The Glass-Steagall Act limited commercial banks' ability to engage in investment practices. This policy was implemented following the Great Depression, and it was considered a necessity to prevent banks from using depositors' money to partake in risky business practices. Enacted in 1933, the act was part of President Franklin Delano Roosevelt's New Deal Program and later became standard in 1945.

In addition to preventing banks from investing in whatever manner they wanted, the Glass-Steagall Act put a measure in place that gave consumers more peace of mind about the money in their deposit accounts. The Federal Deposit Insurance Corporation, commonly referred to as the FDIC, was created to provide insurance for money in a depositor's account, up to a certain dollar amount.

It has been theorized that allowing commercial banks to invest contributed heavily to the Great Depression. Such practices began around 1900 and were fairly common. Banks took greater risks than what was advised for the times, and bankers invested without scruples. Lending was excessive and done freely, without much consideration to overall financial numbers. This continued until the stock market crashed in 1929. In 1930, the banking industry was considered a complete failure. Investment practices indicated more money was available than what actually was. The conditions were so horrific that banks were forced to close for a four-day period in 1933. It was shortly thereafter that the Glass-Steagall Act was created to prevent such an occurrence from repeating itself in the future.

  1. What agencies were created by the Glass-Steagall Act?

    Learn about the Glass-Steagall Act of 1933 that significantly reformed the banking industry, and specifically, what government ... Read Answer >>
  2. How was Glass-Steagall weakened prior to its repeal?

    Learn about the gradual relaxation of the strict banking regulations under Glass-Steagall, eventually culminating in the ... Read Answer >>
  3. What were the objectives of the Glass-Steagall Act?

    Learn about the original objectives of the1933 legislation known as the Glass-Steagall Act and how it affected the banking ... Read Answer >>
  4. What's the difference between investment banks and commercial banks?

    Understand the principal differences between investment banks and commercial banks, and the areas of banking services that ... Read Answer >>
  5. What is the difference between the Volcker Rule and the Glass-Steagall Act?

    Read about the differences between the Volcker rule and provisions in the Glass-Steagall Act, two attempts at regulating ... Read Answer >>
  6. How do investment banks help the economy?

    Learn more about the functions of investment banks in a modern economy and how investment banks have been treated differently ... Read Answer >>
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