Bloomberg has a nice look back at the most controversial element of Glass-Steagall today in an article entitled What FDR Hated About Glass-Steagall.
Interestingly, FDR hated the crown jewel of the Act - FDIC insurance. FDR repeatedly threatened to veto the Banking Reform Act of 1933 over simple deposit insurance.
The debate over the 1999 repeal of that reform still rages. Yet in 1933, the most controversial feature of Glass-Steagall was the creation of federal deposit insurance, which has been wildly successful and has virtually eliminated the repeated bank runs that swept the country in the decades before the bill’s passage. Even the ardent free-marketeer Milton Friedman called it “the most important structural change in the banking system” of the New Deal.But it was deposit insurance supporter Henry Steagall vs both Glass and FDR fighting for months in a debate on whether to include what became the FDIC in the bill. The look back is historically fascinating.
Despite the implicit guarantees in the emergency banking legislation and his support for most of Glass-Steagall, Roosevelt had no interest in backing a full-blown insurance program for bank deposits, and he told reporters that he would veto any legislation that contained one.Today, deposit insurance is the glue that holds banking together and makes banking a collective endeavor due to the fact we pool our money into banks thus making more loans possible. There is over $10 trillion in combined deposits in the US today.
Glass was equally opposed to Steagall’s plan. Roosevelt probably thought that he and Glass could strip the offending provision out of the final bill, and reiterated his continued opposition throughout the spring.
All failed banks since then (and there have been many) have had their insured deposits covered due to this Act.
Yet is almost did not happen.