Glass-Steagall Act

Definition

The Glass-Steagall Act was a U.S. federal law that established the separation of commercial banking and investment banking. It was enacted in 1933 in response to the stock market crash of 1929 and the Great Depression, with the goal of preventing commercial banks from engaging in risky investment practices that could jeopardize customer deposits.

5 Must Know Facts For Your Next Test

1. The Glass-Steagall Act prohibited commercial banks from engaging in investment banking activities, such as underwriting and trading securities.
2. The act aimed to restore public confidence in the banking system by separating the riskier investment banking activities from the more stable commercial banking operations.
3. The Glass-Steagall Act was a key part of the New Deal legislation introduced by President Franklin D. Roosevelt to address the economic crisis of the Great Depression.
4. The repeal of the Glass-Steagall Act in 1999 is often cited as a contributing factor to the 2008 financial crisis, as it allowed for the creation of large, diversified financial conglomerates.
5. The Glass-Steagall Act was in place for over 60 years before its repeal, and its separation of commercial and investment banking was a defining feature of the U.S. financial system during that time.

Review Questions

• Explain how the Glass-Steagall Act was a response to the Stock Market Crash of 1929 and the Great Depression.
  • The Glass-Steagall Act was enacted in 1933, shortly after the Stock Market Crash of 1929 and the onset of the Great Depression. The act was a direct response to the perceived role that risky investment banking activities by commercial banks played in the economic collapse. By separating commercial and investment banking, the Glass-Steagall Act aimed to prevent commercial banks from engaging in speculative activities that could jeopardize customer deposits and contribute to future financial crises.
• Describe the relationship between the Glass-Steagall Act and the rise of Franklin Roosevelt and the New Deal.
  • The Glass-Steagall Act was a key component of the New Deal, the sweeping economic and social reforms introduced by President Franklin D. Roosevelt in response to the Great Depression. As part of the New Deal's efforts to stabilize the financial system and restore public confidence, the Glass-Steagall Act was enacted to separate commercial and investment banking activities. This separation was seen as a critical step in preventing the kinds of risky practices that had contributed to the economic collapse, and it became a defining feature of the U.S. financial system during the Roosevelt administration and the decades that followed.
• Evaluate the impact of the repeal of the Glass-Steagall Act in 1999 and its potential connection to the 2008 financial crisis.
  • The repeal of the Glass-Steagall Act in 1999 is often cited as a contributing factor to the 2008 financial crisis. By allowing commercial banks, investment banks, and other financial institutions to engage in a wider range of activities, the repeal enabled the creation of large, diversified financial conglomerates. These conglomerates were able to take on greater risks and engage in more complex financial instruments, which some argue increased systemic vulnerabilities and contributed to the severity of the 2008 crisis. The repeal of Glass-Steagall is seen by many as a significant deregulatory move that removed important safeguards and may have played a role in the events leading up to the financial crisis.

Related terms

Commercial Banking: The traditional banking activities of accepting deposits, making loans, and providing basic financial services to individuals and businesses.

Investment Banking: The activities of underwriting securities, trading securities, and providing advisory services for corporate mergers and acquisitions.

Great Depression: A severe and prolonged economic downturn that occurred in the 1930s, characterized by high unemployment, low consumer spending, and widespread business failures.