"Filling the Unhelpful Silence": How the Deposit Insurance Provision of the Glass-Steagall Act Transformed the American Banking System

In 1933, Congress passed the Glass-Steagall Act as a response to the Great Crash of 1929. Two basic responses to the banking crisis were on the table in the weeks before the Senate passed a bill proposed by Carter Glass and the House a measure framed by Henry Steagall: unification of the national banking system under federal control or preservation of the state unit banking system augmented by a full federal guarantee of deposits made in every American bank. The conflict between these two alternatives represented the final episode in the nearly 150 year-long struggle between state and federal authorities for control over the banking system.

The competition dated back to 1791 and posed the question: how should the values and structure of American republican federalism be engrafted onto the banking system? This Article begins by arguing that the answer to that query in 1791 was competitive dual federalism. It then frames this federal versus state competition before presenting the two broad ideologies that drove the struggle, as typified by Carter Glass and Henry Steagall. Next, this Article presents the so-called Vandenberg Amendment—adopted as part of the Glass-Steagall Act—as representative of a long-overlooked model of cooperative federalism for banking.

This Article concludes by suggesting that, contrary to the traditional scholarly account, the Glass-Steagall Act as shaped by the Vandenberg Amendment represented a fundamental change to the existing American banking structure, reversing the choice made in 1791 by rejecting a competitive dual federalism model in favor of a cooperative federalism one.