Following the Great Crash of 1929, one of every five banks in America fails.
Many people, especially politicians, see market speculation engaged in by banks
during the 1920s as a cause of the crash.
In 1933, Senator Carter Glass (D-Va.) and Congressman Henry Steagall (D-Ala.)
introduce the historic legislation that bears their name, seeking to limit the
conflicts of interest created when commercial banks are permitted to underwrite
stocks or bonds. In the early part of the century, individual investors were
seriously hurt by banks whose overriding interest was promoting stocks of
interest and benefit to the banks, rather than to individual investors. The new
law bans commercial banks from underwriting securities, forcing banks to choose
between being a simple lender or an underwriter (brokerage). The act also
establishes the Federal Deposit Insurance Corporation (FDIC), insuring bank
deposits, and strengthens the Federal Reserve's control over credit.
The Glass-Steagall Act passes after Ferdinand Pecora, a politically ambitious
former New York City prosecutor, drums up popular support for stronger
regulation by hauling bank officials in front of the Senate Banking and Currency
Committee to answer for their role in the stock-market crash.
In 1956, the Bank Holding Company Act is passed, extending the restrictions
on banks, including that bank holding companies owning two or more banks cannot
engage in non-banking activity and cannot buy banks in another state.
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