06/14/2012 03:59 pm ET Updated Aug 14, 2012

Shattering Glass

Congress grills a JPMorgan Chase senior executive. The shape of banking policy hangs in the balance, as the national economy continues to reel from financial recklessness. The problems caused by the lack of regulation have never been more obvious.

A public that is disgusted by banker recklessness and fed up with Wall Street should take note of the fact that on June 16, 1933, Congress approved a critical law that led to regulations to protect the public in the form of the Glass-Steagall Act.

Sadly, the repeal of this stalwart reform presaged the financial crisis of 2008.

The deregulation that followed the repeal of Glass-Steagall figures prominently in the fact that 13 million Americans remain unemployed, that homeowners collectively owe $700 billion more than the market value of their homes, that retirees lost trillions in savings and that recent college graduates face bleak futures.

The history of our need for financial regulations like Glass-Steagall to protect Main Street and retail investors starts with the stock market crash of 1929, in which the nation entered the gravest economic recession of its history. In a dramatic exchange in the spring of 1933, investigator Ferdinand Pecora pressed JP Morgan Jr. to admit he hadn't paid taxes on his prodigious income for years. Equipped with populist anger at untaxed banker pay, Congress approved a sweeping measure on June 16, 1933, reshaping the financial sector.

In practice, Glass-Steagall separated commercial and investment banking, while creating federal insurance for depositors. Whereas the government provides no federal insurance for house fires, car wrecks or illness (outside of age and certain income parameters), Glass-Steagall declared that the federal government would safeguard the savings of depositors. This guaranteed that cheaper money could be deployed by the banks to make loans to business and homebuyers. Firms that engage in riskier activity such as underwriting and making markets in stocks and bonds must be separated. JP Morgan, as a consequence, divided into JP Morgan and Morgan Stanley.

For seven decades, Glass-Steagall protections provided relative financial peace. In truth, public understanding of Glass-Steagall's wisdom didn't sustain the law so much as intra-industry competition. Investment banks such as Goldman Sachs and Merrill Lynch lobbied against laws permitting federally insured banks to compete in their sector. Beginning in the 1980s, bank-friendly regulatory agencies, notably the Federal Reserve under Chairman Alan Greenspan, and the Comptroller of the Currency, eroded their own prudential rules. Then-U.S. Sen. Phil Gramm (R-Texas), chairman of the Senate banking committee, then successfully sponsored legislation to repeal Glass-Steagall altogether.

After financial recklessness enabled by the repeal of Glass-Steagall again drove the economy into a chasm in 2008, Congress responded with the Dodd-Frank Wall Street Reform Act. To prohibit banks from gambling with taxpayer-guaranteed deposits in high-risk activity, this act included the Volcker Rule, sometimes known as "Glass-Steagall light." (The measure permits market-making but prohibits proprietary trading.)

In a dismal déjà vu, Congress is again investigating JPMorgan for bonus-chasing bets that cost the bank at least $2 billion, and a loss of more than 20 percent of the bank's market value.

JPMorgan CEO Jamie Dimon's testimony before the Senate and House sandwiches the June 16 Glass-Steagall anniversary. Lawmakers and regulators contemplating their own role in history should take note. Sen. Richard Shelby (R-Ala.), points with pride to his lone Republican vote against repealing Glass-Steagall, in honor of fellow Alabaman Rep. Henry Steagall who co-authored the law. A speech by Sen. Byron Dorgan (D-N.D.), where he presciently warned that terminating Glass-Steagall would surely visit financial havoc upon the United States, replays in documentaries such as the recent four-part Frontline production on the financial crisis. Conversely, no statues honor Sen. Phil Gramm, chief sponsor of the Glass-Steagall repeal, or Fed Chairman Greenspan.

In April 2012, Public Citizen documented $67 million worth of campaign contributions from Wall Street to 172 members of Congress who pressed regulators to weaken the Volcker Rule. We urge members of Congress to stand firm against this money and to ensure a strong Volcker rule. As we enter a week where JPMorgan attempts to defend its actions, let's remember the history lessons we've learned from the repeal of Glass-Steagall and make sure that we don't let our newest Main Street protection, the Dodd-Frank Act, be shattered in the same way.