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45 Wash. & Lee L. Rev. 1115 (1988)
Destroying the Barriers between Commercial and Investment Banking: Should Congress Repeal the Glass-Steagall Act

handle is hein.journals/waslee45 and id is 1127 raw text is: DESTROYING THE BARRIERS BETWEEN COMMERCIAL AND INVESTMENT BANKING: SHOULD CONGRESS REPEAL THE GLASS-STEAGALL ACT? Congress enacted the Banking Act of 1933 (Banking Act)' in response to the numerous bank failures that occurred during the early stages of the Depression.2 Congress believed that the bank failures resulted from spec- ulative bank activities caused by the close connection between commercial and investment banking.3 In the section of the Banking Act commonly 1. Banking Act of 1933, 48 Stat. 162 (codified as amended in scattered sections of 12 U.S.C.). 2. See 77 CONG. REc. 3837 (1933) (statement of Rep. Steagall) (stating that purpose of Glass-Steagall Act was to protect safety of bank customers' deposits). Congress feared that the substantial number of bank failures would cause the public to lose confidence in the banking system. See S. REP. No. 77, 73d Cong., 1st Sess. 6 (1933) (hereinafter 1933 Senate Report) (noting that 2290 banks failed in 1931 and 1456 banks failed in 1932). Congress realized the importance of the public having confidence in the banking system. See H.R. REP. No. 150, 73d Cong., 1st Sess. 6-7 (1933) (noting that public was afraid to deposit money in banks and that Congress believed that bank instability would continue until public confidence in banking system returned). Congress realized, further, that the banking system and the economy would fail if the public did not regain confidence in the banking system. Id. 3. 1933 Senate Report, supra note 2, at 6, 10; see 77 CONG. REc. 3907 (1033) (statement of Rep. Koppleman) (stating that chief cause of depression and bank failures was diversion of depositors' money into speculative securities markets). Congress attributed the failure of the Bank of the United States, in particular, to the activities of the bank's securities affiliates. Hearings Pursuant to S. Res. 71 Before a Subcommittee of the Senate Committee on Banking and Currency, 71st Cong., 3d Sess. 116-17, 1017, 1068 (1931) (hereinafter 1931 Hearings). Congress found that securities firms affiliated with commercial banks had engaged in underwriting activities and stock speculation and had maintained a market for the banks' stocks with the banks' own funds. 1933 Senate Report, supra note 2, at 10; see 77 CONG. REc. 3835 (1933) (remarks of Rep. Steagall) (discussing activities of securities firms affiliated with banks). Additionally, some banks extended excessive credit to the banks' customers to enable the customers to purchase the securities the bank offered. See 75 CONG. REc. 9906 (1932) (statement of Sen. Walcott) (noting that excessive use of bank credit by bank customers to engage in stock speculation was a major cause of banks' weakness). Banks also purchased long-term speculative securities for the banks' own accounts, and, therefore, tied up large amounts of the banks' capital. S. REP. No. 584, 72d Cong., 2d Sess. 8 (1932). Congress believed that because of the banks involvement with and ownership of speculative stocks, banks, particularly member banks of the Federal Reserve System, had aggravated the stock market crash. 1933 Senate Report, supra note 2, at 6, 8, 10. Accordingly, a primary purpose of Congress in enacting the Glass-Steagall Act was to prevent commercial Abanks from engaging in investment banking and, therefore, diverting the banks' capital into speculative securities. 75 CONo. REc. 9984 (1932) (statement of Sen. Glass); see 77 CONG. REc. 3835 (1933) (statement of Rep. Steagall) (stating that purpose of Glass-Steagall Act was to remove commercial banks from investment activities). The potential for conflicts of interest between commercial banking and investment banking also concerned Congress. 75 CONG. REc. 9912 (1932) (statement of Sen. Bulkley). 1115

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