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Glass–Steagall Act (bank separation and FDIC)
June 16, 1933· Law or policy· Laws, labor & antitrust
Well documentedSolid records, texts or physical evidence.
The Banking Act of 1933 split deposit-taking banks from Wall Street securities firms and created federal deposit insurance.
See it on the Innovation & Wealth map →What happened
Senate hearings led by counsel Ferdinand Pecora exposed banks selling shaky bonds to their own depositors. Senator Carter Glass and Representative Henry Steagall's law, signed June 16, 1933, barred commercial banks from underwriting most securities, so firms had to choose: J. P. Morgan & Co. stayed a bank, and some partners formed Morgan Stanley in 1935. It created the FDIC, insuring deposits up to $2,500 at first, and capped deposit interest rates. Bank runs nearly stopped; only nine insured banks failed in 1934.
Impact on society and the economy
Depositors gained safety, and banking stayed calm for decades. Big banks lost lines of business. Its partial repeal in 1999 became a flashpoint after the 2008 crisis.
How we know
The statute, transcripts of the Senate's Pecora hearings, FDIC histories, and bank-failure statistics showing the sharp drop after 1933.
Still debated
Whether bank separation mattered, or deposit insurance did the real work, is debated, as is whether the 1999 repeal contributed to the 2008 crisis.
Connections (2)
▸The New Deal included Glass–Steagall Act (bank separation and FDIC)Well documented
The connection
The Senate's Pecora hearings showed banks such as National City selling risky securities to their own depositors. In the Hundred Days, Congress responded by separating commercial from investment banking and creating federal deposit insurance. Roosevelt doubted insurance, fearing it would prop up bad banks, but Steagall and public pressure prevailed.
When and how
Washington, spring 1933; Senator Carter Glass, Representative Henry Steagall, Senate counsel Ferdinand Pecora, and President Roosevelt, who signed it June 16, 1933.
How we know
The Banking Act of 1933, the Pecora hearing transcripts, congressional debates and the FDIC's own published history.
Debates
Most failed banks were small rural lenders without securities arms, so whether separation addressed the real causes is debated; the argument revived after 2008.
▸Glass–Steagall Act (bank separation and FDIC) was partly repealed by Repeal of Glass–Steagall (Gramm–Leach–Bliley Act)Well documented
The connection
The 1933 law separated deposit-taking banks from Wall Street securities firms after the crash. Over decades regulators widened its loopholes, and in 1999 Congress repealed the sections that barred banks from affiliating with securities firms. The deposit insurance it created, the FDIC, remained.
When and how
Washington: signed by Franklin Roosevelt June 16, 1933; partly repealed by the Gramm–Leach–Bliley Act, signed by Bill Clinton November 12, 1999.
How we know
The texts of both laws show exactly which sections were repealed (sections 20 and 32) and which survived.
Debates
Whether keeping the separation would have prevented or softened the 2008 crisis is debated; senators have repeatedly proposed restoring it.