Glass–Steagall Act of 1932

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The first "Glass–Steagall Act" was a law passed by the United States Congress on February 27, 1932, prior to the inclusion of more comprehensive measures in the Banking Act of 1933, which is now more commonly known as the Glass-Steagall Act. It was the first time that currency (non-specie, paper currency etc.) was permitted to be allocated for the Federal Reserve System. It was passed in an effort to stop deflation and expanded the Federal Reserve's ability to offer loans to member banks (rediscounts) on more types of assets such as government bonds as well as commercial paper.[1]

The "Glass–Steagall Act" is not the official title of the law; it is a colloquialism that refers to its legislative sponsors, Carter Glass, a US Senator from Virginia and Henry B. Steagall, the Congressman from Alabama's 3rd congressional district.

The Glass–Steagall Act of 1932 authorized Federal Reserve Banks to (1) lend to five or more Federal Reserve System member banks on a group basis or to any individual member bank with capital stock of $5 million or less against any satisfactory collateral, not only “eligible paper,” and (2) issue Federal Reserve Bank Notes (i.e., paper currency) backed by US government securities when a shortage of “eligible paper” held by Federal Reserve banks would have required such currency to be backed by gold.[2] The Federal Reserve Board explained that the special lending to Federal Reserve member banks permitted by the 1932 Glass–Steagall Act would only be permitted in “unusual and temporary circumstances.”[3]

Historical context[edit]

The crash of 1929 evolved in a panic situation due to people losing their savings. Therefore, a massive withdrawal of deposits of the banks took place leading to the bankruptcy of many entities. In 1933, a young prosecutor named Ferdinand Pecora, who was a member of the US Senate's Monetary and Financial Affairs Commission, interrogated several bank managers about their detestable role in the crisis. These hearings and the coming to power of Franklin D. Roosevelt and his New Deal policy gave rise to the law.


  1. ^ kanopiadmin (18 August 2014). "America's Great Depression - Murray N. Rothbard".
  2. ^ Friedman and Schwartz 1963 , p. 321 and pp. 399-406. Patrick 1993, pp. 71-77.
  3. ^ Federal Reserve Board (1932), "Review of the Month: The Glass–Steagall bill" (PDF), Federal Reserve Bulletin, 73 (3): 141–142 and 180–181, retrieved July 23, 2015. Each form of special lending to Federal Reserve member banks required approval from at least five members of the Federal Reserve Board. Group lending could be made to fewer than five (but not fewer than two) member banks if the borrowing banks had deposit liabilities equal to at least 10% of the deposits liabilities of member banks in their Federal Reserve district. The special lending to individual member banks could be made only in “exceptional and exigent circumstances.” Both forms of lending were based on the borrowing member banks not having sufficient "eligible assets" to borrow on normal terms.

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