A Public Choice Perspective of the Banking Act of 1933

Document Type

Article

Journal/Book Title/Conference

Cato Journal

Volume

7

Publication Date

1988

First Page

595

Last Page

613

Abstract

Against a background of an unprecedented number of commercial bank failures, the Banking Act of 1933 laid out the basic framework of modern banking regulation in the United States. Among its other provisions, the legislation established federal deposit insurance, reaffirmed the restrictions on branch banking imposed in 1927 by the McFadden Act, authorized the Federal Reserve to set ceilings on the interest rates payable on savings and time deposits at member banks, and prohibited the payment of interest on demand deposits. The Banking Act of 1933 also contained four provisions, commonly referred to as the Glass-Steagall Act, that effectively separated commercial and investment banking in the United States. This was accomplished by prohibiting banks from engaging in the activities of underwriting, promoting, or selling securities either directly or through an affiliated brokerage firm. For their part, securities dealers were precluded from engaging in the business of deposit banking.

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