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The Interesting Politics Behind the Glass-Steagall Act

By Motley Fool Staff - Apr 4, 2016 at 10:28AM

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Originally, Citigroup and Chase were some of the strongest supporters of the move to separate investment and commercial banks.

There's a great irony in the history of Citigroup (C -0.17%). While it's been credited with breaking down the wall between investment and commercial banking in the late 1990s, its predecessor entity, the City Bank of New York, was one of the leading proponents of the original separation, which came about during the Great Depression. Citigroup, joined at the time by Chase, supported the move in the 1930s as a way to replace J.P. Morgan -- now JPMorgan Chase (JPM 1.41%) -- at the apex of global finance.

The Motley Fool's Gaby Lapera and John Maxfield discuss this in the video below, which includes a selection from their recent examination of the history of banking in America.

A transcript follows the video.

This podcast was recorded on March 28, 2016. 

Gaby Lapera: Federal Reserve gets created. We're doing OK. You have the roaring 20's, right, the stock market, all that. Then the Great Depression hits.

John Maxfield: Great Depression, total disaster.

Lapera: Total disaster. It didn't start out as a depression.

Maxfield: That's what's so interesting about the Great Depression. It was a normal recession, going into it. What happened was that the Federal Reserve, at the time ... The Federal Reserve ... We had one, right. We had a central bank. So you're thinking, well, why wasn't the Federal Reserve able to stop this? The consensus among historians is that there was infighting between the different Federal Reserve branches and the central monetary commission in Washington, D.C. There's a guy by the name of Benjamin Strong who was the first head of the central bank who had passed away before that. They weren't able to come in and stop the Great Depression. What it was, was that you had a recession that then turned into the Great Depression because of literally thousands of bank failures and people lost their savings and that just turned it into what it was.

Lapera: Part of the Great Depression everyone remembers, is this terrible day on the stock market and that combined with the bank failures, you end up with something called the Glass-Steagall Act.

Maxfield: If you think about the financial crisis, we just deal with the Dodd-Frank. Glass-Steagall was basically the Dodd-Frank of the Great Depression. You went from a relatively unregulated, to a certain extent, banking industry, to a very very strictly regulated bank industry. What Glass-Steagall did in particular is it separated a bank's investment banking activities, which is issuing bonds, underwriting stocks, trading and securities, all those types of things, from your commercial banking activities, which is just taking deposits and making loans. What's interesting about Glass-Steagall is that there is, this is an analysis I've come across in multiple books, there is reason to believe that it was really backed in large part by Chase, which is now part of J.P. Morgan and by the City Bank of New York which is Citigroup. The reason they backed it so much, is because they had large commercial banking activities, large depository activities, but J.P. Morgan, which at the time was the leading bank in the country, was really largely dependent upon investment banking. They knew that if we can separate J.P. Morgan's investment banking business from its commercial banking business, we'll be able to take the lead.

That is where, it was at that point, that Citigroup went from being the second to third largest player in the industry, to really dominating it for many decades after that.

Lapera: This is why people think bankers are sneaky.

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