A SHORT HISTORY OF BANKING INDUSTRY DEREGULATION

Many older Americans will recall how the Great Depression, resulted in a worldwide economic
downturn that began in 1929 and lasted until about 1939. Perhaps the most deastating impact o!
the Great Depression was human su!!ering" with world output and standards o! liing dropping
drastically !or most people. As much as one#!ourth o! the labor !orce in industriali$ed countries
was unable to !ind wor%. &According to the 'ncyclop(dia )ritannica* +he Great Depression was
the longest and most seere depression eer e,perienced by the industriali$ed -estern world,
spar%ing !undamental changes in economic institutions, macroeconomic policy, and economic
theory. And although it originated in the .nited /tates, the Great Depression caused drastic
declines in output, seere poerty due to unemployment, and acute de!lation in almost eery
country o! the world. 0n the .nited /tates alone the Great Depression represented the harshest
adersity !aced by Americans since the 1iil -ar" with irtually eery industriali$ed country
enduring declines in wholesale prices o! 32 percent or more between 1929 and 1933.
A!ter studying the !actors leading to the economic depression !ollowing the 1929 stoc% mar%et
crash" Banking Regulators sought to enact laws to limit the con!licts o! interest created when
commercial ban%s underwrote stoc%s or bonds which they belieed resulted in the serious abuses
that caused mar%et to crash. 0n the !all o! 1932, the !irst o! !our waes o! ban%ing panics gripped
the .nited /tates. By 1933, one-fifth of the !n"# in e$i#ten%e !t the #t!&t of 193' h!( f!i)e(*
+ONGRESSIONAL HEARINGS +ONDU+TED IN EARLY 1933 +ON+LUDED,
1. +hat )an%ers and bro%ers were guilty o! disreputable and dishonest dealings and gross
misuses o! the Public +rust.
2. +hat the chie! culprit o! ban% !ailures was structural" primarily due to inade3uate regulations
that permitted mal!easance or mar%et abuse to become a regular accepted practice.
3. +o preent similar abuses in the !uture )an%ing 4egulators enacted speci!ic laws to limit the
con!licts o! interest created when commercial ban%s underwrote stoc%s or bonds which
contributed to abuses that caused mar%et to 5crash.6
7. +o accomplish this purpose law was enacted called the 8Glass-Steagall Act* &also re!erred to
as the 8)an%ing Act o! 1933.*
*Pic below shows Originators of the Glass-Steagall Act. On the left is Carter Glass; a !-"ear-
ol# senator; an# for$er %reasur" secretar"; an# foun#er of the &e#eral Reser'e S"ste$Carter
Glass. Glass state# that banks shoul# ne'er be allowe# to be in'ol'e# with securities
un#erwriting or in'est$ent; as such acti'ities 'iolate basic rules of goo# banking b" creating
a $oral ha(ar# for Bankers as inter$e#iar" custo#ians of $one"; Glass also warne# that
bank in'ol'e$ent in e)uit" $arkets coul# once again lea# to #estructi'e s*eculation+ as
e'i#ence# b" the Crash of ,-.-. On Glasss right is the other originator; /enr" Steagall; the
0e$ocratic chair$an of the /ouse Banking an# Currenc" Co$$ittee.
+he Glass#/teagall Act was enacting the Glass-Steagall Act. was to preent !uture speculatie
abuses that in!ected commercial ban%ing prior to the collapse o! the stoc% mar%et that resulted in
the economic depression o! 1929#1933. )ecause 1ongress understood that the crash had directly
resulted !rom national ban%s heaily inesting in speculatie securities and concurrently
entering into the business o! inesting money held in +rust in the traditional sense o! the term
by buying original issues !or public resale" e.g. )an%s were inesting their own assets in
securities with conse3uent ris% to their customers commercial and saings deposits. +he concern
o! 1ongress was that unsound loans were made in order to shore up securities and shore up the
!inancial position o! companies in which a ban% had inested its assets.
+he American )an%ing Association wrote about 4iegle#9eal, the )an%ruptcy 4e!orm Act o!
1997, and the 1ommunity )an%ing Deelopment Act that 5the ,12r# will be re$e$bere# as the
first Congress in recent $e$or" to *ass 3clean4 *ro-banking legislation.4 .pon signing +he
Gramm#:each#)liley into law, President 1linton praised Mc1oll and the head o! 1hase
Manhattan, declaring, 6
35t re*resents another e6a$*le of our intent to rein'ent Go'ern$ent b" $aking
it less regulator" an# less o'erreaching an# b" shrinking it where it ought to be
shrunk an# resha*ing it where it ought to be resha*e#.4
+he 1linton administration installed 4obert 4ubin and :arry /ummers in the +reasury, resulting
in the Gramm#:each#)liley Act, which o!!icially cancelled the Glass#/teagall Act and the
1ommodity ;utures Moderni$ation Act, and utterly deregulated the deriaties mar%et. 0n 1999
when President 1linton stated<
5%his is a #a" we can celebrate as an A$erican #a"+4 a##ing; 3 the Glass-
Steagall law is no longer a**ro*riate for the econo$" in which we li'e4 an#
3to#a" what we are #oing is $o#erni(ing the financial ser'ices in#ustr"+ tearing
#own these anti)uate# laws an# granting banks significant new authorit".4

Alan Greenspan &!ormer ../. ;ederal 4esere )an% chairman* lowered the ;ed !unds rate
starting in =uly 1992, claiming his purpose was to 3offset the unusual tightening of cre#it b"
co$$ercial len#ers+4 in order to %eep our economy !rom slipping into a true recession. +his is
when the !inal seeds o! the economic crisis were sown by the ;ederal 4esere who sought to
control what it saw as a pending rescission by sharply lowering interest rates &to 1>* to limit the
economic damage o! the stoc% mar%et decline due to the 2222 dot.com companies? crisis. -ith
interest rates down to 1> &their lowest leel since 19@1*, a massie number o! borrowers, leery
o! stoc% mar%et inestments, elected to inest the cheaply borrowed money into real estate in the
mista%en beliee that Real 7state was a soli# in'est$ent that coul# ne'er go bankru*t. +hey
were proen wrong, howeer, when the real estate bubble burst starting in 222@.
As the number o! borrowers de!aulting on their loans rose, ban%s and bro%erages started to su!!er
capital shortages. +his triggered the credit crisis o! 222A, with the credit mar%ets sei$ing up, and
the economy once again spiraling down into a recession in 222B. :ower interest rates made
mortgage payments cheaper, and the demand !or homes began to rise, sending prices up. 0n
addition, millions o! homeowners too% adantage o! the rate drop to re!inance their e,isting
mortgages. As the industry ramped up, the 3uality o! the mortgages went down due to poor credit
origination and credit ris% assessment. Delin3uency and de!ault rates began to rise in 222@ as
interest rates rose &;ed ;unds at C,2C>* and poor households across the ./ struggled to pay o!!
their mortgages. -ith massie numbers o! wor%ing class Americans going ban%rupt and
ineitably losing their homes.
/till the pace o! lending did not slow until the !all o! 222B, when massie subprime mortgage
loan de!aults turned into AmericaDs biggest economic crisis since the Great Depression" as
hundreds o! billions in mortgage#related inestments collapsed, maEor ban%s attempted to reduce
their e,posure in the interban% mar%ets, causing interban% interest rates and credit de!ault swaps
to increase, resulting in an e,ponentially worsening credit crunch condition to be passed onto
consumers and businesses.
+hen in order !orestall an eminent ban%ing industry collapse our America Goernment Eumped
on the bandwagon with other Goernments to promote bail#out deal agreements in order to
recapitali$e and rescue ban%s !rom potentially disastrous shortages. Massie cash inEections into
money mar%ets and interest rates reductions were proided by central ban%s in an attempt to
shore up ban%s and to restore con!idence within the !inancial system.
SOUR+ES
;ormer 4eporter !or the -all /treet =ournal, 4yan 1hittum, proides insight!ul and analytical
comments in the article published in the 1olumbia =ournalism 4eiew published on Fctober 1,
2213 " B588 C859%O9 O9 07R7G:8A%5O9; <%/7 R7P:B85CA9S =A07 =7 0O 5%>
&http<GGwww.cEr.orgGtheHauditGbillHclintonHtheHrepublicansHm.phpIpageJall*
A Monetary History of the United States, 18671960 &19@3, reissued 1993*, chapter A, 5+he
Great 1ontraction,6 by Milton ;riedman and Anna =acobson /chwart$, details the ways in
which ban%ing panics and monetary contraction contributed to the economic downturn.
59onmonetary '!!ects o! the ;inancial 1risis in the Propagation o! the Great Depression,6
American Economic Revie, A3&3*<2CAK2A@ &=une 19B3*" /tephen G. 1ecchetti, 5Prices During
the Great Depression< -as the De!lation o! 1932K1932 4eally .nanticipatedI,6 American
Economic Revie B2&1*<171K1C@ &March 1992*" 1hristina D. 4omer, 5+he Great 1rash and the
Fnset o! the Great Depression,6 !"arter#y $o"rna# of Economics, 12C&3*<C9AK@27 &August
1992*" and Peter +emin, %id Monetary &orces 'a"se the (reat %e)ression* &19A@*. =ohn
Lenneth Galbraith, +he (reat 'rash, 19,9 &19C7, reissued 199A*" proides a rieting account o!
the 1929 stoc% mar%et crash, one o! the eents leading up to the Great Depression in the .nited
/tates.
(o#den &etters- +he (o#d Standard and the (reat %e)ression, 191919.9 &1992, reissued 199C*,
by )arry 'ichengreen, proides an important study o! the !unctioning and e!!ects o! the
international gold standard in the interwar era.
,+he (erman S#"m)- /o#itics and Economics, 19,019.6 &19B@*" Marold =ames.
+he 1or#d in %e)ression, 19,919.9, re. and enlarged ed. &19B@*" 1harles P. Lindleberger
An Funce o! Preention< ;inancial regulation, moral ha$ard, and the end o! Ntoo big to !ailN"
Moss, Daid A. &2229*, Marard Maga$ine &/eptemberKFctober*< 2@, retrieed ;ebruary 2C,
2212.