The Glass-Steagall Act Pecora 1970

The Glass-Steagall Act (GSA), a part of the Banking Act of 1933 consisting of section 16, 20, 21 and 32 was enacted to correct the crippled financial system in the US. Senator Carter Glass advocated in favour of separation arguing that involvement of commercial banks with corporate securities caused conflict of interest. The GSA prohibited commercial banks or any member of the Federal Reserve from underwriting, trading or holding corporate securities for their own account

On June 16, 1933, President Roosevelt signed into law the widely debated Glass-Steagall Banking Act. Sponsored by Virginia’s U.S. Senator Carter Glass and Alabama’s U.S. Representative Henry Steagall, the Glass-Steagall Banking Act was one of the attempts to restore the American people’s confidence in the banking system. Congress knew the current banking system needed reform. They desired to restrict the use of bank credit for speculation and instead direct bank credit to more productive uses, such as agriculture, commerce, and industry.

     A significant bill in congress was the Banking Act of 1933, a.k.a. Glass-Steagall. It was this act, which separated commercial and investment banking, that also divided the House of Morgan. As a result, Harry Morgan, one of Jack Morgan’s sons, along with two Morgan partners and about 25 employees left to form the investment bank Morgan Stanley.

Several high-profile cases of corporate financial fraud primarily the scandals involving Enron and Worldcom lead to the creation of The Sarbanes-Oxley legislation. SOX requires that companies maintain an archive of all business records for not less than five years. If found in violation of these requirements, consequences could involve potentially accruing fines or jail time.

The emergency legislation that was passed within days of President Franklin Roosevelt taking office in March 1933 was just the start of the process to restore confidence in the banking system. Congress saw the need for substantial reform of the banking system, which eventually came in the Banking Act of 1933, or the Glass-Steagall Act. The bill was designed “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.” The measure was sponsored by Sen. Carter Glass (D-VA) and Rep. Henry Steagall (D-AL). Glass, a former Treasury secretary, was the primary force behind the act. Steagall, then chairman of the House Banking and Currency Committee, agreed to support the act with Glass after an amendment was added to permit bank deposit insurance.1 On June 16, 1933, President Roosevelt signed the bill into law. Glass originally introduced his banking reform bill in January 1932. It received extensive critiques and comments from bankers, economists, and the Federal Reserve Board. It passed the Senate in February 1932, but the House adjourned before coming to a decision. It was one of the most widely discussed and debated legislative initiatives in 1932.

Gov. Chafee and former Virginia Sen. Jim Webb had rather lackluster performances during the debate. Webb’s stand-out moments were his complaints of not being given enough time to answer, to which Cooper responded, “You agreed to these debate rules.” Gov. Chafee also faltered when Cooper asked about his 1999 vote to repeal Glass-Steagall, which Cooper explained to voters as the “Depression-era banking law repealed in 1999 that prevented commercial banks from engaging in investment banking and insurance activities.” Chafee said, “The Glass-Steagall was my very

Financial historians have disputed the rational for reforming the banking system in the US as a result of the 1920s banking crisis. Calomiris (2010) argue that there may have been political self-interest incentives as to why the Glass-Steagall Act was enacted. Firstly Steagall had bargaining power as Chairman of the banking committee in the House of Representatives. Second, the Pecora Hearings populist politicians including Henry Steagall advocated in favour of small banks contributing in making large bank disliked amongst the public. And finally deposit insurance was introduced as a temporary system allowing for easy approval in the Congress.

Even before FDR had taken his oath of office, the Glass-Steagall bill had been in the works. Representative Henry Steagall had proposed deposit insurance as a means of saving failed banks. This was not a new idea. Several states had initiated deposit insurance schemes in the 1920s, when bank failures were on the rise. During the depression, however, states lacked the capital resources to rescue their own state-chartered banks, to say nothing of the many smaller banks. Steagall realized that opposition to a federally insured deposit system would come from the large banks, which would resent parting with revenue for the sake of their weaker competitors. By the spring of 1933, however, even the major banks were willing to support this idea, rather

The Banking Act of 1933 was passed by the United States Congress on June 16, 1933. The Banking Act of 1933 is also knows the Glass-Steagall Act, especially when referring to the principal provision of separating commercial banks and investment banking. The term Glass–Steagall Act, however, is most often used to refer to four provisions of the Banking Act of 1933 and only two of those provision restricted or limited commercial bank securities activities and affiliations between commercial banks and securities firms. That limited meaning of the term is described in the article on Glass–Steagall Legislation. Which means, an act to provide for the safer and more effective used of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.

The Glass Steagall Act was passed on 1933, which is also known as The Banking Act to tighten regulation on the way banks did their business. This act was written as an emergency measure when about 5,000 banks failed during the Great Depression. Banks mostly failed because of the way they would invest with money. The act prohibits banks from investing money on investments that turn out to be risky. Banks could no longer sell securities or bonds. The act also created Federal Deposit Insurance Corporation (FDIC) to protect the deposits of individuals, which is still used to this date. The FDIC in this era insures your deposits in your bank up to $250,000. This gave the public confidence again to deposit their money in the bank. In 1933

Senator Duncan U. Fletcher of Florida along with counsel Ferdinand Pecora were the ones who exposed the bankers and how they would appropriate funds for their own personal use and also to evade income tax. The public was outraged rightfully so the New Dealers response to these claims they founded the Glass-Steagall Banking Act in June of 1933. The Glass-Steagall Banking Act was to separate commercial banks from their investment affiliates that way they could not use depositors’ funds or funds from the Federal Reserve for speculation. This in turn gave the Federal Reserve more power and who there members are. Another impact that came out of this act is the FEDERAL DEPOSIT INSURANCE (FDIC) this would insure all clients’ with a security deposit. The American Banking Association thought that this was a type of government

The initial act was written in 1933, following the Stock Market crash of 1929. The Glass - Steagall act instilled banks to maintain investment money separate from consumer money (Politifact, Glass-Steagall). In short, the law kept commercial banks (consumers deposit money and take out loans) separate from investment firms (hold securities and make investments). The main concern with repealing the act was that it would put the public in a vulnerable position and predispose them to various types of risks (Politifact, Glass-Steagall). For example, if a colossal bank such as Chase merges with an investment firm that bets on an investment that fails, the commercial side will be put at risk. Following the immediate repeal of the Glass - Steagall act, banks and various other companies began to take advantage of loopholes and consequently created a housing

The Glass-Steagall Act of 1933 that defined the roles for commercial banks, investments banks and insurance firms was over ridden by the Gramm-Leach-Bliley Act (1999) which repealed the provisions that restricted affiliations in financial institutions. Hence one solution is to overcome the incentive problem and the conflict of interests that arise when financial institutions simultaneously undertake financial activities of varied nature.

Senator Carter Glass's proposal, incorporated in the Banking Act of 1933 caused a greater stir. Glass proposed to separate investment from commercial banking. Glass wanted to stop the misuse of depositors' funds to acquire and trade stocks and bonds including stocks in the institution itself. Additionally, there was evidence that these banks had made more than $8 billion in loans to brokers and dealers in the 1920s which fueling stock market speculation. Major banks had also compromised their integrity as they attempted to lure their own customers to invest in the banks' securities holdings. When a bank uses most of its depositors' funds to invest in stocks and bonds, liquid cash available to its depositors becomes scarce. Savings and other

In 1993, after the Great Depression, was issued the Glass-Steagall Act to limit the power of the banking system. The two key points of this act were the creation of the Federal Deposit Insurance Corporation and the separation between commercial and investment banks . To achieve this second goal, they prevented commercial Federal Reserve members banks from dealing in non-governmental securities for costumers, investing in non-investment grade securities for themselves, underwriting or distributing non-governmental securities and, finally, affiliating with banks and companies that can do the actions listed. After 66 years, part of the Glass-Steagall Act was repealed by the