The Glass-Steagall Act, also known as the Banking Act of 1933, was proposed and passed by Congress in response to the failure of almost 5,000 banks following the stock market crash of 1929. It primarily prohibited banks from simultaneously being in both the commercial banking and investment banking business. The act led to the creation of separate investment banks. Notably, the act created the Federal Deposit Insurance Corporation (FDIC) to provide insurance on bank deposits for individual bank customers.

The Glass-Steagall Act was originally an emergency measure passed to deal with the banking crisis of the Great Depression, as a part of the New Deal. It became permanent law 12 years later, in 1945. Between 1900 and 1930, there was a huge expansion in banks underwriting securities and doing bond issues. In 1930, when the Bank of the United States failed, the failure was largely attributed to improper practices by the bank's security underwriting affiliates. The closing of several thousand other banks in the months that followed spurred a movement for major banking reform, eventually resulting in the Glass-Steagall Act.

The FDIC, which still insures U.S. bank deposits, was created to lure people back to using banks with the official reassurance that they would not be vulnerable to losing their deposits even in the event of a bank's closing. The insurance comes from a pool of money contributed by banks.

Possibly more important than the creation of the FDIC, Glass-Steagall also created the Federal Open Market Committee (FOMC) under the Federal Reserve. The FOMC is the main organization that determines U.S. monetary policy and money supply. It directs the Federal Reserve's open market operations buying or selling U.S. Treasury bonds (T-bonds). The FOMC sets the all important Fed funds rate, the basic interest rate for major banks that is the reference point from which all other interest rates in the U.S. are calculated. The committee issues notes of its monthly meetings; this usually has a significant impact on the financial markets, as it indicates the likelihood of the Federal Reserve raising or lowering interest rates in the near future. The creation of the FOMC cemented the Federal Reserve's power and control over the U.S. monetary system, which is possibly the most significant legacy of the Glass-Steagall Act. The act also extended the Federal Reserve's power by granting it more regulatory power over all national banks.

Critics of the Glass-Steagall Act argue that the mixing of commercial and investment banking had little, if anything, to do with causing the 1929 market crash, the Great Depression or the large number of bank failures. Even Senator Glass, one of the authors of the bill, later attempted to get the ban on combined commercial and investment banking lifted. The act was repealed in 1999, but this did not include the dissolution of the FDIC or FOMC.

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  1. Glass-Steagall Act

    The Glass-Steagall Act was passed by the U.S. Congress in 1933 ...
  2. Emergency Banking Act Of 1933

    A bill passed during the administration of former U.S. President ...
  3. Bank Insurance

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  4. FDIC Insured Account

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  5. Bank

    A bank is a financial institution licensed as a receiver of deposits. ...
  6. Federal Deposit Insurance Corporation (FDIC)

    The Federal Deposit Insurance Corporation (FDIC) is an independent ...
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