Glass-Steagall Act

What Is Glass-Steagall Act?

The Glass-Steagall Act was a 1933 U.S. law passed in response to the banking collapse of the Great Depression. It separated commercial banking — taking deposits and making loans — from investment banking, which underwrites and trades securities, on the theory that mixing the two had exposed ordinary depositors to speculative risk. The same legislation led to the creation of the Federal Deposit Insurance Corporation, which guaranteed bank deposits. The separation stood for decades but was largely dismantled by the 1999 Gramm-Leach-Bliley Act, which repealed key parts of Glass-Steagall's wall between commercial and investment banking.

Why It Matters

Glass-Steagall matters as a symbol of the regulatory response to one crisis and a point of debate in the next. Its 1933 provisions, especially deposit insurance, are credited with restoring confidence in the banking system after the Depression's wave of failures. Decades later, some economists cited the 1999 repeal of its banking separation as a structural factor that allowed the risk-taking behind the 2008 financial crisis, though others dispute how large a role it played. The debate over whether to restore Glass-Steagall-style separation resurfaces after financial shocks, making the act a lasting reference point in arguments about how tightly to regulate banks.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What 1933 law separated commercial banking from investment banking and led to the creation of the FDIC?
  The Glass-Steagall Act
• What 1999 law, which repealed parts of the Glass-Steagall Act's separation of commercial and investment banking, is cited by some economists as a contributing structural factor to the 2008 crisis?
  The Gramm-Leach-Bliley Act