GLASS-STEAGALL ACT OF 1932

Waves of commercial bank failures and a progressive contraction of credit to businesses and individuals were central features of the economic collapse beginning in 1930. Both were exacerbated by the Federal Reserve's policy of reducing the money supply and by its decision to raise interest rates in the fall of 1931 with the aim of protecting the value of the dollar after Great Britain quit the gold standard. President Herbert Hoover's administration supported such orthodoxy, but recognized the need to buttress the banking system and the supply of credit. The administration's preferred strategy of bank cooperation and "self-help" via the National Credit Corporation failed in 1931, in part because of the unwillingness of leading bankers to lend to weaker institutions. Hoover was compelled to provide federal loans to banks and other businesses through the Reconstruction Finance Corporation.

As the credit crisis worsened both Hoover and Congress supported more liberal credit policies. By early 1932 a group of governors from the Federal Reserve temporarily sought a more expansionary policy based on buying government securities from banks so as to increase the banks' reserves. The Reserve banks could lend only on gold, government securities, or short-term commercial loans (known as eligible paper), in line with the conventions of commercial loan banking theories. However the banking system's gold reserves appeared inadequate; many banks lacked sufficient government securities or eligible paper to support further borrowing. Banks might also use extra funds to reduce their overall borrowings, leaving the Federal Reserve more reliant on its own gold reserves.

The Glass-Steagall Act of February 1932 was an emergency measure designed to support the expansion of bank credit through lending by district or regional Federal Reserve banks to banks that were members of the Federal Reserve System. Sponsored by Senator Carter Glass of Virginia and Representative Henry Steagall of Alabama, the Act widened the range of assets against which commercial banks could borrow to include promissory notes or government bonds if they had no other eligible assets. Senator Glass, who disliked such liberalization, ensured that these loans attracted higher interest rates. The measure eased the immediate availability of credit between February and August 1932, but the Act did not signal a full commitment to expansion by the Federal Reserve Board; its provisions were marginal amid the atmosphere of diminishing confidence among the public, businesses, and the banking community. More active use of the Reconstruction Finance Corporation's powers and more interventionist banking legislation had to await the New Deal.

See Also: FEDERAL RESERVE SYSTEM; GLASS, CARTER; GLASS-STEAGALL ACT OF 1933.

BIBLIOGRAPHY

Burns, Helen M. The American Banking Community and New Deal Banking Reforms, 1933–1935. 1974.

Chandler, Lester V. America's Greatest Depression, 1929–1941. 1970.

Friedman, Milton, and Anna Jacobson Schwarz. A Monetary History of the United States: 1867–1960. 1963.

Michael French