Banking Regulation and the Glass-Steagall Act of 1933

The Glass-Steagall Act, which Congress passed in 1933, sought to cure the excesses that spurred the Great Depression. The legislation also sought to restore the nation's faith in banks. During the 1920s, banks served as underwriters on securities, and many lost millions in speculative ventures. Banks extended themselves into so many areas that they could not weather the economic downturn. As Americans hoarded money, banks simply ran out of capital, prompting numerous ôrunsö and bank failures. That lack of liquidity helped turn a recession into the Great Depression (Campagna, 1987, pp. 101-113).

To restore confidence, Glass-Steagall established the Federal Deposit Insurance Corporation, which guarantees deposits in insured banks. To prevent banks from becoming overextended and illiquid, Glass-Steagall divorced investment banking from commercial banking, and gave the Federal

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s [had] eroded the legal walls that bar[red] banks, securities firms and insurance companies from elbowing into each other's businessesö (Brownstein, 1997, p. A5). The initial effort fell short and House leaders pulled the bill from the floor in the spring of 1997. A caution sign put up by Alan Greenspan, the well-respected Chairman of the Federal Reserve Board, helped put a damper on the effort (ôGreenspan backs two-stage reform of U.S. banking laws,ö 1999, p. C4). For businesses, however, repeal of Glass-Steagall became only a matter of time. Travelers (insurance) and Citicorp (banking) merged in 1997, expressing confidence that Congress would soon pass legislation permitting their union. Lobbyists redoubled their efforts, especially those from the merged Travelers and Citicorp, who needed a reform bill passed before their five-year waiver from the Federal Reserve expired (ôFirms betting on change of federal laws,ö 1997, p. D12). The Clinton Administration's economic team, led by Treasury Secretary Robert Rubin, supported the repeal of Glass-Steagall in principle. Buoyed by the ever-expanding economy, a consensus had emerged that a repeat of the 1920s could be avoided because of strict oversight by federal regulators. De
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