The Creation of a Regulatory Framework: The Enactment of Glass-Steagall

Abstract

This chapter examines a seminal moment in twentieth century banking regulation, namely the creation of the Glass-Steagall regulatory framework. Unlike many studies of regulation, though, this one views the regulatory process as dynamic in nature. Therefore, it employs a longer historical perspective to reveal more clearly the many forces, both economic and political, that were involved.

My chapter begins by briefly recounting earlier American banking experiences. The United States never experienced anything resembling a laissez-faire period in banking. Throughout the whole of American history, governmental actors, whether at the state or federal levels, have sought to regulate banking. This history reveals the commonly held dichotomy between regulation, or state action, on one side, and deregulation, or state inaction, on the other, to be misleading. Instead, this chapter argues for the need to view regulation-deregulation as a continuum and thereby focus specifically on what each actor is doing in the regulatory arena. Doing so allows a scholar to determine better what forces and actors are involved in regulation, a process that is dynamic by its very nature.

With this in mind, the chapter traces the ideas, individuals, and institutions behind Glass-Steagall’s creation. It focuses particular attention on the bill’s two congressional sponsors. Senator Carter Glass, (D-VA), the father of the Federal Reserve and firm adherent of the so-called real bills doctrine, sought to protect his institutional creation by further enshrining his mistaken monetary theory. In contrast, Representative Henry Steagall (D-AL), who had little interest in any particular monetary theory, sought to stem the banking panics and the harm caused to his rural constituents by advocating deposit insurance. My chapter examines the proposals advocated by these individuals, not only how they developed and evolved over the period, but also how they gained political support through both electoral change and worsening economic events, and ultimately obtained enough political support to become institutionalized. In gaining institutionalization, Glass-Steagall created artificial and uncompetitive financial markets. Although these contrived markets functioned well under static conditions, the inertia that immediately set in made them very difficult to alter under subsequent changing circumstances.

Keywords: Glass-Steagall, Banking Act of 1933, Commercial Banking, Investment Banking