Glass-Steagall Act (1933): A Controversial Split of Investment & Retail Banks

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Glass-Steagall Act

What Is the Glass-Steagall Act of 1933?

After consecutive blows from bank runs and failures, the 1929 stock market crash, and the Great Depression, government officials knew the financial industry needed immediate wholesale change to recover and thrive in the future. This change came in 1933, when Senator Carter Glass (D-Va.) and Congressman Henry B. Steagall (D-Ala.) introduced the legislation, known today as the Glass-Steagall Act (Banking Act of 1933) , to completely separate investment and commercial/retail banking activities.

So, why was splitting investment and retail banking seen as the solution to the nation’s economic woes? Many thought commercial financial institutions had been recklessly using depositors’ money on stock market investments. Thus, banks became greedy, taking on huge risks in the hopes of even bigger rewards. Banking itself became sloppy, and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks. and viewed this ‘improper bank activity’ the source of the successive financial crises

The legislation first passed in Congress on May 23, and then in the Senate two days later. President Franklin D. Roosevelt signed the Glass-Steagall Act into law on June 16, as part of the New Deal. The legislation, initially just an emergency response, became permanent in 1945.

The Savings and Loan Crisis in the 70s resulted in the failure of nearly a third of 3,234 S&Ls and reportedly cost taxpayers $132 billion. Was economic foul play involved?

The Provisions of the Glass-Steagall Act

After the enactment of the Glass-Steagall Act, banks were on the clock. They had one year to decide whether they would commit to either being an investment or commercial financial institutions.

The Glass-Steagall Act established the following regulations and reforms to help the nation claw its way out of a deep economic pit. 

Empowering the Federal Reserve 

The Glass-Steagall Act furnished the Federal Reserve (the Central Bank of the U.S.) with the power to regulate retail banks. The Federal Open Market Committee was also formed, allowing those running the Fed to devise and implement better monetary policies.

For Commercial Banks

Retail banks could not draw from depositors’ funds to make risky investments any longer, shifting the focus to lending. Also, only 10% of a commercial financial institution’s total profits could come from selling securities. They did, however, receive an exception to underwrite government-issued bonds. 

For Investment Banks

The legislation prohibited investment banks from having a controlling interest in commercial financial institutions. Investment banks could no longer finance their activity with money from depositors’ accounts. Bank officials could not borrow excessively from their own bank.

For Depositors

The Glass-Steagall Act created the Federal Deposit Insurance Corporation (FDIC) to provide protection for depositors. When the FDIC was first implemented as a temporary measure, the FDIC insured deposits of up to $2,500, which later increased to $5,000 when the agency was permanently instituted. 

As of 2021, the FDIC insures deposits of up to $250,000. When a bank fails (i.e. has become insolvent and thus cannot pay back its depositors), the FDIC assumes the role of the receiver. That means, the agency takes charge of protecting depositor funds and recovering debts owed to creditors.

Regulation Q

Regulation Q prohibited banks from paying interest on checking accounts, and enabled the Fed to set interest rate ceilings paid on other kinds of deposits. 

The Glass-Steagall included Regulation Q to limit the speculative, risky investing by banks vying for customer deposits. To attract depositors, banks offered big returns on interest. Problems arose, of course, as these financial institutions actually had to make these returns materialize. This led to banks taking excessive risks to potentially yield major payouts.

The Debate Surrounding the Glass-Steagall Act


According to democratic think tank Demos, the legislation had an overwhelmingly positive effect: “Glass-Steagall’s goal was to lay a new foundation of integrity and stability for America’s banks. It worked. Financial panics had been regular and devastating occurrences since before the Civil War. No more. While individual banks continued to fail occasionally, their depositors escaped largely unscathed. Trust in the stock and bond markets also grew; for investors around the world, the U.S. financial system seemed to set a high standard of transparency and reliability.”

And, to Demos’ point, only 565 bank failures occurred from the postwar era to the 1980. For a point of comparison, about 4,000 commercial bank failures, which resulted in a $1.3 billion (approx. $18 billion with inflation) loss to depositors, occurred during the five-year period leading to the enactment of the Glass-Steagall Act. 


Critics of the Glass-Steagall Act asserted that it limited the banking industry’s once diverse options and by doing so actually increased risk. Furthermore, the transparency measures big banks already have instituted reduce the possibility that they could or even would assume significant risk or even be able to get away with such behavior.

Banks, as you might expect, did not take well to the legislation. But they did not push back in a concerted manner until the 1960s, when the banking sector started hiring lobbyists to influence Congress. Specifically, financial institutions wanted to get permission to access the municipal bond market. They needed to get the Glass-Steagall Act repealed to do so. According to the PBS Frontline article linked above, “some lobbyists even brag[ged] about how the bill put their kids through college.”

The 1999 Neutering and the Gramm-Leach-Bliley Act

Regardless, the Congressional Research Service argued that the Glass-Steagall Act had been eroding prior to its November 1999 ‘neutering.’ Rather than actually getting repealed, most of its provisions simply got axed. The establishment of the Gramm-Leach-Bliley Act, or the Financial Services Modernization Act, eliminated the firewall between commercial and investment banks.


Have you ever heard of the shadow banking system? Essentially, the erosion of the Glass-Steagall Act enabled non-traditional financial institutions to start performing the same main function of a bank: taking deposits and providing credit. However, the shadow banking system is much less regulated and mainly operates on the repo market.

The 2008 Subprime Mortgage Crisis

After the enactment of the Gramm-Leach-Bliley bill, commercial banks made up for lost time and started making risky investments in order to boost their profits as much as possible. Many economists believe that this behavior, particularly the subprime lending that created a housing bubble, led to the 2008 financial crisis.

Nobel laureate Joseph Stiglitz, in an article for Vanity Fair, claimed the ‘repeal’ of Glass-Steagall had resulted in the 2008 subprime mortgage crisis:

“The most important consequence of the repeal of Glass-Steagall was indirect—it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.”

Standard Disclaimer

The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.   

Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.  

While many have sided with Stiglitz, quite a few prominent critics have emerged as well. Former Treasury Secretary Tim Geithner notably said, “A huge amount of risk built up outside our banking system, outside the safeguards and protections we put in place in the Great Depression…That risk and leverage grew up, built up, very substantially, and when the storm hit it put enormous pressure on a part of the system that provided about half the credit to the American economy. Nothing to do with Glass Steagall.”

The Dodd-Frank Act & Volcker Rule

The eternal debate continues. Some want the Glass-Steagall Act reinstated, and others vehemently oppose it. Finance professionals contend that reenacting many of the provisions of the legislation would make them too small to compete on the world stage.

Meeting something of a compromise, legislators passed the Dodd-Frank Act of 2010 in the wake of the financial crisis. The Volcker Rule—a federal regulation in the Dodd-Frank—reinstate sections of the Glass-Steagall Act through the Volcker Rule.

The Volcker Rule, proposed and named after economist Paul Volcker, went into effect in 2014, and banks have had to remain in full compliance since July 21, 2015. The Volcker Rule aims to prevent much of the same ills that Glass-Steagall did but without disrupting or restricting the banking industry so much.

The Volcker Rule has a few major components:

  • Banks cannot use depositors’ funds to invest in high-risk speculative investments, including derivatives, commodity futures, and options
  • Retail banks can own no more than 3% of the total ownership shares in a private equity or hedge fund 
  • Banks must have established internal compliance mechanisms, which regulatory agencies can supervise

In 2018, Congress rolled back some provisions of the Dodd-Frank Act, but according to Reuters, the rewrite has mainly loosened regulations on small(er) financial institutions. 

What Should Be Done About  the Glass-Steagall Act? 

Where do you stand on the Glass-Steagall Act? Do you think it would have prevented the 2008 financial crisis if it had not been neutered? Should some of its provisions (through the Volcker Rule) be brought back, kept, or removed?

We at the Zero Theft Movement are working to calculate the best estimate for the monetary costs of corruption in the U.S. Corporate, political, and everything in between. Our community isn’t trying to simplify corruption to a single score, nor are they using the definition of a few experts or business professionals. Each holon, or interpretive group, decides what they consider is ‘theft.’

The Zero Theft Movement provides a safe and independent platform where you and your fellow citizens work together to investigate and debate potentially rigged areas across the economy. Through blockchain voting, the way to make all your work permanent, public, and unchangeable, you decide whether (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically. 

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Beyond the Glass-Steagall Act…

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