Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking Before 1933

Abstract

Abstract The Glass-Steagall Act of 1933 prohibits commercial banks from underwriting, holding, or dealing in corporate securities, either directly or through securities affiliates.1 The driving force behind the Act was Senator Carter Glass, who strongly believed that direct commerical-bank involvement with corporate securities was detrimental to the stability of the financial system. The commingling of investment and commercial banking functions, Glass and others argued, creates significant conflicts of interest. This view gained popular support after the Pecora Committee investigations (U.S. Senate Committee on Banking and Currency, 1933-1934) into the potentially conflictladen and putatively abusive practices at securities affiliates of the two most prominent national banks, National City Company and Chase Securities Company.

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