The History of Glass-Steagall

This article was written by Phineas Upham

The Glass-Steagall Act is actually comprised of four separate provisions of the Banking Act of 1933. The act is named after the two biggest supporters, Carter Glass of Virgnia, and Representative Henry B. Steagall. The act was the result of Carter Glass’s repeated attempts to pass legislation related to deposit insurance, and the separation of commercial and investment banks.  At one point, his bills were viewed as so controversial that President Roosevelt threatened a veto if they ever reached his desk. However, he did support several provisions designed to protect both banks and consumers.

Eventually, a hybrid form of the bill that supported both small and large banks was passed by Congress in 1933.

The crash of the stock market in 1929 wreaked havoc on the financial system. Roosevelt publicly declared that the financial system had stopped working, and an emergency response was clearly needed after the collapse of more than 9,000 banks in just a few years time.

FDR was working on what we would come to call “The New Deal,” so the act already had some momentum building before it passed. Through Glass-Steagall, the Fed was able to maintain a tighter regulation of the banks belonging to the Federal Reserve System. The act also prohibited the sale of securities by banks, and it created the FDIC insurance that is still in use today.

Unfortunately the act also created restrictions on what banks could underwrite. At the time, this was considered a non-issue, but by the time the stock market crashed in 1929, opinions had changed. The eventual repeal of Glass-Steagall dissolved the separation of commercial and investment banking.

About the Author: Phineas Upham is an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Phineas Upham was working at Morgan Stanley in the Media & Technology group. You may contact Phineas on his LinedIn page.

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