Understanding the 1933 Banking Act and Its Reforms

The 1933 Banking Act was a significant piece of legislation that aimed to reform the banking system in the United States. It was enacted in response to the banking crisis of the 1930s, which had left millions of Americans without access to their savings.

The Act established the Federal Deposit Insurance Corporation (FDIC), which insured bank deposits up to a certain amount, providing a sense of security for depositors. This was a major departure from the previous system, where depositors had no protection against bank failures.

One of the key provisions of the Act was the creation of the FDIC, which was designed to restore public confidence in the banking system. The FDIC was given the authority to insure bank deposits and to regulate banks to ensure their stability.

The FDIC's insurance coverage was limited to $2,500 per depositor, per insured bank, which was a significant amount at the time. This limit has since been increased several times to keep pace with inflation.

The Banking Act of 1933, also known as the Glass-Steagall Act, had two major functions.

The first function was to separate commercial and investment banking, a move that prohibited commercial banks from engaging in securities underwriting and dealing, and also prohibited investment banks from taking deposits from customers.

Commercial banking refers to the activities undertaken by commercial banks, namely one of the categories of institutions holding federal depository charters, other than thrifts and credit unions.

Investment banking, on the other hand, refers to the activities undertaken by firms that assist companies, financial institutions, and governments in executing transactions such as mergers and acquisitions (M&A), as well as initial public offering (IPO) underwriting.

The Banking Act of 1933 created the Federal Deposit Insurance Corporation (FDIC), providing insurance for depositors and restoring confidence in the payment systems.

Here are the key provisions of the Banking Act of 1933:

These provisions were a direct response to the concerns arising from the financial crash and subsequent banking crisis in the 1920s and early 1930s.

The 1933 Banking Act significantly altered the banking structure in the United States. It created the Federal Deposit Insurance Corporation (FDIC) to insure bank deposits, providing a sense of security for depositors.

The FDIC was established to prevent bank runs and maintain public confidence in the banking system. This move aimed to prevent widespread panic and economic collapse.

The Banking Act also established the Federal Open Market Committee (FOMC) to oversee the nation's monetary policy. The FOMC was tasked with setting interest rates and managing the money supply to promote economic stability.

The core of traditional bank regulation lies in separating commercial and investment banking. This separation was a key component of the 1933 Banking Act, which prohibited commercial banks from engaging in investment activities, such as underwriting or dealing in securities.

Commercial banks were only allowed to take deposits and make loans, while investment banks were restricted from taking deposits. This separation was designed to prevent banks from engaging in risky activities and to promote financial stability.

Glass-Steagall Act, which was a part of the 1933 Banking Act, distinguished between commercial and investment banking by stating that commercial banks could not deal with securities and investment banks could not own commercial banks or have close connections with them. This separation was enforced through various provisions, including Sections 16, 20, 21, and 32 of the Banking Act.

One of the key provisions of the Glass-Steagall Act was the prohibition on commercial banks investing in non-investment grade securities for themselves. This was designed to prevent banks from taking on excessive risk and to promote financial stability.

The 1933 Banking Act also limited the total amount of loans a member bank could make secured by stocks or bonds, and permitted the Federal Reserve Board to impose tighter restrictions. This was designed to prevent banks from engaging in excessive lending and to promote financial stability.

The Glass-Steagall Act also gave banks one year after the law was passed to decide whether they would be a commercial bank or an investment bank. Only 10 percent of a commercial bank's income could stem from securities, and commercial banks could only underwrite government-issued bonds.

The separation of commercial and investment banking was a cornerstone of traditional bank regulation, and it remained in place until it was repealed by the Gramm-Leach-Bliley Act in 1999.

The banking structure of the United States has a complex history, particularly when it comes to unit banks and the Federal Reserve System.

The "unit banking" system was a basic weakness of U.S. banking, characterized by small, single-office banks that struggled to compete with larger banks.

Senator Glass and his advisor Henry Parker Willis criticized this system, arguing that it led to a lack of efficiency and stability in the banking sector.

Glass and Willis believed that banks should stick to their "proper" commercial banking activities, rather than trying to expand into securities markets or other areas.

The Federal Reserve System was established in 1913, and was initially based on a commercial banking theory that prohibited banks from underwriting or dealing in securities.

However, as time went on, many banks began to use "securities affiliates" to circumvent these restrictions and engage in securities activities.

Glass and Willis were critical of this practice, viewing it as an artificial device to evade limits on bank activities.

The creation of the Federal Deposit Insurance Corporation (FDIC) in 1933 marked a significant shift in banking regulation, providing deposit insurance to protect bank depositors in the event of bank failures.

The FDIC initially provided temporary deposit insurance of up to $2,500 per accountholder, and later increased this limit to $5,000 per accountholder.

The FDIC's deposit insurance limit has been raised over the years, and currently stands at $250,000 per accountholder.

In order to become FDIC-insured, banks had to be members of the Federal Reserve System, although this requirement was later repealed in 1939.

The Federal Open Market Committee (FOMC) was created under Section 8 of the Banking Act of 1933. The FOMC was a significant change to the Federal Reserve's structure.

The 1933 FOMC did not include voting rights for the Federal Reserve Board. This was revised in 1935 and again in 1942.

The modern FOMC closely resembles the one established in 1942.

The 1933 Banking Act had several key figures and roles that played a crucial part in its implementation.

The Glass-Steagall Act, a part of the Banking Act, was named after Senator Carter Glass and Representative Henry Steagall, who sponsored the legislation.

President Franklin D. Roosevelt supported the Banking Act, which was part of his New Deal policies.

Roosevelt was sympathetic to the 1933 Banking Act but didn't actively push for its passage.

He claimed full credit for the Banking Act of 1933, which amused or outraged many observers.

Roosevelt supported the separation of commercial and investment banking, a provision in the 1932 Democratic Party platform.

In 1935, Roosevelt opposed Senator Glass's effort to restore national bank powers to underwrite corporate securities.

Roosevelt confirmed to Glass in March 1933 that he supported the separation of commercial and investment banking.

The Banking Act of 1933 was the only important piece of legislation during the New Deal's "one hundred days" that was neither requested nor supported by the new administration.

H. Parker Willis and Carter Glass were two key figures in the banking reform discussions of the 1930s. H. Parker Willis wrote that the 1933 Banking Act was "already outdated" when it became law.

In 1935, Willis expressed his opinion that earlier Glass bills could have "made a difference" if they had become law in 1932. Carter Glass, on the other hand, became dissatisfied with the 1933 Banking Act's separation of commercial and investment banking.

Carter Glass sponsored a bill in 1935 that would have permitted national banks to underwrite corporate bonds.