ABSTRACT
Having narrowly averted the collapse of US banking in March of 1933, New Dealers recognized that further economic reforms would be thwarted by continued crisis in the banking system. In response to this crisis, the Roosevelt administration quickly passed the Banking Act of June 16, 1933.1
We focus on the Banking Act of 1933 (and one subsequent provision in the Banking Act of 1935) as the regulatory framework intended to both stabilize the commercial banking system and enable it to play a supportive role for the greater project of economic recovery. This chapter will survey some highlights of this New Deal banking reform, namely interest rate controls and the introduction of deposit insurance implemented by the Banking Act of 1933, as well as the limitations on entry into commercial banking contained in the Banking Act of 1935. However our major focus is the separation of commercial and investment banking, known in common parlance as the Glass-Steagall Act, despite the fact that Glass-Steagall is not an Act per se but several subsections of the Banking Act of 1933.2
The preamble of the Banking Act of 1933 indicates that it is “[a]n 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, and for other purposes” (in Kross, 1969, 2758). Given that stability in the banking system was a prerequisite to the success of any further pro-investment economic reforms, many of its provisions, such as deposit insurance, sought to stabilize the commercial banking system. The Glass-Steagall separation of commercial and investment banking can also be understood as a measure intended
to promote stability in the banking system. In response to the critique of the pro-speculative propensities of diversified financial capitalist firms discussed in Chapter 4, the Act sought to diminish the conflicts of interest-and other incentives that encourage speculation-that may emerge when commercial and investment banking become organizationally entwined. By shielding commercial banks from these speculative pressures, Glass-Steagall sought to prevent the deposit base of the economy from being excessively channeled towards speculative purposes. This deterrence of commercial bank involvement in speculative activity was understood as enhancing the stability of the commercial banking system, and it responded to Senator Glass’ concerns that the “misapplication” of credit for speculative purposes deprives “legitimate business” of funds (see Chapter 4).
