In the depths of the Great Depression, Congress passed the Glass-Steagall Act, which put interest ceilings on commercial banks and outlawed interest on funds payable on demand. The Federal Reserve Board was instructed to set maximum rates for time and savings deposits like passbooks and certificates of deposit, which it did in September 1933 under Regulation Q. At first the rules covered only Fed member banks, but the FDIC soon applied similar limits to insured nonmember banks, and by early 1936 the agencies had aligned on uniform regulations.
A leading view at the time blamed "excess competition" in the 1920s for instability, particularly banks' rate wars for time deposits. New York's bank supervisor, Joseph A. Broderick, put it bluntly: "we want no competition on the basis of interest rates in this state again." With deposit insurance arriving at the same time, officials also worried banks might take on too much risk without guardrails. Other 1930s measures tried to rein in rivalry, including tighter limits on chartering new banks in markets already served.
The ban on paying interest on checking tied back to a long standing practice: smaller banks kept demand balances with big correspondent banks in cities like New York. Critics argued that habit drained funds from local economies. Senator Carter Glass warned that paying interest on those balances had pulled large sums to money centers and fed stock speculation. There was also a stability concern that abrupt withdrawals of these balances from New York institutions could trigger periodic tight funding.
Looking back, historians have pointed to deeper structural weaknesses that the reforms did not directly fix, like branching restrictions that left banks undiversified and the fact that many institutions stayed outside the Federal Reserve System and thus lacked emergency access to Fed credit.
For decades, market yields were so low that the ceilings barely mattered. In 1936, Treasury bills generally yielded under ¼ percent while banks could legally pay up to 2½ percent on savings. By 1955, bills were around 1¾ percent and the savings cap was still 2½ percent.
The picture changed as yields climbed in the late 1950s and through the 1960s. By 1966, T-bills were nearly 5 percent. The Fed repeatedly raised Regulation Q limits, but a late 1965 revision let large commercial banks pull funds from savings banks and S&Ls, contributing to a mortgage market "credit crunch" in 1966.
In June of that year, Congress held hearings on "unsound competition for savings and time deposits." Fed officials had not expected so many big banks to move straight to the new ceilings or other institutions to struggle as much afterward. The squeeze was severe enough that the Fed drafted contingency plans to lend at the discount window to nonbanks, including savings and loans, but did not use that authority.
Old rules show how steady decisions help protect and grow your savings. Join Briefs Finance CEO Jaspreet Singh on September 29th for a FREE live investor workshop, How to Profit From A Dollar That's Losing its Value, where he shows how we're spotting investment opportunities as the dollar falls. Save your spot.
In September 1966, Congress widened the scope of rate ceilings to cover insured savings and loans - regulated by the Federal Home Loan Bank Board - as well as insured savings banks under the FDIC. To support housing finance, the law required maximum rates at S&Ls and savings banks to sit slightly above commercial bank caps.
Over the next 15 years, as rates climbed and became choppier, the caps rippled across the system. Large banks struggled to keep funds raised through big certificates of deposit. Smaller banks and thrifts had a harder time holding retail deposits.
Businesses and households dependent on these institutions ran into periodic credit tightness during the late 1960s and through the 1970s. More than once, the Fed prepared plans to lend to nonbanks in emergencies.
Banks found workarounds. On checking, they effectively paid in kind by offering services below cost, and sweetened the deal with "free" perks like toasters and umbrellas. They also let customers shuttle money between savings and checking, and technology made those transfers easier. Savings banks introduced NOW accounts, retail savings accounts with check-like features, to navigate around the ban on paying interest on demand deposits.
Some activity simply moved outside insured depositories. Money market mutual funds took off in the 1970s by offering market yields, some check writing, and a stable $1.00 share price. In the realm of housing finance, the U.S. government and market participants reintroduced securitization in the 1970s to supplement thrifts' funding.
The 1970s brought persistent debate over whether the caps still made sense, and support for repeal built over time. Congress ultimately phased out deposit interest-rate controls gradually from 1980 through 2011.
For your wallet, here is the punchline: rules about what banks can pay shape where money flows. Limits that once sounded protective ended up steering cash toward new corners of finance and reshaping the products you use. If you keep cash in bank accounts or invest in vehicles that hold bank paper, remember that regulation can quietly redirect returns and risks.
Keeping a long term view helps you preserve purchasing power and build wealth. Our CEO Jaspreet Singh is hosting a FREE live investor workshop, How to Profit From A Dollar That's Losing its Value, on September 29th. Sign up free to join him live.
