Explaining the Glass-Steagall Act’s Long Life, and Rapid Eventual Demise

Abstract:     
This paper identifies three main factors explaining the longevity of the Glass-Steagall Act: institutional, technological, and political economy factors. Loopholes of the law, i.e. institutional factors, weakened the effectiveness of GSA early on, diminishing the need for reform. As technology improved from the 60s to the 80s, changes in the competitive landscape marginalized commercial banks’ relevance and their ability to compete both at home and abroad. While this served to threaten GSA, the resulting wave of technological and regulatory changes designed to improve U.S. banks’ relative position ultimately led to the continued survival of GSA in the face of reform proposals. Lastly, reform efforts were seldom met with broad political support, as the lack of consensus among industry interest groups, legislators, and regulatory bodies doomed several promising reform attempts in the 80s and 90s. It took the momentous merger between Citicorp and Travelers in 1998, and the ensuing perception of a smash success to mobilize momentum to overcome the political economic difficulties, culminating in the passage of the Gramm-Leach-Bliley Act of 1999 and ending Glass-Steagall’s 66 year resistance of the U.S. financial services industry.

Number of Pages in PDF File: 64

Keywords: Glass-Steagall Act, financial regulation, commercial banking regulation

JEL Classification: G18, G21, G22, G24, G28

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