Decline of the Glass–Steagall Act

This article is about the decline of the effect of the Glass-Steagall Act from 1935 to 1999 via court cases, regulatory interpretation, loopholes, and repeal. For information and analysis of the legislation content and its 1935 amendment, see Glass–Steagall: legislation, limits and loopholes.

The Glass–Steagall Act was a part of the 1933 Banking Act. It placed restrictions on activities that commercial banks and investment banks (or other securities firms) could do. It effectively separated those activities, so the two types of business could not mix, in order to protect consumer's money from speculative use. The Banking Act of 1935 clarified and otherwise amended Glass–Steagall.

Over time, private firms and their regulators found novel ways to weaken the barriers envisioned in the legislation. Eventually, the protections became very weak.

From its start, there were many economists, businessmen, and politicians who did not find the restrictions to be productive, and wished to do away with them altogether. It took about 66 years, but the legislation was eventually completely repealed. Subsequent financial crises have resulted in attempts to revive the legislation, and even make it stronger than originally envisioned.

Commercial banks withdrew from the depressed securities markets of the early 1930s even before the Glass–Steagall prohibitions on securities underwriting and dealing became effective. Those prohibitions, however were controversial. A 1934 study of commercial bank affiliate underwriting of securities in the 1920s found such underwriting was not better than the underwriting by firms that were not affiliated with banks. That study disputed Glass–Steagall critics who suggested securities markets had been harmed by prohibiting commercial bank involvement. A 1942 study also found that commercial bank affiliate underwriting was not better (or worse) than nonbank affiliate underwriting, but concluded this meant it was a “myth” commercial bank securities affiliates had taken advantage of bank customers to sell “worthless securities.”

In 1935 Senator Glass attempted to repeal the Glass–Steagall prohibition on commercial banks underwriting corporate securities. Glass stated Glass–Steagall had unduly damaged securities markets by prohibiting commercial bank underwriting of corporate securities. The first Senate passed version of the Banking Act of 1935 included Glass’s revision to Section 16 of the Glass–Steagall Act to permit bank underwriting of corporate securities subject to limitations and regulations.

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