The Banking Act of 1933 () was a statute enacted by the United States Congress that established the Federal Deposit Insurance Corporation (FDIC) and imposed various other banking reforms. The entire law is often referred to as the Glass–Steagall Act, after its Congressional sponsors, Senator Carter Glass (D) of Virginia, and Representative Henry B. Steagall (D) of Alabama. The term "Glass–Steagall Act", however, is most often used to refer to four provisions of the Banking Act of 1933 that 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.
The Banking Act of 1933 (the 1933 Banking Act) joined two long-standing Congressional projects: A federal system of bank deposit insurance championed by Representative SteagallGolembe 1961. The regulation (or prohibition) of the combination of commercial and investment banking and other restrictions on "speculative" bank activities championed by Senator Glass as part of a general desire to "restore" commercial banking to the purposes envisioned by the Federal Reserve Act of 1913.Perkins 1971. Willis and Parker 1934. Although the 1933 Banking Act thus fulfilled Congressional designs and, at least in its deposit insurance provisions, was resisted by the Franklin D. Roosevelt administration, it later became considered part of the New Deal. The deposit insurance and many other provisions of the Act were criticized during Congressional consideration.Patrick 1993, p. 168-177. The entire Act was long-criticized for limiting competition and thereby encouraging an inefficient banking industry. Supporters of the Act cite it as a central cause for an unprecedented period of stability in the U.S. banking system during the ensuing four or, in some accounts, five decades following 1933.
Creation of FDIC and federal deposit insurance
The 1933 Banking Act established (1) the Federal Deposit Insurance Corporation (FDIC); (2) temporary FDIC deposit insurance limited to $2,500 per accountholder starting January 1934 through June 30, 1934; and (3) permanent FDIC deposit insurance starting July 1, 1934, fully insuring $5,000 per accountholder. 1934 legislation delayed the effectiveness of the permanent insurance system. The Banking Act of 1935 repealed the permanent system and replaced it with a system that fully insured balances up to $5,000 and provided no insurance for balances above that amount., chapter 3, pp. 43–44. Over the years, the limit has been raised which reached up to its current limit of $250,000.
The 1933 Banking Act required all FDIC-insured banks to be, or to apply to become, members of the Federal Reserve System by July 1, 1934. The Banking Act of 1935 extended that deadline to July 1, 1936. State banks were not eligible to be members of the Federal Reserve System until they became stockholders of the FDIC, and thereby became an insured institution. 1939 legislation repealed the requirement that FDIC-insured banks join the Federal Reserve System., chapter 3, pp. 44 and 47–53.
Before 1950, the laws establishing the FDIC and FDIC insurance were part of the Federal Reserve Act. 1950 legislation created the Federal Deposit Insurance Act (FDIA)., chapter 4, p. 61.
Separation of commercial and investment banking
Over time, the term Glass–Steagall Act came to be used most often to refer to four provisions of the 1933 Banking Act that separated commercial banking from investment banking. Congressional efforts to "repeal the Glass–Steagall Act" referred to those four provisions (and then usually to only the two provisions that restricted affiliations between commercial banks and securities firms).Reinicke 1995, pp. 104–105. Greenspan 1987, pp. 3 and 15–22. . Those efforts culminated in the 1999 Gramm-Leach-Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms.Macey 2000, p. 716. Wilmarth 2002, p. 219, fn. 5. The 1933 Banking Act's separation of investment and commercial banking is described in the article on the Glass–Steagall Act. Institutions were given one year to decide whether they wanted to specialize in commercial or investment banking.
Other provisions of 1933 Banking Act
Creation of the Federal Open Market Committee The act had a large impact on the Federal Reserve. Notable provisions included the creation of the Federal Open Market Committee (FOMC) under Section 8. However, the 1933 FOMC did not include voting rights for the Federal Reserve Board, which was revised by the Banking Act of 1935 and amended again in 1942 to closely resemble the modern FOMC.
Regulation Q To decrease competition between commercial banks and discourage risky investment strategies, the Banking Act of 1933 outlawed the payment of interest on checking accounts and also placed ceilings on the amount of interest that could be paid on other deposits.
Regulation of "speculation" Several provisions of the 1933 Banking Act sought to restrict "speculative" uses of bank credit. Section 3(a) required each Federal Reserve Bank to monitor local member bank lending and investment to ensure there was not "undue use" of bank credit for "speculative trading or carrying" of securities, commodities or real estate. Section 7 limited the total amount of loans a member bank could make secured by stocks or bonds and permitted the Federal Reserve Board to impose tighter restrictions and to not limit the total amount of such loans that could be made by member banks in any Federal Reserve district. Section 11(a) prohibited Federal Reserve member banks from acting as agents for nonbanks in placing loans to brokers or dealers. pp. 1 (Section 3(a)), 4 (Section 7), 8 (Section 11(a)). Rodkey 1934, p. 893. Willis 1935, pp. 705–711. Glass also hoped to put "speculative" credit into more productive sectors of the U.S. economy.
Other provisions still in effect
Other provisions of the 1933 Banking Act that remain in effect include (1) Sections 5(c) and 27, which required state member banks to provide its district's Federal Reserve Bank and the Federal Reserve Board and national banks to provide the Comptroller of the Currency a minimum of three reports on their affiliates;, pp. 2–3 and 13. (2) Section 13, which (as Section 23A of the Federal Reserve Act) regulated transactions between Federal Reserve member banks and their nonbank affiliates;, pp. 8–9. Omarova 2011. (3) Sections 19 and 30, which established criminal penalties for misconduct by officers or directors of Federal Reserve System member banks and authorized the Federal Reserve to remove such officers or directors;, pp. 11 (clause (d) of "Regulation of Holding Companies") and 30. (4) Section 22, which eliminated personal liability ("double liability") for new shareholders of national banks;, p. 12. and (5) Section 23, which gave national banks the same ability to establish branches in their "home state" as state chartered banks in that state., p. 12. Alper 1933, pp. 195–196.
The 1933 Banking Act gave tighter regulation of national banks to the Federal Reserve which required state member banks and holding companies to make three reports annually. The reports were to be given to their Federal Reserve Board and Federal Reserve Bank.
Other provisions repealed or replaced
Provisions of the 1933 Banking Act that were later repealed or replaced include (1) Sections 5(c) and 19, which required an owner of more than 50% of a Federal Reserve System member bank's stock to receive a permit from (and submit to inspection by) the Federal Reserve Board to vote that stock (replaced by the Bank Holding Company Act of 1956);, pp. 3 and 11 (Regulation of Holding Companies). Gerald C. Fischer, "Bank Holding Companies", New York: Columbia University Press (1961), pp. 61-78. (2) Section 8, which established the Federal Open Market Committee (FOMC) made up of representatives from each of the 12 Federal Reserve Banks (revised by the Federal Reserve Board-dominated FOMC established by the Banking Act of 1935 and later amended in 1942);, p. 4. Kennedy 1973, pp. 210 and 235-6. Friedman and Schwartz 1963, p. 445. (3) Section 11(b), which prohibited interest payments on demand deposits (repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and allowing interest-bearing demand accounts beginning July 21, 2011) and authorized the Federal Reserve Board to limit interest rates on time deposits (phased out by the Depository Institutions Deregulation and Monetary Control Act of 1980 by 1986),. . both of which interest limitations were incorporated into Regulation Q, and (4) Section 12, which prohibited Federal Reserve System member bank loans to their executive officers and required the repayment of outstanding loans (replaced by the 1935 Banking Act's regulation of such loans and modified by later legislation).Burns 1974, pp. 142 and 173.
Legislative history
1930–1932 Glass bills; Glass Senate subcommittee Between 1930 and 1932 Senator Glass introduced several versions of a bill (known in each version as the Glass bill) to separate commercial and investment banking and to establish other reforms (except deposit insurance) similar to the final provisions of the 1933 Banking Act. Glass had been the House sponsor of the Federal Reserve Act of 1913 (the Glass-Owen Act) and considered himself "the father of the Federal Reserve System". The various versions of his Glass bill consistently sought to (1) expand branch banking and bring more banks and activities under Federal Reserve supervision and (2) separate (or regulate the mix of) commercial and investment banking.
Glass sought to "correct" what he considered to be the "errors" the Federal Reserve System had made in not controlling what he considered "speculative credit" during the 1920s. The Glass bills also sought to avoid deposit insurance by providing for a "Liquidation Corporation", a federal authority to purchase assets of a closed bank based on "an approximately correct valuation of its assets". Glass's idea was for a federal corporation to assume ownership of the assets of failed banks and sell them over time as the market could absorb them, rather than dump assets onto markets with little demand. The bills provided that such payments would be used to make immediate payments to depositors to the extent of the bank's "bona fide assets".Kennedy 1973, pp. 50–53 and 203–204. Perkins 1971, pp. 497–505. Willis and Chapman 1934, pp. 62–102 (with quoted asset liquidation language on pp. 65–66 as descriptions of the statutory language).Robert L. Fuller, "Phantom of Fear" The Banking Panic of 1933 (2011) 48
Glass introduced the first Glass bill on June 17, 1930. The bill's language indicated that it was intended as a "tentative measure to serve as a guide" for a subcommittee of the Senate Committee on Banking and Currency (the Glass Subcommittee) chaired by Glass that was authorized to investigate the operations of the National and Federal Reserve banking systems.Burns 1974, p. 8.
On January 25, 1933, during the lame duck session of Congress following the 1932 elections, the Senate passed a version of the Glass bill.Kennedy 1973, pp. 72–73.
Commercial banking theory; unit banks Senator Glass supported a commercial banking theory (associated with the real bills doctrine) that commercial banks should no longer be allowed to underwrite or deal in securities. This theory, defended by Senator Glass's longtime advisor Henry Parker Willis, had served as a foundation for the Federal Reserve Act of 1913 and earlier US banking law. Glass and Willis argued the failure of banks to follow, and of the Federal Reserve to enforce, this theory had resulted in the "excesses" that inevitably led to the Wall Street Crash of 1929 and the Great Depression.Perkins 1971, pp. 501–505. Wilmarth 2008, p. 565. Friedman and Schwartz 1963, p. 388, fn. 134.