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Glass-Steagall Act

From Academic Kids

Two separate laws are known as the Glass-Steagall Act. The first enacted February 27 1932 by President Herbert Hoover took the United States off the gold standard and greatly increased the ability of the Federal Reserve to influence the money supply. The second, also known as the "Banking Act of 1933", enacted June 16 1933 by President Franklin D. Roosevelt attempted to make banking safer and less prone to speculation. Both acts were reactions of the government to cope with the economic problems which followed the crash of 1929.

The Glass-Steagall Act of 1932 included the following provisions:

  • Permitted Federal Reserve banks to use government securities as collateral for the issue of Federal Reserve notes.
  • Relaxed the collateral security required by member banks at the discount window.
  • Allowed the government to loan out the nation's gold reserves.

The Banking Act of 1933 included the following provisions:

  • Separated the activities of banks and securities firms and (prohibited commercial banks from owning brokerages).
  • Introduced FDIC insurance.
  • Included 'Regulation Q' which prohibited paying interest on commercial demand deposits and capped the interest rate on savings deposits.

Of the important changes to the banking laws in these acts perhaps the most significant was the separation of commercial and investment banks. Before Glass-Steagall, Federal Reserve notes (i.e., U.S. dollars) could only be issued by the government if they were backed with gold. This restricted the amount of dollars the government could issue. By allowing collateralization of dollars on government debt, the treasury gained the authority to create dollars in any amount it desired.

Note that the Banking Act of 1933 should not be confused with the "Emergency Banking Act" of March 9, 1933 which officially took the United States off the gold standard, barred Americans from possessing gold and gave the president wide latitude to dictate fiscal rules and policy.

Both bills were sponsored by Democratic Senator Carter Glass of Virginia, a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency.

On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act. One impact of this repeal is that certain advisory activities of the banks are now regulated by the Investment Advisor Act of 1940.

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