The Glass-Steagall Act of 1933 and the 1999 Repeal Still Argued Over

On June 16, 1933, the last day of the most frantic hundred days in the history of American lawmaking, Franklin Roosevelt sat down with a stack of bills and signed them one after another. One was the National Industrial Recovery Act. Another was a banking bill named for two Southern Democrats, Senator Carter Glass of Virginia and Representative Henry Steagall of Alabama, who disagreed about much of it and had spent months fighting over its terms. Its formal title was the Banking Act of 1933. It would create federal deposit insurance, which both Roosevelt and Glass had doubted, and it would split American banking in two: banks that took deposits and made loans on one side, firms that sold and traded securities on the other. For more than half a century, that line shaped Wall Street. In 1999, Congress erased most of it with large majorities in both parties. Less than a decade later came the worst financial crisis since the one that produced the law, and people have been arguing ever since about whether the two events were connected.

In short: The Banking Act of 1933, usually called Glass-Steagall, separated commercial banking from investment banking and created the FDIC. Regulators chipped away at the separation for years before the Gramm-Leach-Bliley Act repealed key parts of it in 1999. The repeal did not directly cause most of what went wrong in 2008, but it helped create giant financial conglomerates whose failure the government felt it could not allow, and that is the stronger argument for bringing some version of it back.

The hearings that made the law possible

In early 1933, the Senate Banking and Currency Committee hired a former New York prosecutor named Ferdinand Pecora as its chief counsel for a long-running investigation into the 1929 crash. Pecora had been born in Sicily and brought to New York as a boy; he had no ties to Wall Street and no interest in protecting it. Over a series of hearings, he put the country's most powerful bankers under oath and walked them through what their firms had done.

The first great target was Charles Mitchell, head of the National City Bank, the forerunner of today's Citibank. Pecora showed how the bank's securities affiliate had pushed shaky foreign bonds, including bonds issued for Latin American governments, onto ordinary depositors who trusted the bank's name, while the bank knew more about the risks than it told them. Mitchell resigned within days of his testimony. Later, J. P. Morgan Jr. himself testified and acknowledged that he and his partners had paid no federal income tax in some of the Depression years, legally, because of losses.

The hearings also produced one of the strangest images of the era. During a break in Morgan's testimony, a publicity agent placed a circus performer on the banker's lap, and newspapers ran the photograph across the country. It was a stunt, nothing more. But it captured the public mood: the most powerful financier in America, briefly made ridiculous in a Senate hearing room.

Pecora's investigation made the case for reform better than any argument could. It showed that banks with ordinary depositors had used their trusted position to sell risky securities, sometimes to cover their own losses, and that the line between a safe place to keep money and a casino had blurred.

What the act actually did

The Banking Act of 1933 did several big things at once.

It created the Federal Deposit Insurance Corporation, which guaranteed bank deposits up to a limit. This was Steagall's cause. Thousands of banks had failed since 1930, and with each failure ordinary families lost their savings. Roosevelt worried that deposit insurance would protect badly run banks, and Glass opposed it for similar reasons. But the public demand was overwhelming, and deposit insurance went into the final bill. Bank runs, which had been a routine terror of American life, became rare almost overnight.

It separated commercial banking from investment banking. Four short sections of the law, numbered 16, 20, 21 and 32, did the work. Banks that took deposits could not underwrite or deal in most securities. They could not be affiliated with firms principally engaged in that business. Securities firms could not take deposits. And the same people could not serve as officers or directors of both kinds of firms. Banks had to choose. J. P. Morgan & Co. chose to remain a commercial bank, and several of its partners left to form a separate investment firm, Morgan Stanley, in 1935.

It also limited the interest banks could pay on deposits, a rule meant to stop banks from competing for deposits by taking risky bets to pay high rates. That rule was phased out decades ago.

The logic of the separation was simple. Deposits insured by the government should be used for the dull business of lending, not for speculation. If firms wanted to take big risks in the markets, they could, but not with money the taxpayer was guaranteeing.

How the wall came down slowly

For decades the system worked roughly as intended, and American banking was famously boring. Then, from the 1970s onward, the world around the law changed. Money market funds offered savers higher returns than banks could pay. Large companies began raising money directly from markets rather than borrowing from banks. Foreign banks, which faced no such restrictions at home, grew larger than American ones. Bankers argued that the 1933 rules were tying their hands in a world that had moved on.

Regulators responded by reading the law more and more loosely. Section 20 barred banks from affiliating with firms principally engaged in securities work. In 1987, the Federal Reserve decided that a bank holding company could own a securities subsidiary as long as securities underwriting was only a small share of that subsidiary's revenue. Over the following years the Fed raised that share step by step, until by the late 1990s the subsidiaries could be very large securities operations in their own right.

Then came the deal that forced the question. In April 1998, Citicorp, one of the largest banks in the country, announced a merger with Travelers Group, an insurance and securities company run by Sanford Weill. The combined Citigroup would offer banking, insurance and investment banking under one roof, which the law as written did not permit. The merger went ahead on the expectation that Congress would change the law before the company had to divest.

The 1999 repeal

Congress obliged. The Gramm-Leach-Bliley Act, named for Senator Phil Gramm of Texas and Representatives Jim Leach of Iowa and Thomas Bliley of Virginia, all Republicans, repealed sections 20 and 32 of the 1933 law. Banks, securities firms and insurers could now be owned by a single holding company. Bill Clinton, a Democrat, signed it on November 12, 1999. The final version passed the Senate 90 to 8 and the House 362 to 57.

It is worth noticing what was left standing. Sections 16 and 21 survived: a bank itself still could not underwrite most securities, and a securities firm still could not take deposits. What changed was that both could now sit side by side under the same corporate parent. Supporters said the change merely recognized what regulators had already allowed and let American firms compete globally. A handful of senators, including Byron Dorgan of North Dakota, warned that it would create institutions too big and complicated to fail. They were outvoted by wide margins.

A year later, Congress passed the Commodity Futures Modernization Act, which largely kept the fast-growing market in over-the-counter derivatives, including credit default swaps, outside the reach of federal regulators. Many accounts of 2008 assign that law as much responsibility as Gramm-Leach-Bliley, or more.

What the repeal did and did not cause

Here is where the argument gets heated, and where progressives sometimes overstate their case.

Look at the institutions at the centre of the 2008 crisis. Bear Stearns and Lehman Brothers were investment banks; they had never been covered by Glass-Steagall's ban on taking deposits and would not have been affected by it. AIG was an insurance company. Countrywide was a mortgage lender. Washington Mutual, the largest bank failure in American history, was a savings institution that failed because of bad mortgage loans, the most traditional kind of banking risk. None of those failures can be blamed directly on the repeal. That is why many economists, and Clinton himself, have said that the 1999 law had little to do with the crash.

That case is strong, and progressives who claim the repeal alone caused 2008 are wrong.

But it is not the whole story. The repeal helped produce financial conglomerates of enormous size and complexity, Citigroup above all, that combined insured deposits with sprawling trading and securities operations. When the crisis hit, the government decided it could not let those firms fail, because their collapse would take down the deposit system along with the trading desks. Citigroup received hundreds of billions of dollars in combined government support. The repeal also made the rescues of 2008 possible in the form they took: Bank of America absorbed Merrill Lynch, JPMorgan Chase absorbed Bear Stearns, and Goldman Sachs and Morgan Stanley turned themselves into bank holding companies to get access to the Fed's emergency lending. Each move made the biggest firms bigger.

So the more defensible claim is this: Glass-Steagall's repeal was not the spark of 2008, but it helped build the structure that made the fire so hard to contain and so expensive to put out.

What came after, and where it stands

The Dodd-Frank Act of 2010 did not restore Glass-Steagall. It included a narrower measure named for Paul Volcker, the former Fed chairman, which bars banks with insured deposits from most proprietary trading, meaning betting the firm's own money in the markets. The Volcker rule has been loosened since, particularly through rule changes during the first Trump administration.

Efforts to restore the full separation have come from unexpected directions. In 2013, Senators Elizabeth Warren and John McCain introduced a 21st Century Glass-Steagall Act, joined by senators from both parties. In 2016, the platforms of both the Democratic and Republican parties called for restoring Glass-Steagall in some form. None of those efforts became law.

The bank failures of 2023, beginning with Silicon Valley Bank in March of that year, were a reminder that separation is no cure-all. Silicon Valley Bank was not brought down by securities trading; it failed because it put deposits into long-term bonds that lost value when interest rates rose, and its depositors, many of them uninsured, ran. A restored Glass-Steagall would not have prevented that.

The case for bringing it back, carefully

This last section is argument. I think a modern version of the separation is worth pursuing, not because it would have stopped 2008 on its own, but because of what it would do to the size and shape of American finance. The biggest banks have only grown larger since the crisis. When a single firm combines insured deposits, trading, investment banking and asset management on a scale this vast, the public ends up guaranteeing risks it cannot see and did not agree to take. Separating those businesses would make each one easier to supervise and, if necessary, easier to let fail.

The other side's strongest argument is that a separation would be costly and disruptive, would push risk into less regulated parts of the financial system, and would fix a problem that was not the main cause of the last crisis. Those concerns are real. They argue for designing reform carefully and pairing it with oversight of the shadow banking system, not for leaving the giants as they are.

The deeper lesson of 1933 may be that financial rules are written after disasters, by people who saw what happened, and taken apart during long booms, by people who did not. Remembering why the line was drawn is the first step to deciding where it should be drawn now.

The rest of Pecora's legacy

The banking act was only one of the laws the Pecora hearings helped make possible. In May 1933, Roosevelt signed the Securities Act, which required companies selling new stocks and bonds to the public to register them and disclose basic information about their business and risks. A year later, the Securities Exchange Act created the Securities and Exchange Commission to police the markets. Roosevelt chose Joseph P. Kennedy, a wealthy investor who knew the tricks of the trade from the inside, as its first chairman, a choice that drew criticism at the time. Pecora himself was among the commission's first members.

Taken together, these laws rested on a single idea: that the public had a right to know what it was buying and a right not to have its savings gambled by the institutions that held them. Disclosure handled the first problem and the separation of banking handled the second. The disclosure regime has largely survived, and it is still the basis of how American securities markets work. The separation is the part that did not.

What you can do

• Watch for banking rules open for comment. Bank regulators regularly propose rules on capital, mergers and trading that decide how big and how risky the largest firms can get. The comment list shows federal rules open for public comment, closing soonest first, with guidance on writing one.
• Ask where your members of Congress stand on breaking up the biggest banks. Look up your representative and senators for their phone numbers, contact forms and recent votes, and ask them directly about a modern separation of banking and trading.
• Find out which bills drew both parties. Financial reform has drawn unusual coalitions before. The common-ground page lists bills that both parties passed together, a useful guide to where agreement might be possible again.
• Follow the fight over concentrated power. The topic page on corporate power tracks reporting on bank mergers, antitrust and the size of the largest financial firms.