The Long and Bumpy Road to Glass-Steagall Reform: A Historical and Evolutionary Analysis of Banking Legislation - Other Articles - Glass-Steagall Banking Act of 1933

American Journal of Economics and Sociology, The,  Oct, 2001  by Jill M. Hendrickson

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Finally, since the market continues to evolve, it will always produce new niches, new opportunities for profit, new competitors, and so forth that cannot be foreseen by market participants or policymakers. Thus, rival entrepreneurs will continue to lobby for legislative reform; both for more and for less regulation. An ever-evolving market also means that economic equilibrium is not possible. Consider the life of Glass-Steagall. Some may argue that between 1933 and 1999 there was equilibrium because commercial and investment banking was separated by law. However, as this case study reveals, market participants continued their struggle to push regulatory boundaries and to adapt to change. From this perspective, it is not useful to analyze regulation and legislation from an optimizing standpoint with an equilibrium outcome. Rather, when the 1933 Act separated commercial and investment banking, there was no equilibrium, but a new set of rules for the commercial and investment banker to do business by. Some entrepreneurial groups may have lost the battle while others won, but over the course of time market dynamics cause rival entrepreneurs to continue to seek profitable opportunities, which often lie outside the constraints of regulation.

(*.) Jill M. Hendrickson is Associate Professor of Economics at the University of the South, 735 University Avenue, Sewanee, TN 37383-1000, (931) 598-3350, jhendric@sewanee.edu. Professor Hendrickson's research interests include the impact of regulation on commercial bank performance and the history of commercial banking in the United States. She has recently published articles in the Journal of Economic History and the Quartely Review of Economics and Finance.

Notes

(1.) According to Becker, "political equilibrium has the property that all groups maximize their incomes by spending their optimal amount on political pressure, given the productivity of their expenditures, and the behavior of other groups" (1983:372).

(2.) While these provisions divorced commercial and investment banking activities, the divorce was not complete. The exceptions to sections 16, 20, and 21 outlined above indicate one point of incomplete separation. In addition, the Act did not prohibit commercial banks from merely executing securities orders on behalf of customers without giving them investment advice (Litan 1987:28; Eccles 1982:92). Finally, the Act's separation requirements did not apply to foreign markets as American banks were allowed to underwrite corporate securities abroad. Hence, not all avenues for investment dealings were closed to commercial institutions by the Banking Act of 1933.

(3.) This same point is made in an earlier article, "Editorial Comment: The Glass Bill" (Bankers, Magazine 1932a, p. 261).

(4.) See Table 1, which contains a brief summary of the key contemporary regulation and court decisions that slowly eroded Glass-Steagall.

(5.) See Table 2, which contains a brief summary of the provisions contained in each reform effort.