One of the subjects that is often covered in the financial news, especially as talking heads try to figure out what can be done to avoid another financial crisis, is the Glass-Steagall Act.
Many people don’t exactly understand why this old law — parts of which were repealed in 1999 — is still a topic of conversation, and why it matter so much.
Brief Overview of the Glass-Steagall Act
Passed during the Great Depression, the Glass-Steagall Act is also called the Banking Act of 1933.
Glass-Steagall was designed to prevent some of the problems that caused the Great Depression, mainly the difficulties caused by the widespread failure of banks. The Banking Act of 1933 included the creation of the FDIC and it also expanded the role of the Federal Reserve.
However, the item that is most emphasized about the Glass-Steagall Act, particularly in a post-2008 world, is the prohibition of commercial banks from participating in investing.
Part of the problem ahead of the Great Depression was that Main Street banks began underwriting corporate stocks, and even floated bond issues. With all of these Main Street banks exposed to Wall Street, the crash of 1929 was hugely devastating.
The idea of Glass-Steagall was that banks separate themselves out by the type of banking they did.