The Cycle of U.S. Banking Regulation: From the Great Depression to Today

By Aliya Ahmed and Yusra Adil

Nearly a century after the 1929 stock market crash marked the beginning of the Great Depression, governments still struggle with the same issue: how much should the state regulate banks to prevent financial crisis without suppressing economic growth? The United States responded to the Depression with radical reforms such as the Glass-Steagall Act and securities laws designed to provide stability to the financial system. Yet decades later, these laws were dismantled by the Gramm-Leach-Bliley Act of 1999. If the lessons of the Depression were so clear, why did policymakers choose to reverse them, and are we repeating the same cycle today?

I. The 1929 Crash and the Banking Panics of 1930–1931

The 1920s in the U.S. were a prosperous time. World War I had come to an end, the Second Industrial Revolution had turned the nation into an economic powerhouse, and social change was thriving, from the suffrage movement to the Harlem Renaissance (Cunningham, 2025). But on October 28, 1929, everything changed when the Dow Jones Industrial Average, which had increased sixfold over the previous eight years, dropped by 13 percent, giving this date the title of “Black Monday” (Kenton, 2023). By mid-November, the Dow had lost nearly half of its value and would continue to fall until it reached a level of 89 percent below its peak in the summer of 1932 (Richardson et al., 2013).

Following the crash of 1929, anxiety plagued the economy. The first of four independent waves of panic started in Nashville, Tennessee, in the fall of 1930. This began a domino effect throughout the southeastern United States. Depositors, having lost confidence, would withdraw all their funds at once. As a result, banks had to liquidate assets quickly, often at low prices, leading to insolvency. In other cases, rumors alone of a bank’s inability to pay out funds would cause bank runs (History, 2010). At the time, only eight states had deposit guarantee funds, so depositors were quick to withdraw money during periods of uncertainty. Between 1930 and 1933, 9,000 banks failed, and depositors in those institutions lost $1.3 billion (DeSilver, 2023).

II. The New Deal and The Banking Act of 1933: Glass Steagall

On July 2, 1932, Franklin D. Roosevelt accepted the U.S. Democratic nomination for presidency. The Democratic promise of a “new deal” for the “forgotten man” would eventually come to life when the New Deal, a domestic program under President Roosevelt’s administration, took place between 1933 and 1939. The program was intended to provide immediate economic relief and reform for a variety of industries, embracing the concept of a government-regulated economy.

The first three months of Roosevelt’s presidency came to be known as the Hundred Days, a period of mass reform. To start, the administration’s primary aim was to aid the large number of unemployed workers. As a result, agencies such as the Works Progress Administration (WPA) and the Civilian Conservation Corps (CCC) were established, providing jobs to 8.5 million people. In 1935, the Second New Deal was enacted to assist labour and other urban groups, focusing on non-banking sectors to stabilize and rebuild the economy. By 1941, less than a decade after the Great Depression, real GDP in the United States had recovered to within 10 percent of its long-run trend level (The Editors of Encyclopedia Britannica, 1999).

In this same period, one of the most significant pieces of U.S. banking legislation came into effect in June of 1933. The Glass Steagall Act was signed by President Roosevelt “…to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes to” (United States Congress, 1933). Mainly, it outlined a distinct separation between commercial banking and investment banking. Commercial banks, which accepted deposits and issued loans, were no longer allowed to underwrite or deal in securities as investment banks do, and vice versa. The Act also created the Federal Deposit Insurance Corporation (FDIC), which insured deposits up to $2,500 (History, 2018).

As a result of the Act, large financial institutions such as J.P. Morgan & Company were targeted and forced to reduce their services and income sources. The goal was to prevent failed underwriting and the use of deposits for speculation. However, by the mid-1950s, institutions had successfully begun finding solutions around legislatures. Bank holding companies could be used to avoid restrictions on bank branching. For this reason, in 1956, an extension of the Glass–Steagall Act was introduced called the Bank Holding Company Act, which defined a “bank holding company” as a company holding at least a 25% ownership stake in two or more banks. This allowed Congress to give the Federal Reserve oversight over these institutions (Heakal, 2023).

III. The Securities Act of 1933 and Securities Exchange Act of 1934

In the 1920s, millions of new, often inexperienced investors poured savings into increasingly speculative securities, aided by aggressive investment banks, complex holding-company structures, and widespread promotional abuses. In particular, fraudulent firms like George Graham Rice defrauded investors of over $200 million through the sale of securities for “bogus corporations.” In an attempt of prevention, the state issued securities statutes or “blue sky” laws which focused on anti-fraud and licensing. However, these proved to be ineffective, contributing to the 1929 crash, followed by massive losses through the early 1930s, creating intense political pressure for national reform (Keller, 1988).

Congress responded first with the Securities Act of 1933, which regulated the new issuing of securities by issuers. This required issuers to file a detailed registration statement and prospectus with the Commission before selling/marketing securities to the public, aiming to ensure “full, accurate and complete” information rather than federal merit review. The Act emphasizes strong civil liabilities for false statements that were designed as incentives for issuers. Despite this, there were some inadequacies and required an independent administrative body to enforce the federal securities laws, regulate stock market practices and allow self-regulation in stock exchanges which led Congress to enact the Securities Exchange Act of 1934, one of the most successful laws enacted by the New Deal. This Act required corporations to disclose balance sheets, income statements, and supporting sub-statements (10K) within 120 days after the close of its fiscal year, as well as semi-annual (9K) and current reports (8K) on significant events to the Securities and Exchange Commission (SEC) (Benston, 1973).

IV: Gramm-Leach-Bliley Act of 1999

By 1999, the rigid division between commercial banking, investment banking and certain sectors of the financial services imposed by the Glass Steagall Act was viewed by policymakers and financial institutions as outdated (Mahon, 2013). As markets became more complex and globalized, banks argued that restrictions prevented them from competing effectively with foreign institutions and non-bank firms that offered a broader range of services. In response to these pressures, Congress passed the Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act (Thomson Reuters, 2026).

The GLBA repealed key provisions of the Banking Act of 1933 that prohibited a single institution from serving in both commercial banking and investment banking. Instead, the law created financial holding companies (FHCs), which were allowed to engage in a broad range of business activities if these activities were “financial in nature.” This change effectively permitted the consolidation of financial services into large, diversified institutions or universal banks (Mahon, 2013).

Furthermore, the GLBA introduced protection provisions aimed at safeguarding consumer financial information. These included the Financial Privacy Rule, which governs how institutions collect and disclose consumer financial data, the Safeguards Rule requiring systems to protect this information including credit-rating agencies, and pretexting provisions preventing individuals or firms from obtaining financial information under false pretenses (Mahon, 2013).

However, while the GLBA modernized the financial system and improved efficiency, Federal Reserve History also considers the consequences of this Act in triggering the 2007-08 Financial Crisis. The rise of large, highly concentrated financial conglomerates increased systemic risk and instability (Thomson Reuters, 2026).

V: U.S. Banking In the Present Day

Today, the U.S. banking sector is dominated by a small number of large financial institutions that play central roles in both global and domestic markets. In the 1980s, Citibank was the largest financial institution with total assets of $126 billion. By 2013, its assets reached $1.9 trillion, growing by roughly 1400%, despite JPMorgan Chase overtaking it as the largest bank (Pethokoukis, 2013). Major banks such as JPMorgan, Citibank, Bank of America, and Wells Fargo control a significant share of banking assets, reflecting decades of consolidation following deregulation in the late twentieth century. While this rise may be attributed to increased efficiency in the financial system, it also raises systemic concerns. In an interconnected system, distress at even a single major bank could potentially spread throughout the broader financial system, requiring policy intervention.

The regulatory framework governing U.S. banks is constantly responding to environmental changes. Following the 2008 financial crisis, the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law by the Obama administration, strengthening oversight of large financial institutions. The Dodd–Frank Act established the Financial Stability Oversight Council (FSOC) and granted the federal government the authority to dismantle banks considered “too big to fail” (EBSCO Information Services, 2023).

Despite these measures, concerns persist in the sufficiency of current regulations to prevent future crises. The history of U.S. banking regulation, from the reforms of the Great Depression to the deregulation in the late twentieth century and the regulatory expansion after 2008, suggests a recurring cycle: crises prompt stronger state intervention, only for those rules to be gradually loosened over time as stability is achieved.

References

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