Glass Steagall Act

Definition: The Glass-Steagall Act, also known as the banking act of 1933, separated investment banking from commercial banking. Investment banks help corporations raise money by organizing the initial sales of stocks, facilitating mergers and acquisitions, and operating hedge funds. Commercial banks take deposits, manage checking accounts and make loans. Commercial banks are protected by the government. Their deposits are insured by the Federal Deposit Insurance Corporation (FDIC), and they are regulated by the Federal Reserve.

Glass-Steagall was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression. In 1933, all U.S. banks closed for four days - when they reopened, they only gave depositors 10 cents for each dollar. Glass-Steagall was part of Roosevelt’s New Deal and became a permanent measure in 1945. It gave tighter regulation of national banks to the Fed, prohibited bank sales of securities, and created the FDIC.

Glass-Steagall was repealed in 1999 by the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act was passed along party lines by a Republican vote in the Senate. The banking industry had been lobbying for the repeal since the 1980s, complaining it couldn't compete with other securities firms. The banks said they would only go into low risk securities, and this would reduce risk for their customers by diversifying their business. By consolidating investment and commercial banks, repeal of Glass-Steagall led to banks being too big to fail. This required their bailout in 2008-2009 to avoid another depression.