The Glass-Steagall Act was designed to prevent what?

The Glass-Steagall Act, enacted in 1933, was primarily aimed at preventing conflicts of interest between commercial banking and investment banking. Before the Act, banks could engage in investment activities, which created a potential for conflicts of interest. For instance, commercial banks could advise clients to invest in securities that they themselves were promoting or selling, leading to speculation that could compromise the stability of financial institutions and the confidence of depositors.

By separating commercial banks from investment banks, the Glass-Steagall Act sought to create a more stable financial system where banks could focus on traditional banking activities, such as accepting deposits and making loans, without being exposed to the risks associated with investment activities. This separation was seen as a necessary step to protect consumers and reduce the likelihood of bank failures stemming from speculative practices.

Understanding the context of the financial landscape at the time helps to illustrate the need for such regulation. The Great Depression highlighted the risks associated with combining these banking functions, which contributed to severe bank failures and economic instability. Thus, the separation enacted by the Glass-Steagall Act was a crucial reform aimed at maintaining the integrity and safety of the banking system.