1933 Banking Act
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The Banking Act of 1933 () was a statute enacted by the
United States Congress The United States Congress is the legislature of the federal government of the United States. It is Bicameralism, bicameral, composed of a lower body, the United States House of Representatives, House of Representatives, and an upper body, ...
that established the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
(FDIC) and imposed various other banking reforms. The entire law is often referred to as the Glass–Steagall Act, after its Congressional sponsors, Senator
Carter Glass Carter Glass (January 4, 1858 – May 28, 1946) was an American newspaper publisher and Democratic politician from Lynchburg, Virginia. He represented Virginia in both houses of Congress and served as the United States Secretary of the Treas ...
( D) of
Virginia Virginia, officially the Commonwealth of Virginia, is a state in the Mid-Atlantic and Southeastern regions of the United States, between the Atlantic Coast and the Appalachian Mountains. The geography and climate of the Commonwealth are ...
, and Representative Henry B. Steagall (D) of
Alabama (We dare defend our rights) , anthem = " Alabama" , image_map = Alabama in United States.svg , seat = Montgomery , LargestCity = Huntsville , LargestCounty = Baldwin County , LargestMetro = Greater Birmingham , area_total_km2 = 135,7 ...
. The term "Glass–Steagall Act," however, is most often used to refer to four provisions of the Banking Act of 1933 that limited commercial bank
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
activities and affiliations between
commercial bank A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with ...
s and securities firms. That limited meaning of the term is described in the article on
Glass–Steagall Legislation The Glass–Steagall legislation describes four provisions of the United States Banking Act of 1933 separating commercial and investment banking.. Wilmarth 1990, p. 1161. The article 1933 Banking Act describes the entire law, including the legi ...
. The Banking Act of 1933 (the 1933 Banking Act) joined together two long-standing Congressional projects: #A federal system of bank deposit insurance championed by Representative Steagall #The regulation (or prohibition) of the combination of commercial and
investment banking Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with ...
and other restrictions on " speculative" bank activities championed by Senator Glass as part of a general desire to "restore" commercial banking to the purposes envisioned by the
Federal Reserve Act of 1913 The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States. The Panic ...
. Although the 1933 Banking Act thus fulfilled Congressional designs and, at least in its
deposit insurance Deposit insurance or deposit protection is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance systems are one component of ...
provisions, was resisted by the
Franklin Delano Roosevelt Administration Franklin Delano Roosevelt (; ; January 30, 1882April 12, 1945), often referred to by his initials FDR, was an American politician and attorney who served as the 32nd president of the United States from 1933 until his death in 1945. As th ...
, it later became considered part of the
New Deal The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Con ...
. The deposit insurance and many other provisions of the Act were criticized during Congressional consideration. The entire Act was long-criticized for limiting
competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, ind ...
and thereby encouraging an inefficient banking industry. Supporters of the Act cite it as a central cause for an unprecedented period of stability in the U.S. banking system during the ensuing four or, in some accounts, five decades following 1933.


Creation of FDIC and federal deposit insurance

The 1933 Banking Act established (1) the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
(FDIC); (2) temporary FDIC deposit insurance limited to $2,500 per accountholder starting January 1934 through June 30, 1934; and (3) permanent FDIC deposit insurance starting July 1, 1934, fully insuring $5,000 per accountholder. 1934 legislation delayed the effectiveness of the permanent insurance system. The
Banking Act of 1935 The ''Banking Act of 1935'' passed on August 19, 1935 and was signed into law by the president, Franklin D. Roosevelt, on August 23. The Act changed the structure and power distribution in the Federal Reserve System that began with the ''Banking ...
repealed the permanent system and replaced it with a system that fully insured balances up to $5,000 and provided no insurance for balances above that amount. Over the years, the limit has been raised which reached up to its current limit of $250,000. The 1933 Banking Act required all FDIC-insured banks to be, or to apply to become, members of the
Federal Reserve System The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after ...
by July 1, 1934. The
Banking Act of 1935 The ''Banking Act of 1935'' passed on August 19, 1935 and was signed into law by the president, Franklin D. Roosevelt, on August 23. The Act changed the structure and power distribution in the Federal Reserve System that began with the ''Banking ...
extended that deadline to July 1, 1936. State banks were not eligible to be members of the Federal Reserve System until they became stockholders of the FDIC, and thereby became an insured institution. 1939 legislation repealed the requirement that FDIC-insured banks join the Federal Reserve System. Before 1950, the laws establishing the FDIC and FDIC insurance were part of the Federal Reserve Act. 1950 legislation created the Federal Deposit Insurance Act (FDIA).


Separation of commercial and investment banking

Over time, the term Glass–Steagall Act came to be used most often to refer to four provisions of the 1933 Banking Act that separated commercial banking from investment banking. Congressional efforts to "repeal the Glass–Steagall Act" referred to those four provisions (and then usually to only the two provisions that restricted affiliations between commercial banks and securities firms).Reinicke 1995, pp. 104-105. Greenspan 1987, pp. 3 and 15-22. . Those efforts culminated in the 1999 Gramm-Leach-Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms.Macey 2000, p. 716. Wilmarth 2002, p. 219, fn. 5. The 1933 Banking Act's separation of investment and commercial banking is described in the article on the Glass–Steagall Act. Institutions were given one year to decide whether they wanted to specialize in commercial or investment banking.


Other provisions of 1933 Banking Act


Creation of the Federal Open Market Committee

The act had a large impact on the Federal Reserve. Notable provisions included the creation of the Federal Open Market Committee (FOMC) under Section 8. However, the 1933 FOMC did not include voting rights for the Federal Reserve Board, which was revised by the Banking Act of 1935 and amended again in 1942 to closely resemble the modern FOMC.


Regulation Q

To decrease competition between commercial banks and discourage risky investment strategies, the Banking Act of 1933 outlawed the payment of interest on checking accounts and also placed ceilings on the amount of interest that could be paid on other deposits.


Regulation of "speculation"

Several provisions of the 1933 Banking Act sought to restrict "speculative" uses of bank credit. Section 3(a) required each
Federal Reserve Bank A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve ...
to monitor local member bank lending and investment to ensure there was not "undue use" of bank credit for "speculative trading or carrying" of securities, commodities or real estate. Section 7 limited the total amount of loans a member bank could make secured by stocks or bonds and permitted the Federal Reserve Board to impose tighter restrictions and to not limit the total amount of such loans that could be made by member banks in any Federal Reserve district. Section 11(a) prohibited Federal Reserve member banks from acting as agents for nonbanks in placing loans to brokers or dealers. pp. 1 (Section 3(a)), 4 (Section 7), 8 (Section 11(a)). Rodkey 1934, p. 893. Willis 1935, pp. 705-711. Glass also hoped to put "speculative" credit into more productive sectors of the U.S. economy.


Other provisions still in effect

Other provisions of the 1933 Banking Act that remain in effect include (1) Sections 5(c) and 27, which required state member banks to provide its district's Federal Reserve Bank and the Federal Reserve Board and national banks to provide the
Comptroller of the Currency The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all nationa ...
a minimum of three reports on their affiliates; (2) Section 13, which (as Section 23A of the Federal Reserve Act) regulated transactions between Federal Reserve member banks and their nonbank affiliates; (3) Sections 19 and 30, which established criminal penalties for misconduct by officers or directors of Federal Reserve System member banks and authorized the Federal Reserve to remove such officers or directors; (4) Section 22, which eliminated personal liability ("double liability") for new shareholders of national banks; and (5) Section 23, which gave national banks the same ability to establish branches in their "home state" as state chartered banks in that state. The 1933 Banking Act gave tighter regulation of national banks to the Federal Reserve which required state member banks and holding companies to make three reports annually. The reports were to be given to their Federal Reserve Board and Federal Reserve Bank.


Other provisions repealed or replaced

Provisions of the 1933 Banking Act that were later repealed or replaced include (1) Sections 5(c) and 19, which required an owner of more than 50% of a Federal Reserve System member bank's stock to receive a permit from (and submit to inspection by) the
Federal Reserve Board The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the m ...
to vote that stock (replaced by the
Bank Holding Company Act of 1956 The Bank Holding Company Act of 1956 (, ''et seq.'') is a United States Act of Congress that regulates the actions of bank holding companies. The original law (subsequently amended), specified that the Federal Reserve Board of Governors must app ...
); (2) Section 8, which established the Federal Open Market Committee (FOMC) made up of representatives from each of the 12 Federal Reserve Banks (revised by the Federal Reserve Board-dominated FOMC established by the
Banking Act of 1935 The ''Banking Act of 1935'' passed on August 19, 1935 and was signed into law by the president, Franklin D. Roosevelt, on August 23. The Act changed the structure and power distribution in the Federal Reserve System that began with the ''Banking ...
and later amended in 1942); (3) Section 11(b), which prohibited interest payments on demand deposits (repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and allowing interest-bearing demand accounts beginning July 21, 2011) and authorized the Federal Reserve Board to limit interest rates on time deposits (phased out by the Depository Institutions Deregulation and Monetary Control Act of 1980 by 1986), both of which interest limitations were incorporated into Regulation Q, and (4) Section 12, which prohibited Federal Reserve System member bank loans to their executive officers and required the repayment of outstanding loans (replaced by the 1935 Banking Act's regulation of such loans and modified by later legislation).


Legislative history


1930-1932 Glass bills; Glass Senate subcommittee

Between 1930 and 1932 Senator Glass introduced several versions of a bill (known in each version as the Glass bill) to separate commercial and investment banking and to establish other reforms (except deposit insurance) similar to the final provisions of the 1933 Banking Act. Glass had been the House sponsor of the
Federal Reserve Act of 1913 The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States. The Panic ...
(the Glass-Owen Act) and considered himself "the father of the Federal Reserve System." The various versions of his Glass bill consistently sought to (1) expand branch banking and bring more banks and activities under Federal Reserve supervision and (2) separate (or regulate the mix of) commercial and investment banking. Glass sought to "correct" what he considered to be the "errors" the Federal Reserve System had made in not controlling what he considered "speculative credit" during the 1920s. The Glass bills also sought to avoid deposit insurance by providing for a "Liquidation Corporation," a federal authority to purchase assets of a closed bank based on "an approximately correct valuation of its assets". Glass's idea was for a federal corporation to assume ownership of the assets of failed banks and sell them over time as the market could absorb them, rather than dump assets onto markets with little demand. The bills provided that such payments would be used to make immediate payments to depositors to the extent of the bank's "bona fide assets". Glass introduced the first Glass bill on June 17, 1930. The bill's language indicated that it was intended as a "tentative measure to serve as a guide" for a subcommittee of the Senate Committee on Banking and Currency (the Glass Subcommittee) chaired by Glass that was authorized to investigate the operations of the National and Federal Reserve banking systems. On January 25, 1933, during the lame duck session of Congress following the 1932 elections, the Senate passed a version of the Glass bill.Kennedy 1973, pp. 72-73.


Commercial banking theory; unit banks

Senator Glass supported a commercial banking theory (associated with the real bills doctrine) that commercial banks should no longer be allowed to underwrite or deal in securities. This theory, defended by Senator Glass's long time advisor
Henry Parker Willis Henry Parker Willis (August 14, 1874 – July 18, 1937) was an American financial expert. Biography He was born at Weymouth, Massachusetts, the son of the Universalist minister and suffragist Olympia Brown. He graduated from the University of ...
, had served as a foundation for the
Federal Reserve Act of 1913 The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States. The Panic ...
and earlier US banking law. Glass and Willis argued the failure of banks to follow, and of the Federal Reserve to enforce, this theory had resulted in the "excesses" that inevitably led to the
Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange coll ...
and the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. Before and after the
Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange coll ...
Senator Glass used this commercial banking theory to criticize banks for their involvement in securities markets. Glass condemned banks for lending to stock market "speculators" and for underwriting "risky" or "utterly worthless" securities, particularly foreign securities, that were sold to unsophisticated bank depositors and small "correspondent banks". Glass opposed direct bank involvement in these activities and indirect involvement through "securities affiliates". Such affiliates were typically owned by the same shareholders as the bank, with the affiliate's shares held in a "voting trust" or other device that ensured bank management controlled the affiliate. Glass and Willis viewed such affiliates as artificial devices to evade limits on bank activities. Large banks such as National City Bank (predecessor to
Citibank Citibank, N. A. (N. A. stands for " National Association") is the primary U.S. banking subsidiary of financial services multinational Citigroup. Citibank was founded in 1812 as the City Bank of New York, and later became First National City ...
) and
Chase National Bank JPMorgan Chase Bank, N.A., doing business as Chase Bank or often as Chase, is an American national bank headquartered in New York City, that constitutes the consumer and commercial banking subsidiary of the U.S. multinational banking and fina ...
typically used such securities affiliates to underwrite securities.Perkins 1971, pp. 503-504 and 517-522. Peach 1941, pp. 66-70. Glass and Willis criticized all forms of "illiquid loans" including bank real estate lending. They were, however, especially critical of bank securities activities. Willis identified bank investments in, and loans to finance purchases of, government securities during World War I as the beginning of the corruption of commercial banking that culminated in the "speculative excesses" of the 1920s. Glass and Willis also identified the "unit banking" system of small, single office banks as a basic weakness of U.S. banking. The Glass bills tried to limit banks to their "proper" commercial banking activities and to permit banks to expand their geographic operations through greater permission for branch banking. Additionally, many small banks were not able to profit in the securities business, leading many small banks to push for deposit insurance. However, many large banks opposed deposit insurance because "they expected deposits running off from small, weak country banks to come to them".


Unit banks, Federal Reserve System, and deposit insurance

Following his defeat in the 1932 presidential election, President
Herbert Hoover Herbert Clark Hoover (August 10, 1874 – October 20, 1964) was an American politician who served as the 31st president of the United States from 1929 to 1933 and a member of the Republican Party, holding office during the onset of the Gre ...
supported the Glass bill. In 1932 Hoover had delayed Congressional action on the Glass bill by requesting further hearings and (according to Willis) by working to delay Senate consideration of revised versions of the Glass bill introduced after those hearings. In the 1933 "lame duck" session of the
72nd United States Congress The 72nd United States Congress was a meeting of the legislative branch of the United States federal government, consisting of the United States Senate and the United States House of Representatives. It met in Washington, D.C. from March 4, 193 ...
, the final obstacle to Senate passage came from supporters of small "unit banks" (i.e., single office banks). They opposed the Glass bill's permission for national banks to branch throughout their "home state" and into neighboring states as far as a 50-mile "area of trade". Even in the extended period of economic prosperity in the 1920s, a large number of "unit banks" in agricultural areas failed as agricultural prices declined. During the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
unit bank failures grew. Willis and others noted that there were no significant bank failures in Canada, despite similar bad economic conditions. Canada permitted branch banking (which had led to a system of large, nationwide banks), but otherwise shared the U.S. system of "commercial banking" distinct from the "universal banks" common in Europe and elsewhere in the world. Glass stated he had originally supported the "little bank" but as so many unit banks failed he concluded they were a "menace" to "sound banking" and a "curse" to their depositors. Glass also wanted Federal Reserve supervision of all banks under a "unified banking system". Glass stated "the curse of the banking system for this country is the dual system" under which states could charter banks that were supervised by state officials outside the Federal Reserve System. Under the Federal Reserve Act, all national banks were required to be members of the Federal Reserve System, but state chartered banks could choose whether to join. Glass and others concluded that this had led to a "competition in laxity" between regulators of member and non-member banks. In opposition to the Glass bill's branch banking provisions, Senator
Huey Long Huey Pierce Long Jr. (August 30, 1893September 10, 1935), nicknamed "the Kingfish", was an American politician who served as the 40th governor of Louisiana from 1928 to 1932 and as a United States senator from 1932 until his assassination ...
(D-LA)
filibuster A filibuster is a political procedure in which one or more members of a legislative body prolong debate on proposed legislation so as to delay or entirely prevent decision. It is sometimes referred to as "talking a bill to death" or "talking out ...
ed the Glass bill until Glass revised his bill to limit national bank branching rights to states that permitted their own banks to branch. Glass also revised his bill to extend the deadline for banks to dispose of securities affiliates from three to five years. With those changes, the Glass bill passed the Senate in an overwhelming 54-9 vote on January 25, 1933.Kennedy 1993, p. 73. In the House of Representatives, Representative Steagall opposed even the revised Glass bill with its limited permission for branch banking. Steagall wanted to protect unit banks, and bank depositors, by establishing federal deposit insurance, thereby eliminating the advantage larger, more financially secure banks had in attracting deposits. 150 separate bills providing some form of federal deposit insurance had been introduced in the
United States Congress The United States Congress is the legislature of the federal government of the United States. It is Bicameralism, bicameral, composed of a lower body, the United States House of Representatives, House of Representatives, and an upper body, ...
since 1886. The House had passed a federal deposit insurance bill on May 27, 1932, that was awaiting Senate action during the 1933 "lame duck" session. After several states had closed their banks in what became the banking crisis of 1933, President Hoover issued a February 20, 1933, plea to the House of Representatives to pass the Glass bill as the "first constructive step to remedy the prime weakness of our whole economic life". On March 4, 1933, however, the lame duck session of the 72nd Congress adjourned without either the Glass bill or the House deposit insurance bill becoming law. On the same day, the Senate reconvened in a special session called by President Hoover and
Franklin Delano Roosevelt Franklin Delano Roosevelt (; ; January 30, 1882April 12, 1945), often referred to by his initials FDR, was an American politician and attorney who served as the 32nd president of the United States from 1933 until his death in 1945. As the ...
was inaugurated as the new President.


1933 extraordinary session of Congress


Glass bills

President Roosevelt called both Houses of Congress into "extraordinary session" on March 9, 1933, to enact the
Emergency Banking Act __NOTOC__ The Emergency Banking Act (EBA) (the official title of which was the Emergency Banking Relief Act), Public Law 73-1, 48 Stat. 1 (March 9, 1933), was an act passed by the United States Congress in March 1933 in an attempt to stabilize t ...
that ratified Roosevelt's emergency closing of all banks on March 6, 1933. On March 11, 1933, Senator Glass reintroduced (as S. 245) his Glass bill revised to require banks to eliminate securities affiliates within 2 years rather than the 5 years permitted by the compromised version of the Glass bill the Senate had passed in January. Roosevelt told Glass he approved most of the bill, including the separation of commercial and investment banking, that he shared Glass's desire for a "unified banking system" with state and national banks regulated by a single authority, but that he only approved countywide, not statewide, branch banking, and that he opposed deposit insurance. On March 7, 1933, National City Bank (predecessor to
Citibank Citibank, N. A. (N. A. stands for " National Association") is the primary U.S. banking subsidiary of financial services multinational Citigroup. Citibank was founded in 1812 as the City Bank of New York, and later became First National City ...
) had announced it would liquidate its security affiliate. The next day, Winthrop Aldrich, the newly named chairman and president of
Chase National Bank JPMorgan Chase Bank, N.A., doing business as Chase Bank or often as Chase, is an American national bank headquartered in New York City, that constitutes the consumer and commercial banking subsidiary of the U.S. multinational banking and fina ...
, announced Chase would do the same and that Chase supported prohibiting banks from having securities affiliates.Perkins 1971, p. 523. Kennedy 1973, pp. 212–213. Aldrich also called for prohibiting securities firms from taking deposits. According to Aldrich and his biographer, Aldrich (a lawyer) drafted new language for Glass's bill that became Section 21 of the Glass–Steagall Act.Kelly III, p. 53, fn. 157. Garten 1999, p. 292, fn. 25. Contemporary observers suggested Aldrich's proposal was aimed at J.P. Morgan & Co. A later Glass–Steagall critic cited Aldrich's involvement as evidence the Rockefellers (who controlled Chase) had used Section 21 to keep J.P. Morgan & Co. (a deposit taking private partnership best known for underwriting securities) from competing with Chase in the commercial banking business. After Glass introduced S. 245, he chaired a subcommittee that considered the bill and prepared a revised version while negotiating at length with the Roosevelt Administration to gain its support for the bill. By April 13, 1933, the subcommittee had prepared a revised Glass bill, but delayed submitting the bill to the full Senate Committee on Banking and Currency to continue negotiations with the Roosevelt Administration. President Roosevelt had declared on March 8, 1933, in his first press conference, that he opposed a guarantee of bank deposits for making the government responsible for the "mistakes and errors of individual banks" and for putting "a premium on unsound banking". Glass had reluctantly accepted that no banking reform bill would pass Congress without deposit insurance, but President Roosevelt and Treasury Secretary William Woodin continued to resist such insurance during their negotiations with the Senate subcommittee. On April 25, 1933, Roosevelt asked for two weeks to consider the deposit insurance issue. In early May, Roosevelt announced with Glass and Steagall that they had agreed "in principle" on a bill. On May 10, 1933, Glass introduced his revised bill (S. 1631) in the Senate. The most important change was a new provision for deposit insurance. As Roosevelt demanded, deposit insurance was based on a sliding scale. Deposit balances above $10,000 would only be partially insured. As Roosevelt had suggested, deposit insurance would not begin for one year. Glass limited the deposit insurance to Federal Reserve System member banks in the hope this would indirectly lead to a "unified banking system" as the attraction of deposit insurance would lead banks to become Federal Reserve members. Aside from the new federal deposit insurance system, S. 1631 added provisions based on earlier versions of the Glass bill that became Sections 21 (prohibiting securities firms from taking deposits) and 32 (prohibiting common directors or employees for securities firms and banks) of the Glass–Steagall Act.


Steagall bill

On May 16, 1933, Representative Steagall introduced H.R. 5661, which became the vehicle through which the 1933 Banking Act became law. This bill largely adopted provisions of the new Glass bill. Reflecting Steagall's support for the "dual banking system", however, H.R. 5661 permitted state chartered banks to receive federal deposit insurance without joining the Federal Reserve System. On May 23, 1933, the House passed H.R. 5661 in a 262-19 vote. On May 25, 1933, the Senate approved H.R. 5661 (in a voice vote) after substituting the language of S. 1631 (amended to shorten to one year the time within which banks needed to eliminate securities affiliates) and requested a House and Senate
conference A conference is a meeting of two or more experts to discuss and exchange opinions or new information about a particular topic. Conferences can be used as a form of group decision-making, although discussion, not always decisions, are the main p ...
to reconcile differences between the two versions of H.R. 5661.


Banking Act of 1933

The final Senate version of H.R. 5661 included Senator
Arthur Vandenberg Arthur Hendrick Vandenberg Sr. (March 22, 1884April 18, 1951) was an American politician who served as a United States senator from Michigan from 1928 to 1951. A member of the Republican Party, he participated in the creation of the United Natio ...
's (R-MI) amendment providing for an immediate temporary fund to insure fully deposits up to $2,500 before the FDIC began operating on July 1, 1934. The "Vandenberg Amendment" was added to the Senate bill through a procedural maneuver supported by Vice President
John Nance Garner John Nance Garner III (November 22, 1868 – November 7, 1967), known among his contemporaries as "Cactus Jack", was an American Democratic politician and lawyer from Texas who served as the 32nd vice president of the United States under Fran ...
, who was over the Senate in a judicial impeachment proceeding. This highlighted the differences between Garner and Roosevelt on the controversial issue of deposit insurance. Roosevelt threatened to veto any bill that included the Vandenberg Amendment's provision for immediate deposit insurance. On June 7, however, Roosevelt indicated to Glass he would accept a compromise in which permanent FDIC insurance would not begin until July 1934, the limited temporary plan would begin on January 1, 1934, and state banks could be insured so long as they joined the Federal Reserve System by 1936. Roosevelt, like Glass, saw redeeming value in deposit insurance if its requirement for Federal Reserve System membership led to "unifying the banking system". The Roosevelt Administration had wanted Congress to adjourn its "extraordinary session" on June 10, 1933, but the Senate blocked the planned adjournment. This provided more time for the House and Senate Conference Committee to reconcile differences between the two versions of H.R. 5661. In the House, nearly one-third of the Representatives signed a pledge not to adjourn without passing a bill providing federal deposit insurance. After Steagall and other House members met with Roosevelt on June 12, 1933, the Conference Committee filed its final report for H.R. 5661. Closely tracking the principles Roosevelt had described to Glass on June 7, the Conference Report provided that permanent deposit insurance would begin July 1, 1934, temporary insurance would begin January 1, 1934, unless the President proclaimed an earlier start date, and state non-member banks could be insured, but after July 1, 1936, would only remain insured if they had applied for Federal Reserve System membership Although opponents of H.R. 5661 hoped Roosevelt would veto the final bill, he called Senator Glass with congratulations after the Senate passed the bill. Roosevelt signed H.R. 5661 into law on June 16, 1933, as the Banking Act of 1933. Roosevelt called the new law "the most important" banking legislation since the Federal Reserve Act of 1913.


Commentator description and evaluation of 1933 Banking Act


Roosevelt's role in 1933 Banking Act

Time Magazine reported the 1933 Banking Act passed by "accident because a Presidential blunder kept Congress in session four days longer than expected." H. Parker Willis described Roosevelt as treating the final bill with "indifference" but not "hostility". In his account of the "First
New Deal The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Con ...
" Raymond Moley stated Roosevelt was "sympathetic" to the 1933 Banking Act "but had no active part in pressing for its passage". Moley also wrote that most of "the people who were close to the White House were so busy with their own legislative programs that Glass was left to his own devices."
Adolf A. Berle Adolf Augustus Berle Jr. (; January 29, 1895 – February 17, 1971) was an American lawyer, educator, writer, and diplomat. He was the author of ''The Modern Corporation and Private Property'', a groundbreaking work on corporate governance, a pro ...
, like Moley a member of Roosevelt's First New Deal
Brain Trust Brain trust was a term that originally described a group of close advisers to a political candidate or incumbent; these were often academics who were prized for their expertise in particular fields. The term is most associated with the group of ad ...
, was "disappointed" by the 1933 Banking Act. He wished the more extensive branch banking permission in earlier Glass bills had been adopted. Berle concluded that limited branch banking with deposit insurance would preserve small banks certain to fail in an economic downturn, as they had consistently in the past. While Berle shared Glass's hope that the new law's deposit insurance provisions would force all banks into the Federal Reserve System, he correctly feared that future Congresses would remove this requirement. According to Carter Golembe, the Banking Act of 1933 was the "only important piece of legislation during the New Deal's famous "one hundred days" which was neither requested nor supported by the new administration." In their books on banking events in 1933, Susan Eastabrook Kennedy and Helen Burns concluded that, although the 1933 Banking Act was not part of the
New Deal The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Con ...
, Roosevelt ultimately preferred it to no banking reform bill even though it did not provide the more "far reaching" reforms (Kennedy) or "fuller solution" (Burns) he sought. Both present Roosevelt as being influenced by the strong public demand for deposit insurance in accepting the final bill. Both also describe the
Banking Act of 1935 The ''Banking Act of 1935'' passed on August 19, 1935 and was signed into law by the president, Franklin D. Roosevelt, on August 23. The Act changed the structure and power distribution in the Federal Reserve System that began with the ''Banking ...
as being more significant than the 1933 Banking Act. Kennedy notes that after the 1933 Banking Act became law Roosevelt "claimed full credit, to the amusement or outrage of contemporary and hindsighted observers". Roosevelt's concerns with the 1933 Banking Act were not tied to what later became known as the "Glass–Steagall" separation of investment and commercial banking. The 1932 Democratic
Party platform A political party platform (US English), party program, or party manifesto (preferential term in British & often Commonwealth English) is a formal set of principle goals which are supported by a political party or individual candidate, in order ...
provisions on banking (drafted by Senator Glass) called for that separation. In a campaign speech Roosevelt specifically endorsed such separation.Burns 1974, pp. 22–24. In 1935 President Roosevelt opposed Glass's effort to restore national bank powers to underwrite corporate securities.Burns 1974, pp. 170–171. Perkins 1971, p. 269. Roosevelt confirmed to Glass in March 1933, that he supported the separation of commercial and investment banking, although Treasury Secretary Woodin feared that prohibiting bank underwriting of securities would "dampen recovery".


Accounts describing 1933 Banking Act as New Deal legislation

Despite the Congressional origins of, and President Roosevelt's lack of support for, the 1933 Banking Act, many descriptions of the New Deal or of the 1933 Banking Act refer to the Act as New Deal legislation. In the prologue to his classic account of the
New Deal The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Con ...
, Arthur M. Schlesinger Jr. suggests
Felix Frankfurter Felix Frankfurter (November 15, 1882 – February 22, 1965) was an Austrian-American jurist who served as an Associate Justice of the Supreme Court of the United States from 1939 until 1962, during which period he was a noted advocate of judic ...
and his colleagues were the source for the 1933 Banking Act (along with the
Securities Act of 1933 The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and after ...
) in the tradition of "trust-busting liberalism". In that book's later brief description of the 1933 Banking Act, however, Schlesinger does not mention Frankfurter and focuses on the role of the Pecora Investigation and opposition to deposit insurance, including from Roosevelt, in the debate over the legislation. The
Commerce Clearing House CCH, formerly Commerce Clearing House, is a provider of software and information services for tax, accounting and audit workers. Since 1995 it has been a subsidiary of Wolters Kluwer. History CCH has been publishing materials on U.S. tax la ...
explanation of the Gramm-Leach-Bliley Act quoted Roosevelt as calling the 1933 Banking Act "the most important and far-reaching legislation ever enacted by the American Congress." Roosevelt made that statement about the
National Industrial Recovery Act The National Industrial Recovery Act of 1933 (NIRA) was a US labor law and consumer law passed by the 73rd US Congress to authorize the president to regulate industry for fair wages and prices that would stimulate economic recovery. It also ...
on the same day he signed the 1933 Banking Act.


Glass–Steagall provisions and the Pecora Investigation

Many descriptions of the 1933 Banking Act emphasize the role of the Pecora Investigation in creating a public demand for the separation of commercial and investment banking. Some accounts even suggest those Glass–Steagall provisions were created in response to the Pecora Investigation. National City Bank (predecessor to
Citibank Citibank, N. A. (N. A. stands for " National Association") is the primary U.S. banking subsidiary of financial services multinational Citigroup. Citibank was founded in 1812 as the City Bank of New York, and later became First National City ...
) was the only commercial bank examined by Ferdinand Pecora before the 1933 Banking Act became law in June 1933.Perino 2010, pp. 5–6, 271–272 and 282–290. After the National City hearings ended on March 2, 1933, the Pecora Investigation resumed in May 1933, with the examination of "private bankers", covering J.P. Morgan & Co., Kuhn, Loeb & Co., and Dillon, Read & Co., before returning to a commercial bank with the examination of
Chase National Bank JPMorgan Chase Bank, N.A., doing business as Chase Bank or often as Chase, is an American national bank headquartered in New York City, that constitutes the consumer and commercial banking subsidiary of the U.S. multinational banking and fina ...
beginning in late October 1933. Although those hearings, therefore, took place after the 1933 Banking Act became law, testimony from the lengthy Chase hearings is often cited as evidence for the need to separate commercial and investment banking. Pecora was appointed counsel for what became known as the Pecora Investigation on January 22, 1933, and conducted his first hearing on February 15, 1933. Earlier, on January 27, 1933, the Senate overwhelmingly passed a Glass bill separating commercial and investment banking. Even earlier, at Glass's instigation, the 1932 Democratic Party platform had called for such separation. During the 1932 Presidential campaign then President Hoover supported the regulation of investment banking, particularly securities affiliates of commercial banks, and Roosevelt supported the separation of commercial and investment banking. The dramatic "ten days" of National City hearings in February 1933, however, were a high point of publicity for the Pecora Investigation. They led to
Charles Mitchell Charles Mitchell may refer to: * Charles Mitchell (footballer), British soccer player * Charles Mitchell (academic) (born 1965), professor of law at University College, London * Charles Mitchell (American football) (born 1989), American football ...
's resignation as Chairman of National City Bank. Days later, both National City and Chase announced they would eliminate their securities affiliates. Chase also announced it supported a legislative separation of commercial and investment banking. H. Parker Willis and others have written that the Pecora Investigation hearings concerning J. P. Morgan & Co., which began on May 23, 1933, gave the "final impetus" to the 1933 Banking Act.Willis and Chapman 1934, p. 101. Lindley 1933, pp. 138–143. Those hearings did not deal with commercial bank securities activities. Their revelations were that several J. P. Morgan partners had not paid income taxes in one or more years from 1930–32 and that the firm had provided exclusive investment opportunities to prominent business and political leaders. During the J. P. Morgan hearings Senator Glass dismissed the Pecora Investigation as a "circus"."Bored by Senatorial exhibitionism" Glass had not attended the earlier National City hearings. While the Pecora Investigation made dramatic headlines and generated public outrage, critics at the time and since attacked the hearings for creating misleading or inaccurate accounts of the investigated transactions. Glass–Steagall critics have argued that the evidence from the Pecora Investigation did not support the separation of commercial and investment banking.


H. Parker Willis and Carter Glass on Banking Act of 1933

In 1935, H. Parker Willis wrote that the 1933 Banking Act was "already outdated" when it became law. He wrote that earlier Glass bills could have "made a difference" if they had become law in 1932. Carter Glass became dissatisfied with the 1933 Banking Act's separation of commercial and investment banking. In 1935 he sponsored a bill passed by the Senate that would have permitted national banks to underwrite corporate bonds.Burns 1974, pp. 170–171. Patrick 1993, pp. 265–266. Wilmarth 2008, pp. 590–591.


Conservative nature of Banking Act of 1933

Carter Golembe (addressing the FDIC insurance provisions) and Helen Garten (addressing the Glass–Steagall separation of investment and commercial banking and the FDIC insurance provisions) describe the 1933 Banking Act as legislation intended to protect the existing banking system dominated by small "unit banks". Garten labels this a "conservative" action at a time when there was serious consideration of nationalizing banks or of permitting a consolidated banking system through nationwide branch banking. Golembe saw deposit insurance as a compromise between forces that sought to stop the destruction of the "circulating medium" (i.e., bank deposits, particularly checking accounts) and forces that wanted to preserve the existing bank structure made up of a large number of geographically isolated banks. After the closing of banks nationwide in early March 1933, press reports and public statements by Congressional leaders suggested banks might be nationalized or the existing system of "dual banking" might be eliminated through federal legislation, or even a Constitutional amendment, to prohibit state chartering of banks. Others proposed requiring all banks to join the Federal Reserve System. None of these proposals was contained in the 1933 Banking Act, although the Act's FDIC insurance provisions would have required banks to join the Federal Reserve System to retain deposit insurance. According to Helen Burns "Roosevelt met with severe criticism from the liberals and the progressives for not nationalizing the banks during the period of crisis." She states "there seems little doubt that he could have done this" but she also concludes Roosevelt "did not believe in a government-owned and-operated bank" and was ultimately pragmatic or even conservative in his approach to banking legislation. As described above, Adolf Berle, the 1933 Roosevelt Brain Trust's leading authority on banking law, was "disappointed" by the 1933 Banking Act. He wished it had not been so heavily compromised to satisfy Representative Steagall (a "half portion" of what the Glass bill originally sought). Berle argued the United States needed a "unified banking system" (most likely through the Federal Reserve System) that would perform more like the nationwide branch bank systems in Australia, Canada, and the United Kingdom (which otherwise all shared the U.S. "commercial banking" tradition). Berle supported separating commercial banking from other activities, but disagreed with the Winthrop Aldrich position, contained in Glass–Steagall's Section 21, that this should also apply to "private bankers".Berle 1934, p. 251. Berle suggested that required a "separate study".


Fate of 1933 Banking Act as "traditional bank regulation"

Helen Garten describes the 1933 Banking Act as exemplifying the form and function of "traditional bank regulation" based on limiting bank activities and protecting banks from competition. The Act established the traditional bank regulation of separating commercial from investment banking, limiting deposit interest rate competition through rate limitations, and restricting competition for deposits based on financial strength by insuring depositors. It also ratified the existing policy of limited branch banking, thereby limiting competition among banks geographically. The resulting "government-enforced cartel in banking" allowed commercial banks to earn "high profits and avoid undue risk" until nonbanking companies found ways to offer substitutes for bank loans and deposits. Supporters of this traditional banking regulation argue that the 1933 Banking Act (and other restrictive banking legislation) produced a period of unparalleled financial stability. David Moss argues this stability may have induced a false belief in the inherent stability of the financial system. Moss argues this false belief encouraged legislative and regulatory relaxations of traditional restrictions and that this led to financial instability. Earlier critics of the 1933 Banking Act, and of other restrictive banking regulation, argued it has not prevented the return of financial instability beginning in the mid-1960s.
Hyman Minsky Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research ...
, a supporter of traditional banking regulation,Mayer 1974, pp. 523 and 531-535. described the 1966 return of financial instability (and its increasingly intense return in 1970, 1974, and 1980) as the inevitable result of private financial markets, previously repressed by memories of the Great Depression.Minsky 1982, pp. xii–xiv. Minsky proposed further controls of finance to limit the creation of "liquidity" and to "promote smaller and simpler organizations weighted more toward direct financing".Minsky 1982, p. 201 Commentators argued traditional banking regulation contained the "seeds of its own destruction" by "distorting competition" and "creating gaps between cost and price". In particular, by establishing "cartel profits" traditional bank regulation led nonbank competitors to develop products that could compete with bank deposits and loans to gain part of such profits. Instead of financial stability inducing deregulation and financial instability after 1980, as later suggested by David Moss and Elizabeth Warren, Thomas Huertas and other critics of traditional bank regulation argued Regulation Q limits on interest rates (mandated by the 1933 Banking Act) created the "disintermediation" that began in the 1960s, led to the phase-out of Regulation Q through the Depository Institutions Deregulation and Monetary Control Act of 1980, and opened banking to greater competition.Huertas 1983, pp. 24–27. Vietor 1987, pp. 45–48. Jan Kregel accepts that "supporters of free-market liberalism" were correct in describing "competitive innovations" of nonbanks as breaking down the "inefficiencies of a de facto cartel" established by the 1933 Banking Act, but argues the "disintegration of the protection" provided banks was "as much due to the conscious decisions of regulators and legislators to weaken and suspend the protections of the Act.".


See also

*
American International Group American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. , AIG companies employed 49,600 people.https://www.aig.com/content/dam/aig/amer ...
*
Arthur Vandenberg Arthur Hendrick Vandenberg Sr. (March 22, 1884April 18, 1951) was an American politician who served as a United States senator from Michigan from 1928 to 1951. A member of the Republican Party, he participated in the creation of the United Natio ...
*
Commodity Futures Modernization Act of 2000 The Commodity Futures Modernization Act of 2000 (CFMA) is United States federal legislation that ensured financial products known as over-the-counter (OTC) derivatives remained unregulated. It was signed into law on December 21, 2000 by President ...
* Corporate Law *
Global financial crisis of 2008 Global means of or referring to a globe and may also refer to: Entertainment * ''Global'' (Paul van Dyk album), 2003 * ''Global'' (Bunji Garlin album), 2007 * ''Global'' (Humanoid album), 1989 * ''Global'' (Todd Rundgren album), 2015 * Bruno ...
* Presidency of Franklin D. Roosevelt#Banking and financial reforms *
Subprime mortgage crisis The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the col ...
*
Systemic risk In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the ...


Notes


References

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Further reading

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External links


Public Law 66, 73d Congress, H.R. 5661: an Act to Provide for the Safer and More Effective Use of the Assets of Banks, to Regulate Interbank Control, to Prevent the Undue Diversion of Funds into Speculative Operations (Banking Act of 1933)

Full text of the Banking Act of 1933 followed by New York Federal Reserve Bank Explanation

Glass Subcommittee hearings

Pecora Investigation hearings

FDIC History: 1933-1983

1987 Federal Reserve Bank of Kansas City Jackson Hole Symposium on Restructuring the Financial System

Article from March 10, 1933, in The Southeast Missourian detailing debate about intended and unintended consequences of having FDIC
{{Bank regulation in the United States 1933 in American law 73rd United States Congress Federal Deposit Insurance Corporation United States federal banking legislation Banking Act Separation of investment and retail banking 1933 in economics