10.36172/EKONOMISTI.2024.XX.04.CHIKOBAVA

Expanded Summary 

The passage of the Glass-Steagall Act played an important role in stabilizing the US financial and banking system. Until the end of the 20th century, America lived without banking crises (although individual banks went bankrupt regularly). The Glass-Steagall Act became an insurmountable barrier to greedy bankers who wanted to combine the privileged status of their depository institutions with speculative operations in the stock markets. They were eager to use depositors' money to gamble on the stock exchange. The first attempt by bankers to weaken the Glass-Steagall Act was made as early as 1956 with the passage of the Bank Holding Company Act. It was then proposed to repeal the ban on combining lending and investment activities for subsidiaries of bank holding companies in all states. However, the attempt failed. Deposit and credit institutions were forbidden in advance to carry out investment activities, as well as to absorb companies from other sectors of financial services (insurance, investment, asset management, etc.), as well as to organize partnerships with them.

At the turn of the 1960s and 1970s, it was possible to take the first step in breaking down the wall between the two main types of financial business - deposit-credit and investment. Commercial banks were allowed to enter the municipal bond market as underwriters (investment brokers). At the same time, investment companies, through their lobbyists, won the right to open demand accounts in the money market (money market accounts) for clients, which are actually analogues of short-term deposits. But, such accounts were not covered by the Federal Deposit Insurance Corporation (FDIC) and there were high risk accounts (Katasonov, 2024).

In late 1986 and early 1987, another important development occurred: the Federal Reserve allowed some particularly reliable commercial banks to receive no more than 5% of their gross income from securities operations (though not yet at the expense of client funds, but at the expense of their own capital). A little later, the previously established margin for the most reliable banks was raised to 10%. This happened back when Paul Volcker was the chairman of the Federal Reserve System.

The final stage of dismantling the Glass-Steagall law is associated with the name of Alan Greenspan. In August 1987 J. P. Upon his appointment as Chairman of the Board of Governors of the Federal Reserve System from the directorship of J.P. Morgan, Greenspan immediately declared the need for "maximum deregulation of the banking system in order to increase the competitiveness of American banks in the fight against large foreign banks." According to Greenspan, "deregulation" was, first of all, the repeal of the Glass-Steagall Act. As they say, "the process has started". Naturally, the first bank to receive from the Federal Reserve in 1990 the right to invest up to 10% of gross income was Greenspans "home" bank J. P. Morgan. Greenspan's gift allowed the bank to dramatically strengthen its position among and at the expense of other Wall Street banks. J. P. Morgan, through investment operations, began to devour competitors with great appetite: Chemical Bank (1991), Chase Manhattan (1995), First Chicago (1995), Great Western Bank (Great Western Bank ) (1997), Bank One (Bank One) (2004) and A.S.

By December 1996, Greenspans initiative increased the level of own investment activity allowed to banks to 25%. Already in August 1997, the first banking structure, Bankers Trust, absorbed the brokerage company Alex, Brown & Company (Alex, Brown & Co). It was later absorbed by Deutsche Bank. Wall Street is well on its way to tearing down the wall between different types of financial services. For a certain period of time, only the prohibition of entry of banks into insurance activities was maintained.

The blatant disregard for the Glass-Steagall Act continued. In 1997, the insurance company "Travelers" absorbed the investment bank Solomon Brothers, and in 1998, "Travelers" itself was bought by Citicorp (Citibank's parent company) for $70 billion.

Then the big banks continued to fight for the complete liquidation of the Glass-Steagall Act. On November 4, 1999, they celebrated their victory. On this day, Democratic President Bill Clinton signed the Financial Modernization Act. It is also called the Gramm-Leach-Bliley Act (Gramm-Leach-Bliley Act), after the names of its authors (Gramm-Leach-Bliley Act, or GLB Act for short). A quarter of a century ago, the Glass-Steagall law, which had existed in this world for 66 years, died.

In numerous speeches accompanying the passage of the law, bankers cynically painted a rosy outlook for the American people. It was said that the time of "universal" banks is beginning in America; That henceforth Americans would save time and money by getting all their financial services from a single window. In fact, the US has returned to the Roaring Twenties.

In fact, on November 4, 1999, a mine was planted in the US financial system that exploded nine years later. We are talking about the financial crisis of 2008-2009. The American Financial Crisis Investigation Commission, under the chairmanship of Phil Angelides, published the results of the research into the causes of the financial collapse. It was recognized that literally from the moment the Financial Modernization Act was passed, American banks began actively inflating "bubbles" in the stock and other financial markets. The "bubble" in the mortgage securities market became particularly active. After its collapse, the banking crisis began. In August 2007, Bear Stearns (at the time the fifth largest investment bank in the United States) found itself in the middle of the subprime crisis. On September 15, 2008, one of the largest US banks, Lehman Brothers, declared bankruptcy. As of October 2, 2008, five of Americas leading investment banks have ceased operations with their previous profiles: Bear Stearns was resold, Lehman Brothers went bankrupt, Merrill Lynch was resold, Goldman Sachs and Morgan Stanley changed their names and ceased investment activities for special risks and federal funds. Due to the need to receive additional support from the reserve system (Katasonov, 2024).

According to the conclusion of the aforementioned Angelides Commission report, the main cause of the crisis was the cancellation of the Glass-Steagall Act adopted by Franklin Delano Roosevelt in the 1930s, and Alan Greenspan, the former chairman of the Federal Reserve System, was named as the main initiator of the destruction of regulatory mechanisms.

Of course, the US authorities had to respond to the financial crisis of 2007-2008 by demonstrating that they had learned from this crisis and were able to take the necessary measures to prevent a new crisis. The US Congress, with the support of President Barack Obama, passed a comprehensive bill in 2010 to reform Wall Street banks and protect consumers. It is also called the Dodd-Frank Act, after Senator Dodd and Congressman Frank, who initiated it.

The aforementioned Dodd-Frank Act (its full name is the "Wall Street Reform and Consumer Protection Act"; 848-page document) failed to solve the key problem - the separation of deposit-credit activities of American banks from investment (speculative) and insurance activities. Renowned politician and public figure Lyndon LaRouche (1922-2019) called this law a "useless, half-measure of a heartbeat."

In Lyndon LaRue, individual congressmen and senators tried (and are still trying) for many years to restore the Glass-Steagall Act. Back in early 2010, Senators Maria Cantwell (Democrat of Washington State) and John McCain (Republican of Arizona) introduced amendments to the Dodd-Frank Act that would, in effect, reinstate key provisions of the Glass-Steagall Act. The change did not gain the necessary support.

In April 2011, US House of Representatives Marcy Kaptur (D-Ohio) reintroduced a bill to restore the Glass-Steagall Act, H.R. 1489 - with a proposal to "repeal certain provisions of the Graham-Leach-Bliley Act and restore the separation between commercial banking and securities trading, as well as for other purposes, as provided by the law passed in 1933, which received the name of the Glass-Steagall Act."

On May 16, 2013, Senator Tom Harkin (D-Iowa) introduced Bill N985 (SB 985) to the upper house of the US Congress to restore the Glass-Steagall Act.

The list of legislative initiatives in the upper and lower houses of the US Congress to restore the repealed Glass-Steagall Act in 1999 could go on. But, unfortunately, none of them have been successful so far.

Exactly one year ago, in March, a series of bank bankruptcies began in the USA. The first in this line was Silicon Valley (16th largest bank in the USA). Then several other banks followed him. The expansion after the banking crisis was stopped last year. But stability in the banking sector remains fragile. The systemic causes of instability in the banking sector of the American economy remain in force. At the beginning of this year, the formation of a "bubble" was observed on the part of the largest American banks in the real estate market. Experts predict a repetition of the events of 2007-2008, which began with the mortgage market and ended with the collapse of the largest Wall Street banks (Мигунов, 2024).

It is understood that the US government and the Federal Reserve System are avoiding the issue of a possible banking crisis in the country. What is needed to provoke it? Another fact is worth noting: even in the US Congress, they stopped raising the question of restoring the Glass-Steagall Act. America still continues to live in an economic space that was mined 25 years ago when the said law was repealed.

Dramatic events are happening in the world today. Jamaica's monetary and financial system is experiencing a serious crisis. There are signs that the US dollar is losing its appeal even to countries considered Washington's allies. So, Saudi Arabia, which has been a traditional ally of America and sold oil for dollars for almost half a century, no longer shows the same respect for either Washington or the American dollar. It will start shipping in Chinese yuan today or tomorrow. Oil may become a real competitor to the oil dollar. A very serious and dangerous crack is brewing in the structure of the Jamaican system. So far, neither the International Monetary Fund, nor Washington, nor anyone else in the West has formally raised the question of what might replace the current dollar system. We believe preparations are already underway to replace it, but behind the scenes, as was the case in the first half of the 1970s, when preparations were underway to abandon the gold dollar standard and create the petrodollar. 

Key words: Bretton Woods system, Jamaican system, reserve currency, petrodollar, eurodollar, special drawing right, Glass-Steagall Act, Gramm-Leach-Bliley Act.