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

Finally, section 32 prohibited the officers of member banks from engaging in the purchase, sale, or negotiation of securities. (2)

B. Interest Group Positions

The evidence discovered regarding the banking sector's position on the Glass-Steagall bill indicates a metamorphosis of opinion between the 1932 Gray-Pecora investigation and the months just preceding the passage of the 1933 Act. Specifically, both large and small commercial bankers as well as investment bankers were initially opposed to the separation of commercial and investment banking activity. However, by late spring of 1933 these bankers had a change of heart and supported the separation of commercial and investment banking.

1. Early Opposition

Commercial bankers' opposition stemmed from several perspectives. Many commercial institutions, both large and small, were operating through security affiliates, and doing so because it was profitable. Indeed, in 1932, 36 percent of national bank profits came from their investment affiliates (Wall Street Journal 1933b, p. 1). Thus, a loss of profit from securities activities was one motivation for commercial bank opposition.

A second motivation for opposing the Glass-Steagall bill rested on the ability of the commercial banks to provide necessary capital to the other sectors of the economy. The Federal Advisory Council of the Federal Reserve Board stated its opposition to the bill based primarily on its belief that such legislation would hinder the ability of financial institutions to provide long-term capital to the non-financial business sector (Wall Street Journal 1993a, p. 1). Bankers argued that without affiliates and without branch banking, they would be unable to supply adequate capital to their customers.

Commercial bank opposition also stemmed from the belief that the proposed reforms were too severe. Several national banks argued that the proposed separation of commercial and investment bank activity was too drastic and that rather than separation, supervision ensuring safe investments with deposits would be more desirable (Wall Street Journal 1933b, p. 1). According to Bankers' Magazine, bankers expressed their opposition based on the bill's drastic nature and the fact that it placed too much faith on unwise legal restrictions (1932c, p. 493). (3)

The American Bankers Association stated their opposition to the Glass-Steagall bill in 1932, based on their belief that it was contrary to the stabilizing function of the Reconstruction Finance Corporation. Specifically, the American Bankers Association was fearful that the forced separation of commercial and investment banking would cause a further liquidation of securities, thereby decreasing their market value at a time when further losses would be disastrous (Bankers' Magazine 1932b, p. 410).

Other bankers were concerned that the bill, by banning commercial member banks from participating in any securities issue other than certain government obligations, would eliminate competition in corporate or public utility security fields (Bankers' Magazine 1933a, p. 253). By removing the commercial banking institutions from securities dealings, the only institutions left to compete in the underwriting and distributing of non-government securities would be investment banks and trust companies.