May 27, 2013 3 min read

In between approving the minutes and making appointments to the parks and recreation board, Mt. Pleasant Township’s supervisors made a rare foray into national politics and policy last Wednesday when they called for the reinstatement of the Glass-Steagall Act.

Passed unanimously by the board, the resolution is, of course, a symbolic act more than anything else – the sentiments of a township board in a relatively remote spot in Southwestern Pennsylvania are unlikely to rattle the halls of power in Washington, D.C. But it should nonetheless be applauded for pressing the point. The time is indeed ripe for the Glass-Steagall Act to be placed back on the books.

A little history: The Glass-Steagall Act became law 80 years ago, after President Franklin Roosevelt arrived in the White House and was buttressed by large Democratic majorities in Congress bent on restoring an economy that had been flattened by the Great Depression and instituting safeguards that would lessen the likelihood that an economic shock of a similar magnitude would reoccur. One of them was the Glass-Steagall Act, named for Sen. Carter Glass of Virginia and Sen. Henry Steagall of Alabama. Basically, it separated commercial banking and investment banking. Under the new rules, commercial banks could accept the money of depositors and engage in lending, but they could not trade or sell securities or get involved in underwriting. The reckless blending of commercial and investment banking was part of what led to both the collapse of the stock market in 1929 and the meltdown of the entire banking system, a circumstance that left many customers wishing they had instead stashed their pennies in a jar below the bed.

Flash forward to 1999. The number of people with memories of the Great Depression and the misery it fostered had dwindled, and lawmakers who came of age in prosperity and adhered to free-market fundamentalism pushed for the repeal of the Glass-Steagall Act. Fueled by a $300 million lobbying effort by the banking and financial-services industries, the proponents of repeal argued that banks were losing ground to securities firms, and erasing the Glass-Steagall Act would allow banks to diversify their portfolios and make them more competitive in the global marketplace.

Well, that didn’t work out so well.

The removal of the restraints imposed by the Glass-Steagall Act led many banks to engage in speculation and make risky investments, much the way they did in the 1920s. According to economist Joseph Stiglitz, “Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. … Investment banks, on the other hand, have traditionally managed rich people’s money – people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only though high leverage and big risk-taking.”

As the Great Recession has relentlessly dragged on, there have been calls to reinstate the Glass-Steagall Act from liberals like Sens. Tom Harkin of Iowa and Elizabeth Warren of Massachusetts. Even U.S. Rep. Paul Ryan, Mitt Romney’s running mate in 2012, expressed an interest a few years ago. Considering the partisan inertia that has gripped Capitol Hill, the likelihood of Glass-Steagall making a comeback in the near term is unlikely. Perhaps the greatest worry, though, is that the economy will eventually recover, we’ll forget the Great Recession’s lessons and be right back where we started.