercial banks were accused of being too iffy in the pre-Depression era because they were diverting funds to speculative operations. Thus, banks became greedy, bewitching on huge risks in the hopes of even bigger rewards. Banking itself became sloppy, and objectives became blabbed. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those even so stocks.

Senator Carter Glass, a former Treasury secretary and the founder of the United States Federal Reserve Procedure, was the primary force behind passing the Glass-Steagall Act along with Henry Bascom Steagall. Steagall was a member of the Organization of Representatives and chair of the House Banking and Currency Committee. Steagall agreed to support the act with Glass after an remedy was added permitting bank deposit insurance, which was responsible for creating the Federal Deposit Insurance Corporation (FDIC).

In reaction to one of the worst financial crises at the time, the Glass-Steagall Act set up a regulatory firewall between commercial and investment bank activities. Banks were certainty a year to choose between specializing in commercial or investment banking. Only ten percent of commercial banks’ total gains could stem from securities; however, an exception allowed commercial banks to underwrite government-issued bonds.

The law entrusted the Federal Reserve to regulate retail banks, to introduce the Federal Open Market Committee, and ultimately, better carry out monetary policy.  

Financial giants at the time, such as JP Morgan and Company, which were seen as part of the trouble, were directly targeted and forced to cut their services and thus, one of the main sources of their income. By creating this ha-ha, the Glass-Steagall Act was aiming to prevent the banks’ use of deposits in the case of a failed underwriting job.

The Glass-Steagall Act was also passed to encourage banks to use their funds for fit rather than investing those funds in the equity markets. This was intended to increase commerce. However, the demands of the act were considered harsh by most in the financial industry, and it was very controversial.

The Act was signed into law by President Franklin Delano Roosevelt on June 16, 1933, as constituent of the New Deal. It became a permanent measure in 1945.

Further Regulations on the Banking Sector

Despite the lax implementation of the Glass-Steagall Act by the Federal On call Board, the regulator of U.S. banks, Congress made a further effort to regulate the banking sector in 1956.

In an effort to prevent fiscal conglomerates from amassing too much power, the Bank Holding Company Act focused on banks involved in the insurance sector. Congress agreed that endurance the high risks undertaken in underwriting insurance is not good banking practice.

Thus, as an extension of the Glass-Steagall Act, the Bank Restraining Company Act further separated financial activities by creating a wall between insurance and banking. Even though banks could, and but can, sell insurance and insurance products, underwriting insurance was forbidden by this legislation.

The 1999 Repeal and the Gramm-Leach-Bliley Act

The limitations inflicted on the banking sector by the Glass-Steagall Act sparked a debate over how much restriction can be considered healthy for the industry. Many demonstrated that allowing banks to diversify their activities offers the banking industry the potential to reduce risk. They make a cased that the restrictions of the Glass-Steagall Act could actually have an adverse effect, making the banking industry riskier measure than safer. Furthermore, the transparency measures of big banks lessen the possibility that they will assume too much danger or that they will be able to cover up unsound investment decisions.

To the approval of many in the banking industry, Congress annulled the Glass-Steagall Act in November 1999. The establishment of the Gramm-Leach-Bliley Act, or the Financial Services Modernization Act, eliminated the Glass-Steagall Act’s restrictions against affiliations between commercial and investment banks.

The 2008 Fiscal Crisis

After the passing of the Gramm-Leach-Bliley bill, commercial banks resumed taking on risky investments in order to aid their profits. Many economists believe that this increase in speculative and risky activities, including the get to ones feet in subprime lending, led to the 2008 financial crisis.

Despite its tendency to be scapegoated, proponents of the repeal argue that the Glass-Steagall Act was, at scad, a minor contributor to the most recent financial crises. Instead, they claim that at the heart of the 2008 danger was nearly $5 trillion worth of basically worthless mortgage loans, among other factors. Although the nullify allowed for much bigger banks, it can’t be blamed for the crisis.

Impact of the Glass-Steagall Act

The immediate impact of the Glass-Steagall Act was to restore the unshrouded’s faith in the banking sector after the great depression. Individuals were wary of keeping their money in banks that choice squander it away on risky investments, which the act prevented.

The long-term impact of the Glass-Steagall Act depends on which school of remunerative thought you follow. Some economists believe that it hamstrung the commercial banking sector until its repeal and aborted economic growth. Others believe that it prevented market volatility and aided the prosperity of the post-war years.

What Was the Use of the Glass-Steagall Act?

The Glass-Steagall Act was intended to separate investment and commercial banking activities. It was established in the wake of the 1929 stock bazaar crash.

Is the Glass-Steagall Act Still in Effect?

No. It was repealed in 1999, during the Clinton Administration.

Why Was the Glass-Steagall Act Repealed?

The Glass-Steagall Act was recalled in 1999 amid long-standing concern that the limitations it imposed on the banking sector were unhealthy, and that granting banks to diversify would actually reduce risk. 

The Bottom Line

Many people agreed that the forerunner market collapse of 1932 and the depression that ensued was the result of banks being overzealous with their investments. The fancy was that commercial banks were taking on too much risk with their money, and their clients’ dough.

The GSA made it harder for commercial banks, which were in the business of lending money, to invest speculatively. Banks were reduced to making just 10% of their income from investments (except government bonds). The goal was to put limitations on these banks to forestall another collapse. The regulation was met with a lot of backlash, but it held firm until repeal in 1999.

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