US & World Economies US Economy Glass Steagall Act of 1933, Its Purpose and Repeal This 1933 Law Would Have Prevented the Financial Crisis By Kimberly Amadeo Kimberly Amadeo Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. learn about our editorial policies Updated on June 22, 2022 Reviewed by Somer G. Anderson Reviewed by Somer G. Anderson Somer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article When It Passed Purpose Effect Repeal Should Glass-Steagall Be Reinstated? Frequently Asked Questions (FAQs) President Roosevelt affixes his signature to the Glass-Steagall bank reform--deposit insurance measure, one of the last bits of legislation put thru before Congress adjourned. Behind the President (L-R) are: Sen. Allen Barkley; Sen. Thomas Gore; Sen. Carter Glass; Comptroller of Currency J.F.T. Connors; Sen. William G. McAdoo; Rep. Henry S. Steagall; Senator DUncan U. Fletcher; Rep. Alan Goldsborough; and Rep. Robert Luce. Photo: Photo by Bettmann/Getty Images The Glass-Steagall Act is a 1933 law that separated investment banking from retail banking. Investment banks organized the initial sales of stocks, called an initial public offering. They facilitated mergers and acquisitions. Many of them operated their own hedge funds. Retail banks took deposits, managed checking accounts, and made loans. By separating the two, retail banks were prohibited from using depositors' funds for risky investments. Only 10% of their income could come from selling securities. They could underwrite government bonds. Most important to depositors, the act created the Federal Deposit Insurance Corporation. The law gave power to the Federal Reserve to regulate retail banks. It created the Federal Open Market Committee, allowing the Fed to better implement monetary policy. Glass-Steagall prohibited investment banks from having a controlling interest in retail banks. They had to find another source of funds separate from depositors' accounts. It prohibited bank officials from borrowing excessively from their own bank. The act introduced Regulation Q. It prevented banks from paying interest on checking accounts. It also allowed the Fed to set ceilings on interest paid on other kinds of deposits. The official name for Glass-Steagall was the Banking Act of 1933 (48 Stat. 162). The law was named after its sponsors, Senator Carter Glass, D-Va. and Representative Henry B. Steagall, D-Ala. When It Passed Glass-Steagall was passed by the House of Representatives on May 23, 1933. It was passed by the Senate on May 25, 1933. It was signed into law by President Roosevelt on June 16, 1933, as part of the New Deal. It became a permanent measure in 1945. After the law passed, banks had one year to decide whether they would become investment or commercial banks. Purpose Glass-Steagall sought to permanently end bank runs and the dangerous bank practices that created them. Congress passed Glass-Steagall to reform a system that allowed the failure of 4,000 banks during the Great Depression. It had debated the bill during 1932. It redirected bank funds from fueling stock speculation to building industrial capacity. Since 1922, the stock market had gone up by almost 20% per year. Banks invested in the stocks. When the market crashed in 1929, depositors rushed to withdraw their funds. By March 8, they had withdrawn $1.78 billion in just four weeks. Others demanded gold in return for the money. The United States was still on the gold standard, but the demand was so high that the Federal Reserve was running low on its gold deposits. A bank run will put even sound banks out of business. Banks keep just one-tenth of their deposits on hand and lend out the rest. Most of the time, they only need 10% to fill depositors' demand. In a bank run, they must quickly find the cash. On March 6, 1933, President Roosevelt declared a four-day bank holiday. On March 9, Congress passed the Emergency Banking Act. It allowed banks to reopen on March 13. Banks would no longer exchange dollars for gold. Instead, the Federal Reserve printed dollars to meet depositors' demand. The currency was based on the banks' paper assets. By March 15, most banks had reopened to find that the bank run was over. Effect Glass-Steagall restored confidence in the U.S. banking system. It increased trust by only allowing banks to use depositors' funds in safe investments. Its FDIC insurance program prevented further bank runs. Depositors knew that the government protected them from a failing bank. During the Reagan administration, the banking industry complained that the act restricted them too much. They said they couldn't compete with foreign financial firms that could offer higher returns. The U.S. banks could only invest in low-risk securities. They wanted to increase the return while lowering the overall risk for their customers by diversifying their business. Citigroup had begun merger talks with Travelers Insurance in anticipation of Glass-Steagall. In 1998, it announced the successful merger under a new company called Citigroup. Its move was audacious, given that it was technically illegal, but banks had been taking advantage of loopholes in Glass-Steagall. Repeal On November 12, 1999, President Clinton signed the Financial Services Modernization Act that repealed Glass-Steagall. Congress had passed the so-called Gramm-Leach-Bliley Act along party lines, led by a Republican vote in the Senate. The repeal of Glass-Steagall consolidated investment and retail banks through financial holding companies. The Federal Reserve supervised the new entities. For that reason, few banks took advantage of the Glass-Steagall repeal. Most Wall Street banks did not want the additional supervision and capital requirements. Those that did became too big to fail. This required their bailout in 2008-2009 to avoid another depression. Should Glass-Steagall Be Reinstated? Reinstating Glass-Steagall would better protect depositors. At the same time, it would disrupt the banks’ structures. Banks would no longer be too big to fail, but it could slow growth as they reorganize. Congressional efforts to reinstate Glass-Steagall have not been successful. In 2011, H.R. 1489 was introduced to repeal the Gramm-Leach-Bliley Act and reinstate Glass-Steagall. If these efforts were successful, it would result in a massive reorganization of the banking industry. The largest banks include commercial banks with investment banking divisions, such as Citibank, and investment banks with commercial banking divisions, such as Goldman Sachs. The banks argued that reinstating Glass-Steagall would make them too small to compete on a global scale. The Dodd-Frank Wall Street Reform Act was passed instead. A part of the Act, known as Volcker Rule, puts restrictions on banks' ability to use depositors' funds for risky investments. It does not require them to change their organizational structure. If a bank becomes too big to fail and threatens the U.S. economy, Dodd-Frank requires that it be regulated more closely by the Federal Reserve. Frequently Asked Questions (FAQs) Who repealed the Glass-Steagall Act? President Bill Clinton repealed portions of the Glass-Steagall Act in 1999. A majority of both Democrats and Republicans supported the repeal effort in the Senate. Seven Democrats and one Republican voted against the repeal, and two Republicans did not take a side. How does the Glass-Steagall Act affect Americans today? While significant portions of the Glass-Steagall Act were repealed in 1999, some of its provisions remain in place. For example, savings accounts still enjoy FDIC insurance. This insurance system was a controversial provision at the time, but Rep. Henry Steagall insisted on including it in the bill, and it remains in effect today. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Federal Reserve Bank of St. Louis. "Banking Act of 1933 (Glass-Steagall Act)." Federal Deposit Insurance Corporation. "Historical Timeline - 1930's." Federal Deposit Insurance Corporation. "A Brief History of Deposit Insurance in the United States," Page 27. April 24, 2020. Congressional Research Service. "The Glass-Steagall Act: A Legal and Policy Analysis," Pages 5-7. Federal Reserve History. "Banking Act of 1933 (Glass-Steagall)." United States House of Representatives. "Engrossed Copy of Glass–Steagall Act." Corporate Finance Institute. "Glass-Steagall Act." Federal Reserve Bank of Philadelphia. "40 Years of the Federal Reserve Act," Page 11. History. "What Caused the Stock Market Crash of 1929?" Federal Reserve Bank of New York. "Why Did FDR’s Bank Holiday Succeed?," Pages 22-23. Corporate Finance Institute. "What Is Fractional Banking?" Federal Reserve History. "Bank Holiday of 1933." Federal Reserve History. "Emergency Banking Act of 1933." Congressional Research Service. "Glass-Steagall Act: Commercial vs. Investment Banking," Pages 2-4. Board of Governors of the Federal Reserve System. "Federal Reserve Press Release," Pages 1-6. U.S. Department of the Treasury. "Statement by the President Bill Clinton at the Signing of the Financial Modernization Bill." GovTrack. "S. 900 (106th): Gramm-Leach-Bliley Act." Federal Reserve History. "Financial Services Modernization Act of 1999, Commonly Called Gramm-Leach-Bliley." Congressional Research Service. "Systemically Important or “Too Big to Fail” Financial Institutions," Page 2. U.S. Library of Congress. "H.R.1489 - Return to Prudent Banking Act of 2011." U.S. Library of Congress. "H.R.4173 - Dodd-Frank Wall Street Reform and Consumer Protection Act." Obama White House. "Wall Street Reform: The Dodd-Frank Act." Board of Governors of the Federal Reserve. "Dodd-Frank Act Stress Test 2018: Supervisory Stress Test Methodology and Results - June 2018."