Glass-Steagall Act

Question: In the USA, regulations in the past prevented commercial banks, investment banks and insurance companies from encroaching on each other’s territory. What likely consequences emerge now that these regulations are phased out.

In October 1929 the New York stock market crashed, wiping out 40 percent of the paper values of common stock. By 1933 the value of the stock on the New York Stock exchange was less than a fifth of what it had been at its peak in 1929 (Mitchell 2010). Business houses closed, factories shut down and banks failed. By 1932 approximately one in four Americans were unemployed. A Congressional investigation into the causes of the crash concluded that reckless and sometimes fraudulent underwriting of securities and risky loans by commercial banks were to blame (Crawford 2009). To prevent another crash regulators decided that commercial banking had to be strictly regulated, backed by deposit insurance and separated from the risky and speculative business of underwriting and trading in securities(Mitchell 2010). This report will look in particular at the Glass-Steagall Act and how strict financial regulation stabilised the U.S. economy for over 50 years but eventually gave way to technological innovation and competition on the global market in 1999. It will then analyse the significance of Glass-Steagall’s repeal in conjunction with the 2008 global financial crisis, caused in part by 25 years of radical financial deregulation and the lessons for the future. The Glass- Steagall Act was passed in 1933 in response to failure of the banks following the Great Depression. In that time, one out of every five banks failed in the aftermath of the stock market crash. With the intent of forestalling bank runs the legislation created the Federal Deposit Insurance Corporation (FDIC), which guaranteed bank deposits up to $2,500 (later scaled up to $250,000) (Crawford 2009). In return for this insurance protection, the Federal Reserve Bank’s control over...