Glass-Steagall Act (1933)

Times Topics section on Glass-Steagall

Adapted from an article in the Law Library.

The Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), was passed by Congress in 1933 and prohibits commercial banks from engaging in the investment business.

It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression. The act was originally part of President Franklin D. Roosevelt’s New Deal program and became a permanent measure in 1945. It gave tighter regulation of national banks to the Federal Reserve System; prohibited bank sales of securities; and created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits with a pool of money appropriated from banks.

Beginning in the 1900s, commercial banks established security affiliates that floated bond issues and underwrote corporate stock issues. (In underwriting, a bank guarantees to furnish a definite sum of money by a definite date to a business or government entity in return for an issue of bonds or stock.) The expansion of commercial banks into securities underwriting was substantial until the 1929 stock market crash and the subsequent Depression. In 1930, the Bank of the United States failed, reportedly because of activities of its security affiliates that created artificial conditions in the market. In 1933, all of the banks throughout the country were closed for a four-day period, and 4,000 banks closed permanently.

As a result of the bank closings and the already devastated economy, public confidence in the U.S. financial structure was low. In order to restore the banking public’s confidence that banks would follow reasonable banking practices, Congress created the Glass-Steagall Act. The act forced a separation of commercial and investment banks by preventing commercial banks from underwriting securities, with the exception of U.S. Treasury and federal agency securities, and municipal and state general-obligation securities. Likewise, investment banks may not engage in the business of receiving deposits.
Investment banking consists mostly of securities underwriting and related activities; making a market in securities; and setting up corporate mergers, acquisitions, and restructuring. Investment banking also includes services provided by brokers or dealers in transactions in the secondary market.

The Glass-Steagall Act restored public confidence in banking practices during the Great Depression. However, many historians believe that the commercial bank securities practices of the time had little actual effect on the already devastated economy and were not a major contributor to the Depression. Some legislators and bank reformers argued that the act was never necessary, or that it had become outdated and should be repealed.

Congress responded to these criticisms in passing the Gramm-Leach-Bilely Act of 1999, which made significant changes to Glass-Steagall. The 1999 law did not make sweeping changes in the types of business that may be conducted by an individual bank, broker-dealer or insurance company. Instead, the act repealed the Glass-Steagall Act’s restrictions on bank and securities-firm affiliations. It also amended the Bank Holding Company Act to permit affiliations among financial services companies, including banks, securities firms and insurance companies. The new law sought financial modernization by removing the very barriers that Glass-Steagall had erected.

Published in: on January 21, 2010 at 2:17 pm  Comments (2)  
Tags: , ,

Filibusters and Debate Curbs

Jimmy Stewart is shown in a scene from the 1939 film “Mr. Smith Goes to Washington.” Associated Press

Updated April 30, 2009

The filibuster is an extra-constitutional accident of Senate history that has become an institution. In the classic 1939 movie “Mr. Smith Goes to Washington,” a reporter called it “democracy’s finest show,” the “American privilege of free speech in its most dramatic form.”

What politicians think of it often depends on who is in power. In 2004, Senator Bill Frist, then the Republican majority leader, called the filibuster “nothing less than a formula for tyranny by the minority,” vowing to end the Democrats’ use of the filibuster to prevent floor votes on President Bush’s judicial nominees. In 2009, with Democrats firmly in control of the Senate, the Republicans didn’t hesitate to use the threat of a filibuster on President Obama’s legislative agenda.

When it comes to filibusters, though, perhaps no performance exceeded that of the populist Democratic senator, Huey P. Long, of Louisiana. Hoping to stave off a bill that would have given his political enemies at home lucrative New Deal jobs, Mr. Long took the floor on June 12, 1935. He read the Constitution and the plays of Shakespeare. He offered up a recipe for fried oysters and a formula for Roquefort dressing. He asked his exhausted colleagues to suggest topics for his monologue. When they wouldn’t oblige, he invited reporters in the press gallery to pass down suggestions.

Only at 4 a.m. did the urgent call of nature put an end to Mr. Long’s 15-hour soliloquy. Yet this is not the Senate record. That dubious honor belongs to Senator Strom Thurmond of South Carolina, who held up the 1957 civil rights bill for a brain-numbing 24 hours and 18 minutes.

What is the good of a tradition whose essence is wasting time? Many historians and congressional scholars respond that the filibuster is a valuable check against the passage of ill-considered legislation.

The word filibuster is derived from the Dutch vrijbuiter, or pirate. Passed down through French and Spanish, “filibuster” landed in Congress in the mid-19th century as a tongue-in-cheek label for a senator whose interminable speech held a bill, not to mention his colleagues, hostage.

Sarah A. Binder, a political scientist at George Washington University and co-author of a book on the filibuster, said that both the House and Senate began work in 1789 with a measure called a “previous question motion” that required only a simple majority to cut off debate. The House has kept such a rule to the present day.

But the Senate dropped it in an 1806 housecleaning without fully understanding the implications, she said.

As early as 1841, a frustrated Senator Henry Clay of Kentucky threatened to try to change the debate rules when opponents tied up his banking bill with interminable talk. But the Senate finally adopted a formal means of ending a filibuster only in 1917, at the urging of President Woodrow Wilson.

Infuriated by the failure of Congress to act on war measures, Mr. Wilson fumed. “A little group of willful men,” he declared, “representing no opinion but their own, have rendered the great government of the United States helpless and contemptible.”

With that push, the Senate decided that a two-thirds vote could cut off a filibuster, borrowing the French parliamentary term “clôture” for such a motion. In 1975, the Senate cut the required vote for cloture to three-fifths, or 60 senators, instead of 67.

At about the same time, the Senate created a two-track process that allows senators to block action on a piece of legislation merely by invoking the right to filibuster, without actually having to stand before the chamber and drone endlessly on. Meanwhile, the Senate can take up other business.

The measure, intended to promote efficiency, inadvertently encouraged filibusters by making them painless, and made them a normal tool of political debate. In 1995, almost 44 percent of all major legislation considered by the Senate was delayed by a filibuster or the threat of one.

The filibuster has at times symbolized, justifiably or not, the courageous stand of principled individuals against a corrupt or compromised majority. That symbolism was captured in “Mr. Smith Goes to Washington,” the classic Frank Capra film in which James Stewart plays a naïve newcomer who holds the Senate hostage for longer even than Strom Thurmond did, before collapsing in fatigue and triumph.

Such iconography is so powerful that, even as he attacked the Democrats’ filibustering in 2004, then-Senator Frist praised the movie and what it represented.

“The right to talk – the right to unlimited debate – is a tradition as old as the Senate itself,” Dr. Frist said. “It’s unique to the institution. It shapes the character of the institution. It’s why the United States Senate is the world’s greatest deliberative body.” — Adapted from “Henry Clay Hated It. So Does Bill Frist,” by Scott Shane, The Times, Nov. 21, 2004

Published in: on January 20, 2010 at 1:10 pm  Leave a Comment  
Tags: ,