Glass-Steagall, Deregulation, and the Great Recession

Glass-Steagall, Deregulation, and the Great Recession 

Neelay Talwalkar

In the midst of the Great Depression, president Franklin Delano Roosevelt proposed what he called a “Second Bill of Rights,” which, focusing primarily on economics, stated that all Americans have the right to:

1. A Job paying an adequate wage and providing a decent living 

2. For farmers: the right to sell products at a return that provides a decent living 

3. Freedom from monopolies and unjust competition

4. A decent home 

5. Medical care 

6. Economic protection during sickness, accident, old age, or unemployment

7. A good education   

To put into motion these proposals, FDR put through numerous initiatives and pieces of legislation, including the creation of social security, government jobs programs, and more in order to get the people back on their feet.

One of the most important pieces of legislation signed into law by FDR came in 1933, during the first of his four terms as president: The Glass-Steagall Act. This initiative has been one of the most widely debated pieces of legislation in America, but it was actually quite popular at its inception. The controversy and debate around Glass-Steagall really ramped up in the 80s and 90s when America was hit with a slew of pro-deregulation presidents, such as Ronald Regan, George H.W. Bush, Bill Clinton, and, later, George W. Bush. 

FDR signs the Glass-Steagall Act in 1933

Glass-Steagall was named after the two prominent Democrats that sponsored the bill, these Democrats being Carter Glass (D-VA), a representative in both the house and the senate as well as a former United States secretary of the Treasury, and Henry Steagall (D-AL), who was the chairman of the Committee on Banking and Currency at the time. 

The bill’s main provisions effectively separated commercial banking from investment banking. “Commercial banks accept deposits, make loans, safeguard assets, and work with many different types of clients, including the general public and businesses.” Investment banks, however, tend to solely work with large corporations and wealthy investors. They tend to do things such as “provide financing for large-scale business projects,” as well as aiding in transactions having to do with mergers and acquisitions. 

The main purpose of this separation was to make sure that commercial and investment banks ceased any close connections with one another. Glass-Steagall aimed to protect the basic uses of day-to-day banking, and prevent said day-to-day banking from being put in danger by losses suffered from high-risk, “casino” banking activities usually performed by corporations through investment banks. It also aimed to protect everyday utility banking from the risks of a volatile stock market, and prevented commercial banks from acting as stock brokers. In the end, it was meant to protect the finances and banking of your average working American, who, in the midst of the Great Depression, was likely to be financially unstable and/or unemployed.

Then 1999 came, and Bill Clinton, in his second of two terms, signed the Gramm-Leach-Bliley Act (GBLA), which effectively repealed the main provisions of Glass-Steagall. The main purpose was to, in essence, serve the interests of massive corporations and banks, and to put these interests ahead of the interests of working class Americans. 

According to the St. Louis Federal Reserve, repealing Glass-Steagall did wonders for short-term profit in the financial industry

The GBLA was passed a short while after Citicorp, a commercial bank, merged with Travelers Group, an insurance firm. They formed the conglomerate known as Citigroup, which provided insurance services, commercial banking services, as well as “lines of business related to securities,” with securities being defined as any tradable financial asset. Securities services were primarily associated with investment banks. In short, Cirigroup had violated the Glass-Steagall act, alongside the Bank Holding Company Act of 1956. 

So what was the government’s response to this violation? Why, allowing the Federal Reserve to give Citigroup a waiver in 1998, of course! Basically, they let them get away with it. The GBLA was then passed in 1999, repealing Glass-Steagall, making such mergers fully legal. 

Here we see  how repealing Glass-Steagall killed competition in banking, allowing more and more mega-conglomerates to form 

While there were a few negative impacts that people realized near-instantly, the most disastrous consequence of repealing Glass-Steagall would be seen nearly a decade later in the 2007 financial crisis. Now, the absence of Glass-Steagall was not the primary factor in causing the Great Recession; The Recession was caused by a multitude of smaller factors, mainly revolving around deregulation, that all stacked on top of one another. Banks wanted more and more mortgages to back their securities. So, brokers began wantonly handing out mortgages to pretty much anyone. These cheap mortgages combined with rising property value seemed very enticing for people, who flocked to take out home loans, causing a bubble in the housing market. The Fed increased interest rates in 2004, and the increased mortgage payments caused a squeeze in the ability of homeowners to pay. The bubble burst in 2007. 

Because of a lack of regulation in banking, the housing market, and the financial industry, we had a massive financial crisis lasting from 2007 to 2009. The repeal of Glass-Steagall is just one example of deregulation.  It may not have been the root cause, but it was a factor nonetheless. 

Works Cited

Amadeo, Kimberly. “Causes of the 2008 Global Financial Crisis.” The Balance, 29 May 2020, www.thebalance.com/what-caused-2008-global-financial-crisis-3306176.

“The Case.” Collective Voices, www.betterbankinglaw.com/the-case.

Kagan, Julia. “The Gramm-Leach-Bliley Act of 1999 (GLBA).” Investopedia, Investopedia, 4 Mar. 2021, www.investopedia.com/terms/g/glba.asp.

Lemann, Nicholas. “What Would Be Wrong with Trump Restoring Glass-Steagall?” The New Yorker, The New Yorker, 19 June 2017, www.newyorker.com/business/currency/what-would-be-wrong-with-trump-restoring-glass-steagall.

Maues, Julia. “Banking Act of 1933 (Glass-Steagall).” Federal Reserve History, www.federalreservehistory.org/essays/glass-steagall-act.

Ross, Sean. “Investment Banking vs. Commercial Banking: What's the Difference?” Investopedia, Investopedia, 28 Aug. 2020, www.investopedia.com/articles/professionals/091615/career-advice-investment-banking-vscommercial-banking.asp.