IS THE GLASS-STEAGALL ACT JUSTIFIED - A STUDY OF THE UNITED-STATES EXPERIENCE WITH UNIVERSAL BANKING BEFORE 1933

The Glass-Steagall Act of 1933 removed commercial banks from the secur ities underwriting business. We evaluate the argument for the separati on of commercial and investment banking, that conflicts of interest in duce commercial banks to fool the public into investing in securities which tum out to be of low quality. A comparison of the performance of securities underwritten by commercial and investment banks prior to t he Act shows no evidence of this. Instead, the public appears to have rationally accounted for the possibility of conflicts of interest, and this appears to have constrained the banks to underwrite high-quality securities.