Tuesday, March 21, 2017

GLASS-STEAGALL | The Banking Act of 1933

Sen. Carter Glass (D-Va.) and Rep. Henry Steagall (D-Ala.) co-sponsored
a good law that traded deposit insurance for bank regulation.
The 37-page Banking Act of 1933, also known as the Glass-Steagall Act of 1933, was passed by Congress on June 16, 1933.

It is lean and clear and it served the American people well for nearly seven decades.

It created the Federal Deposit Insurance Corporation (section 12B), which was much wanted by the banking community to reduce the threat of panics.

In exchange for deposit insurance, the law establishes multiple constraints on banks to protect the insured deposits from speculation. It separates commercial banking from insurance and investment banking.

It also creates the Federal Open Market Committee (12A), which becomes the main body for ongoing monetary policy for the Federal Reserve System.

The limits on deposit insurance were gradually raised until the FDIC decided that it was most efficient to take over failing banks, thereby essentially insuring all deposits.

Also, over time, the separation of commercial banks from investment banks and insurance companies was eroded. Investment bankers sought access to government-insured funds and banks—protected by the taxpayer from risk—saw no reason not to hunt for the highest yield. This led to the meltdown of 2008.