This Week in History:
April 3 - 9, 1933
Provisions of the Glass-Steagall Banking Act
Franklin D. Roosevelt
The second prong of re-regulation of the financial system that was passed as part of Franklin Delano Roosevelt's Hundred Days of New Deal legislation, following the Securities Bill, was the Glass-Steagall Act, also known as The Banking Act of 1933. The origins of this bill went back to 1932, or earlier, but it was only under the conditions of the re-assertion of the principle of the General Welfare, which FDR's leadership represented, that it could be passed. The battle over the bill's provisions raged throughout the entire spring of 1933, before final passage in June, but we devote this column to its provisions, because it directly follows upon the determination of FDR's Administration to crack down on the corruption in the financial sector.
Glass-Steagall split commercial banking from brokerage/investment banking. Any financial institution engaging in both activities either had to split into two entities, or forego one or the other activity. No commercial bank was allowed to own an investment bank, and vice versa. Sections 16 and 21 of the Act stated that no commercial bank could engage in the business of "issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stock, bonds, debentures, notes or other securities." (The exception is that commercial banks could sell and underwrite U.S. government bonds.) No commercial bank could underwrite, deal with, trade, or possess for its own account, securities—since that was the domain of the investment banks. Conversely, no investment bank could take individual small customer deposits, which was the domain of the commercial banks.
To counter some of the other practices of the 1920s, the bill also forbade any bank officer from borrowing from his own institution.
A Firewall Against Financial Imperialism
This enforced separation of banking activities addresses two very important matters. First, if a single institution is allowed to carry out commercial banking and investment banking (and insurance) under one roof, a very great amount of power is concentrated in that institution's hands. Today, the repeal of Glass-Steagall, combined with the repeal of the McFadden Act—which forbids interstate banking—has allowed financial institutions in the United States to consolidate to only a half-dozen entities representing one foreign oligarchical class-interest, the British Empire, and controlling every aspect of America's financial life. Such a process was advancing rapidly in the 1920s, and Glass-Steagall helped to halt it.
Second, by placing different pools of money in a single institution—pools from commercial banking, from investment banking, from insurance—one is creating the temptation that that institution will commingle the funds, and use them for whatever purposes it pleases. This violates a basic tenet of banking. A commercial bank is, by definition, simply a deposit-taking institution. An individual who puts his money into a savings or checking account in a commercial bank, expects some interest, but is putting the funds there for safe-keeping, not for investment, which is the purpose of an investment bank/brokerage house. The individual does not want the funds commingled with other funds without permission.
During the 1920s, precisely these principles were grossly abused; banks were building up enormous power, and they were using funds as they saw fit. It was this abuse, as Franklin Roosevelt and other patriots saw, that had contributed mightily to the 1929-32 stock market crash, the breakdown of the banking system, and the physical-economic depression which had left millions destitute.
The bill carried another useful provision. It created the Federal Deposit Insurance Corp. (FDIC), which gave Federal insurance for citizens' bank deposits up to a certain amount, for the first time in the nation's history. The FDIC announced that starting July 1, 1934, all deposits under $10,000 would be insured 100%; deposits in the range of $10,000 to $50,000 would be insured 75%; and deposits of $50,000 or larger would be insured 50% (today, all deposits up to $100,000 are insured 100%).
Regulation Needed Now More Than Ever
When the Glass-Steagall Act became law, the bankers understood that an important part of the cycle of the 1920s was being broken. W.C. Potter of the Morgan Bank-controlled Guaranty Trust characterized the proposal as "quite the most disastrous" he had "ever heard." The American Bankers Association led the fight against the bill, "to the last ditch," in its president's words.
Today, the bankers argue against the Glass-Steagall regulations with the lie that they are "outmoded." Now that the banks are able to unrestrictedly commingle commercial banking, investment banking, and insurance, they have put the entire planet on the brink of the deadliest physical-economic collapse since the bubonic plague outbreaks of the 14th century; in fact, the food supplies are already declining dangerously. Immediate action must be taken to restore the Glass-Steagall regulations to prevent a global holocaust. Failure to do so will not only cause a global holocaust, with a return to Medeival or worse levels of population, literacy, and life expectancy, but the destruction of centuries, perhaps milenia, of scientific and cultural progress will make the human species much more vulnerable to extinction due to cosmic events which we fail to understand, much less defend against. "Outmoded", indeed!
The original article was published in the EIR Online’s Electronic Intelligence Weekly, as part of an ongoing series on history, with a special emphasis on American history. We are reprinting and updating these articles now to assist our readers in understanding of the American System of Economy.