The Glass-Steagall Act of 1933 was enacted as a result of the Great Depression. After the uncontrollable run on banks in 1929, Congress decided that it was necessary to insure depositors' funds by establishing the Federal Deposit Insurance Corporation. Known as the FDIC, it allows insurance for deposits to protect against banks that are mismanaged or default on their customers. Many people do not realize that when they deposit money it is no longer their money. What they have in exchange for their deposit is a promise to repay from the bank. If the bank defaults, then the depositor is the ultimate loser. At least, that was the case until 1933.
Another purpose of the Glass-Steagall Act was to erect a barrier between investment banks and commercial banks. Combined banking operations were no longer allowed. The primary cause of The Great Depression has long been considered to be overindulgence of commercial banks in the stock market. Commercial banks were loaning money to companies from which they had also bought stock and were recommending that customers buy the same stock. There was too much power concentrated into too few hands and the banks were trying to maximize this position of utility. The result was a banking system that resembled a house of cards. The fall was swift and the impact was long-term.
It cannot be overlooked that in 1933, after Herbert Hoover's re-election loss, President Franklin D. Roosevelt signed The Gold Confiscation Act of 1933. This discontinued the gold standard for the dollar. The move had been proposed during the Hoover Administration, but Congress had failed to pass the legislation. Foreign investors may have begun the run on the banks when many of them started withdrawing their deposits and draining bank funds. However, the actual causation should be attributed to multiple factors. The primary purpose of the Glass-Steagall Act was to help differentiate between banks and brokerages.
The bankers obviously thought that this was a knee-jerk over-reaction to the stock market crash, but the bill did provide some protection for depositors. Rep. Henry Steagall, chairman of the House Banking and Currency Committee, was adamant that depositors would have insurance on their deposits. When this clause was finally inserted into the legislation, he provided his support for the landmark bill.
The Federal Reserve System had only been in operation for about 20 years with zero regulation, establishing the control of US cash flow by a private bank. Even today, many people do not realize that there is nothing federal about the Federal Reserve Bank. The term "federal" is highly misleading. And the implementation of the Glass-Steagall Act was not strict. The Federal Reserve Board members are appointed by the US President, but they are generally political figureheads.
The Glass-Steagall Act was embellished in 1956 in the area of insurance sales and underwriting. The Bank Holding Company Act maintained that banks could continue to sell insurance products but were restricted from actually underwriting insurance companies. Insurance underwriting is deemed to be a high-risk practice that can affect the holdings of too many customers.
The Glass-Steagall Act was finally repealed in 1999 by a Republican-controlled Congress with passage of the Gramm-Leach-Bliley Act, which became law in November of the same year when President William Clinton signed the legislation. Commonly referred to as the "deregulation" of the banking industry, it effectively blurred the lines between loans and securities and allowed the banks to operate by policing themselves. The result was that banks once again began attempting to optimize their positional utility, resulting in the need for "bank bailout" legislation that was passed during the end of the George W. Bush Administration.
While many decry the fall of the Glass-Steagall Act, anarcho-capitalists and even run of the mill libertarians might have questions about whether MORE regulation can cure market failures. Look closely and one might find that initial market failures are caused by TOO MUCH regulation. Banks are destabilized for a number of reasons, mostly having to do with initial regulation and under-capitalization.
There is nothing particular about Glass-Steagall legislation that is noteworthy. It is merely more government propaganda in that government destabilizes banks to begin with and then those who promote "good government" suggest that MORE government regulation (such as Glass-Steagall) can ameliorate the harm government has already done.