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 thecontinental divide in American financial and banking history. Bydisallowing banks from getting involved in the investment bankingindustry, this Act imposed an institutional change that shaped howfinancial institutions conduct their business, even today in itsdecline. Conventional wisdom has it that the Act was enacted tocorrect the ``deficient'' financial system that existed during theperiod. In this paper we investigate whether this assertion can beempirically verified by analyzing the Senate vote on a predecessorof this Act (which included the clause separating commercialbanking from investment banking activities). Using multinomiallogits, we examine what may have motivated senators to vote for itspassage. The econometric evidence indicates that the Senate votewas significantly influenced by important interest groups(including national banks as well as manufacturing sectorinterests), despite the large populist outcry for financial marketreforms at the onset of the Depression.