Banking Act of 1933

The Banking Act of 1933, also known as the Glass-Steagall Act, was the first piece of New Deal legislation to bring significant reform to the banking system. Developed by Congress and signed by President Franklin D. Roosevelt on June 16, 1933, the act’s main provisions were to separate commercial and investment banking, to create the Federal Deposit Insurance Corporation (FDIC), and to increase the power of the Federal Reserve Board. It played a major role in strengthening and stabilizing American banking.

Banking policy of the early 20th century allowed commercial banks to trade in stocks and bonds and underwrite securities. This practice was never seriously challenged until the stock market crash of 1929, which wiped out billions of dollars in assets. Because banks could not turn their greatly devalued paper assets into cash, they were often unable to pay off panicked depositors. As the Great Depression deepened in the early 1930s, thousands of banks failed and countless individual bank accounts were lost. When President Roosevelt was inaugurated in March 1933, the banking system was in crisis and had been temporarily shut down by banking “holidays” declared in state after state. The Emergency Banking Act of 1933 restored confidence and brought the reopening of the banking system, but it did not bring fundamental change.

Although Roosevelt wanted to defer further banking legislation, members of Congress thought reform was essential. In mid-May, Senator Carter Glass (D-Va.) and Congressman Henry Steagall (D-Ala.) proposed their bill to address problems in banking. The prohibition against commercial banks from also engaging in investment banking ended a practice that had contributed not only to the liquidity crisis of the early 1930s but also to speculation that had helped bring on the stock market crash. The Glass-Stea-gall Act prohibited commercial banks from underwriting or dealing in corporate securities. The act’s most important contribution to banking stability, at first opposed by Roosevelt and most bankers, was the creation of the FDIC (initially called the Temporary Deposit Insurance Corporation). The FDIC insured individual bank depositors up to $2,500 (raised to $5,000 in 1934), a crucial guarantee that eliminated the individual investor’s fear of losing deposited money and thus prevented bank panics and resulting bank failures. The Glass-Steagall Act also gave the Federal Reserve Board new power over open-market operations (selling and buying government securities to affect interest rates), an important reform carried further by the Banking Act Of 1935.

The Glass-Steagall Act, especially the creation of the FDIC, brought stability to the banking industry and a sharp reduction in bank failures. In fact, fewer banks suspended operations between 1933 and 1940 than in any single year in the 1920s. Ironically, the Roosevelt administration received credit for a major and successful measure that really originated in Congress.

Further reading: Susan Estabrook, The Banking Crisis of 1933 (Lexington: University Press of Kentucky, 1973).

—Michael Leonard