The Glass-Steagall Act set up a firewall between commercial banks, which accept deposits and issue loans and investment banks which negotiate the sale of bonds and stocks.

The Banking Act of 1933 also created the Federal Deposit Insurance Corporation (FDIC), which protected bank deposits up to $2,500 at the time (now up to $250,000 as a result of the Dodd-Frank Act of 2010).

As the bill stated, it 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.”

Some of those “undue diversions” and “speculative operations” had been revealed in congressional investigations led by a firebrand prosecutor named Ferdinand Pecora.

As chief counsel to the U.S. Senate’s Committee on Banking and Currency, Pecora—an Italian immigrant who rose through the ranks of Tammany Hall, despite his reputation for honesty—dug into the actions of top bank executives and found rampant reckless behavior, corruption and cronyism.

Part of the problem, as Pecora and his investigative team revealed, was that banks could lend money to a company and then issue stock in that same company without revealing to shareholders the bank’s underlying conflict of interest. If that company then failed, the bank suffered no losses while its investors were left holding the bag.

In a series of sensational hearings, Pecora exposed the deeds of people like Charles Mitchell, head of the largest bank in America, National City Bank (now Citibank), who made more than $1 million in bonuses in 1929 but paid zero taxes. National City Bank, testimony uncovered, had taken on bundles of bad loans, packaged them as securities and unloaded them on unsuspecting customers.

Meanwhile, a top executive of Chase National Bank (a precursor of today’s JPMorgan Chase) had gotten rich by short-selling his company’s shares during the 1929 stock market crash. In testimony from financier J.P. Morgan, the public learned that Morgan had issued stocks at discounted rates to a small circle of privileged clients, including former President Calvin Coolidge.

Pecora’s hearings captivated an increasingly disgusted American public, which began to refer to these men as “banksters,” a term coined to refer to financial leaders who had put the nation’s economy at risk while pocketing profits.

A Chicago Tribune editor wrote on February 24, 1933, that “the only difference between a bank burglar and a bank president is that one works at night.” President Roosevelt and lawmakers harnessed this wave of anger for the financial industry to push through the Glass-Steagall Act, which Roosevelt signed into law on June 16, 1933.

Under the act, bankers could take deposits and issue loans and brokers at investment banks could raise capital and sell securities, but no banker at a single firm could do both. Over time, however, barriers set up by Glass-Steagall gradually chipped away.

Starting in the 1970s, large banks began to push back on the Glass-Steagall Act’s regulations, claiming they were rendering them less competitive against foreign securities firms.

The argument, embraced by Federal Reserve Chairman Alan Greenspan, who was appointed by President Ronald Reagan in 1987, was that if banks were permitted to engage in investment strategies, they could increase the return for their banking customers while avoiding risk by diversifying their businesses.

Soon, several banks began crossing the line once established by the Glass–Steagall Act through loopholes in the act. For example, the act stipulated that while a Federal Reserve member bank could not deal in securities, a bank could affiliate with a company that did as long as that company that was not “engaged principally” in such activities.

One of the most prominent deals that exploited this loophole was the 1998 merger of banking giant Citicorp with Travelers Insurance, which owned the now-defunct investment bank Salomon Smith Barney.

One year later, President Bill Clinton signed the Financial Services Modernization Act, commonly known as Gramm-Leach-Bliley, which effectively neutralized Glass-Steagall by repealing key components of the act.

President Clinton said the legislation would “enhance the stability of our financial services system” by permitting financial firms to “diversify their product offerings and thus their sources of revenue” and make financial firms “better equipped to compete in global financial markets.”

Some economists point to the repeal of the Glass-Steagall Act as a key factor leading to the housing market bubble and subsequent Great Recession, the financial crisis of 2007-2008.

Joseph E. Stiglitz, a Nobel laureate in economics and a professor at Columbia University, wrote in a 2009 opinion piece that by bringing “investment and commercial banks together, the investment bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risk-taking.”

But other economists, including former Treasury Secretary Tim Geithner, argued that a boom in sub-prime mortgage lending, inflated scores by credit-rating agencies and an out-of-control securitization market were more significant factors than any dismantling of federal regulation.

In any case, less than 10 years following the dismantling of the Glass-Steagall Act, the nation suffered through the Great Recession, the largest financial meltdown since the 1929 stock market crash that had originally inspired the act.

Banking Act of 1933 (Glass-Steagall), Federal Reserve History.
“The Banking Act of 1933” by Howard H. Preston, December 1933, The American Economic Review 23, no. 4.
“The Man Who Busted the Banksters,” by Gilbert King, November 29, 2011, Smithsonian.
“Pecora Hearings a Model for Financial Crisis Investigation,” by Amanda Ruggeri, September 29, 2009, US News and World Report.
Subcommittee on Senate Resolutions 84 and 234, United States Senate/History.
“The Legacy of F.D.R.” by David M. Kennedy, June 24, 2009, Time.
“Greenspan Calls for Repeal of Glass-Steagall Bank Law,” by Kathleen Day, November 19, 1987, The Washington Post.
Statement by President Bill Clinton at the Signing of the Financial Modernization Bill, November 12, 1999, U.S. Department of the Treasure, Office of Public Affairs.
“Capitalist Fools,” by Joseph E. Stiglitz, January 2009, Vanity Fair.
“How Wall Street Killed Financial Reform,” by Matt Taibi, May 10, 2012, Rolling Stone.
“The Origins of the Financial Crisis: Crash Course,” September 7, 2013, The Economist.
“2008 Crisis Still Hangs Over Credit-Ratings Firms,” by Matt Krantz, September 13, 2013, USA Today.
“Fact Check: Did Glass-Steagall Cause the 2008 Financial Crisis?” by Jim Zarroli, October 14, 2015, NPR.
“What Could Be Wrong With Trump Restoring Glass-Steagall?” by Nicholas Lemann, April 12, 2017, The New Yorker.
“Statement on Signing the Gramm-Leach-Bliley Act: November 12, 1999,” William J. Clinton. The American Presidency Project.