Glass-Steagall makes sense
MORE than just the banking and securities industries should be closely watched following Senate hearings scheduled for early next month into proposals to overturn key provisions of the Glass-Steagall Banking Reform Act of 1933. No one has a greater stake in the outcome than the American public, which has been well served by the legislation since its enactment during the worst days of the Great Depression. The Glass-Steagall Act has often been called the bedrock financial legislation of the New Deal. And for good reason. Glass-Steagall divorced commercial and investment banking activities. Banks were falling like dominoes in the early '30s, as the stock market plummeted. But from 1933 on, a wall was erected down the center of the banking highway: Commercial banks would be barred from the volatile securities market; securities would be handled by investment banking houses.
Now the commercial banking industry - and no small contingent of supporters, including the Reagan administration, as well as federal bank regulatory agencies - want to tear down that wall. They've won an important ally: William Proxmire, Democratic chairman of the Senate Banking Committee.
Mr. Proxmire and Republican Sen. Jake Garn have recently introduced legislation to allow banks back into the securities market by way of holding companies. By putting the investment banking operation and the commercial bank under a common parent, Proxmire and Mr. Garn argue, banks and bank depositors would be insulated from any risk or fallout during an economic crisis.
The Proxmire-Garn plan, meanwhile, is not the only proposal to allow banks back into the securities trade.
A somewhat different plan has been introduced by Democratic Sens. Timothy Wirth and Bob Graham.
There is much to be said for continued deregulation of banking - such as providing banks greater opportunity in interstate banking. But removing restrictions on banking activities in the securities market is quite different. Not one major bank has failed after the recent Oct. 19 slump.
In 1930 alone, by one count 1,352 banks crashed. In 1934, however, after Glass-Steagall, only 57 failed, by one count.
The burden of proof must be on the proponents of repealing Glass-Steagall. Unless the reasons prove to be decisive, the law, which has safeguarded the American people for more than half a century, should not be altered.