Background
The Glass–Steagall Act refers to four provisions of the U.S. Banking Act of 1933 that limited commercial banks’ securities activities and affiliations between commercial banks and securities firms. Its main goal was to provide a buffer between commercial banking activities and investment banking activities to reduce risks within the banking system.
Historical Context
Enacted during the Great Depression, the Glass–Steagall Act was primarily focused on restoring confidence in the U.S. banking system after its collapse. It emerged from the prevailing belief that the failure of universal banking (where banks could engage in both commercial and investment activities) was a significant factor in the economic downturn. The widespread bank collapses during the Great Depression underscored the importance of safeguarding depositors’ funds from risky investment activities.
Definitions and Concepts
- Universal Banking: A financial system where banks are allowed to engage in both commercial and investment banking activities.
- Commercial Banks: Financial institutions that accept deposits, offer checking account services, and make various loans.
- Investment Banks: Financial organizations dedicated to creating capital for businesses, governments, and other entities. They underwrite new debt and equity securities.
- Financial Crisis of 2008: A major financial crisis that led to the collapse of major financial institutions, downturns in stock markets globally, and severe economic consequences worldwide.
Major Analytical Frameworks
Classical Economics
Classical economists did not have a framework for modern banking regulations like Glass-Steagall, being more focused on laissez-faire principles.
Neoclassical Economics
Advocates for minimal state intervention laid the groundwork for significant discussion about the impact of regulatory measures like Glass-Steagall.
Keynesian Economics
Keynesian frameworks support regulation as a means of ensuring economic stability and minimizing systemic risks, thus endorsing policies like those embodied by the Glass-Steagall Act.
Marxian Economics
Marxian economists may interpret the passing of the Glass-Steagall Act as a struggle against capitalist excess and the concentration of wealth inherent in banking monopolies.
Institutional Economics
This framework views the Glass-Steagall Act as a significant effort to re-enforce institutional boundaries that safeguard economic stability.
Behavioral Economics
Behavioral economists indicate the concentration of high-risk activities in fewer entities can exacerbate irrational biases, thus backing separation policies like Glass-Steagall.
Post-Keynesian Economics
Post-Keynesian scholars might view the abolition of Glass-Steagall’s regulatory barriers as increasing financial instability due to unchecked speculative activities.
Austrian Economics
Austrian economists generally oppose such regulations, positing that the market would self-correct without governmental intervention.
Development Economics
In the context of developing economies, restrictive regulations like Glass-Steagall could ensure stable financial growth absent aggressive capitalism.
Monetarism
Monetarists may critique Glass-Steagall in the context of how it impacts money supply through banking behaviour. They often advocate for central control over anticompetitive practices rather than separation mandates.
Comparative Analysis
Comparing the U.S. system under the Glass-Steagall Act versus countries that permit universal banking, such as Germany, shows distinctive stability dynamics and regulatory approaches. Countries with universal banking models have different forms of checks and balances, focusing on co-regulation typified by the coordination among varied financial agencies.
Case Studies
- Pre-1933 U.S. Banking System: Analysis leading to the enactment of the Glass-Steagall Act.
- Post-1999 Partial Repeal of Glass-Steagall: How the Gramm-Leach-Bliley Act influenced financial services and contributed to financial fragility before the 2008 crisis.
Suggested Books for Further Studies
- “The End of Alchemy: Money, Banking, and the Future of the Global Economy” by Mervyn King
- “The Glass-Steagall Act: I Am Weeping Like a Child” by Ferdinand Pecora
- “Too Big to Fail” by Andrew Ross Sorkin
- “Financial Shock (Updated Edition): Global Panic and Government Bailouts” by Mark Zandi
Related Terms with Definitions
- Securities: Financial instruments that represent an ownership position in a publicly-traded corporation, creditor relationship, or rights to ownership as represented by an option.
- Dodd-Frank Act: Legislation passed in response to financial crisis aiming to reduce risks in the U.S. financial system by regulating financial markets and protecting consumers.
- Leverage: The use of borrowed capital (debt) to increase the potential return on investment.
- Systemic Risk: The risk of collapse of an entire financial
