What Was the Purpose of the Glass-Steagall Banking Act?


Quick Answer

The purpose of the Banking Act of 1933, also often referred to as the Glass-Steagall Act, was to restore public confidence in the banking system. It did so primarily by restricting the use of bank credit for speculation and by creating a formal separation between investment banking and commercial banking.

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What Was the Purpose of the Glass-Steagall Banking Act?
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Full Answer

The Banking Act of 1933 was a response to the 1929 stock market crash and the Great Depression that followed. Congress saw a danger in commercial banking being too closely linked to more volatile speculative investment.

The act prevented commercial banks from dealing in securities, and it prevented investment banks from having common ownership or management ties to commercial banks. Banks were given a year from the passage of the act to decide which branch of banking they wanted to commit to. The act also gave the Federal Reserve System expanded regulatory powers and created the Federal Deposit Insurance Corporation (FDIC) to insure commercial deposits. Regulation Q forbade the paying of interest on checking accounts (to reign in excessive competition among banks), and bank officers were forbidden to take out loans from their own banks.

The act was named for the two senators who co-sponsored it: Carter Glass of Virginia and Henry B. Steagall of Alabama.

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