Understanding America's Hesitant Steps toward Financial Capitalism: Politics, the Depression, and the Separation of Commercial and Investment Banking.

Abstract

Few would disagree that the Glass-Steagall Act of 1933 is the continental divide in American financial and banking history. By disallowing banks from getting involved in the investment banking industry, this Act imposed an institutional change that shaped how financial institutions conduct their business, even today in its decline. Conventional wisdom has it that the Act was enacted to correct the "deficient" financial system that existed during the period. In this paper we investigate whether this assertion can be empirically verified by analyzing the Senate vote on a predecessor of this Act (which included the clause separating commercial banking from investment banking activities). Using multinomial logits, we examine what may have motivated senators to vote for its passage. The econometric evidence indicates that the Senate vote was significantly influenced by important interest groups (including national banks as well as manufacturing sector interests), despite the large populist outcry for financial market reforms at the onset of the Depression. Copyright 2001 by Kluwer Academic Publishers