The Glass-Steagall Act, enacted in 1933, separated commercial banking from investment banking in the United States. It aimed to prevent conflicts of interest between the two activities, which were believed to have contributed to the financial crisis of 1929. The Act established the Federal Deposit Insurance Corporation (FDIC) to insure bank deposits and created the Securities and Exchange Commission (SEC) to regulate the securities industry. It effectively prevented banks from engaging in certain risky activities, such as underwriting securities, and limited their affiliation with investment firms.
Glass-Steagall Act: An in-Depth Explanation for APUSH
The Glass-Steagall Act was a landmark piece of legislation passed in 1933 as part of the New Deal. It was designed to prevent the recurrence of the financial crisis of 1929 and to restore confidence in the banking system. The Act’s most significant provisions were:
Separating Commercial and Investment Banking:
- Glass-Steagall separated commercial banking (accepting deposits and making loans) from investment banking (underwriting and distributing securities).
- This prevented banks from using depositors’ money to speculate in the stock market.
Limiting Bank Size:
- The Act limited the size of banks, prohibiting them from having branches in more than one state.
- This was intended to prevent the formation of large, concentrated financial institutions.
Creating the FDIC:
- The Act created the Federal Deposit Insurance Corporation (FDIC), which insured bank deposits up to a certain amount.
- This gave depositors confidence that their money was safe, even if their bank failed.
Table Summarizing Key Provisions:
| Provision | Purpose |
|---|---|
| Separation of commercial and investment banking | Prevent banks from using depositors’ money to speculate |
| Limit on bank size | Prevent the formation of concentrated financial institutions |
| Creation of the FDIC | Insure bank deposits and restore confidence in the banking system |
Impact of Glass-Steagall:
- The Act helped to restore confidence in the banking system and contributed to the economic recovery of the 1930s.
- It also prevented the recurrence of financial crises until its provisions were repealed in 1999.
- The repeal of Glass-Steagall is widely seen as a contributing factor to the financial crisis of 2008.
Question 1:
What is the Glass-Steagall Act?
Answer:
The Glass-Steagall Act is a federal law enacted in 1933 that separates investment banking and commercial banking, prohibiting banks from engaging in both activities.
Question 2:
Why was the Glass-Steagall Act passed?
Answer:
The Glass-Steagall Act was passed in response to the financial crisis of 1929, which was blamed in part on the risky practices of banks that engaged in both investment and commercial banking.
Question 3:
How has the Glass-Steagall Act impacted the U.S. banking system?
Answer:
The Glass-Steagall Act has significantly impacted the U.S. banking system by creating a separation between commercial banks, which focus on lending and taking deposits, and investment banks, which specialize in underwriting securities and providing financial advice.
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