Glass-Steagall Act

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The Glass-Steagall Act was created through the U.S. Banking Act of 1933, which legislated the differences between investment banks and commercial banks by limiting the type of banking activities that each type of bank may participate in.

Under the Glass-Steagall Act, Federal Reserve Banks are prohibited from purchasing or underwriting non-government securities for investors, purchasing securities that are not investment grade, and engaging in business with companies that participate in those activities. In 1999, U.S. President Bill Clinton declared the Glass-Steagall Act no longer applicable, which resulted in the fusion of investment banking and commercial banking.

The overall goal of the Glass-Steagall Act was to prevent financial managers from partaking in risky investments or transactions that could result in economic crises. Many economists cite the repeal of the Glass-Steagall Act as the primary cause of the 2008 financial crisis and housing bubble. Others, including Fed chairman Ben Bernanke, claimed that the financial activities leading to the crisis fell outside of the purview of the Glass-Steagall Act.

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