The FDR Memorial in Washington, DC. Photo: Tony the Misfit (flickr)

"Too big to fail." We’ve all heard it. It’s why the U.S. government bailed out some the world’s largest banks in 2008. And the largest U.S. automakers in 2009. But where did we get this idea that our governments can and should bail out private companies in a free market? Here's how the seeds were planted more than 70 years ago that made bailouts not just legal, but seemingly essential. This is Act 1 of our four-part exploration.

By Ben Osborn and Kyla Springer

After the stock market crash of 1929, financial speculation was painted as one of the big bad wolves, especially by politicians. Banks, it was thought, had put too many of their eggs into the investment and securities basket. When the basket was dropped and all the eggs cracked, consumers made a “run” on the banks, compounding bank failure. Stuffing cash under the mattress was, briefly, a safer savings method.

As things got worse and almost 5,000 banks failed by 1933, President Roosevelt and Congress swooped in and enacted the Glass-Steagall Act, an emergency measure that limited the conflict of interest between commercial and investment banking activities, which had been revealed through Congressional hearings exploring the cause of the crash. The act sought to create a wall of protection for consumers.

In another move toward consumer protection and restoration of public confidence in the banking sector, the Act also established the Federal Deposit Insurance Corporation (FDIC), which insured bank deposits up to $100,000. Even if your bank failed, your money would be safe; banks would be safe from "runs." Today, economists continue to agree that the largest economic crises are often caused, or at least preceded by, bank failures.

But Glass-Steagall had its critics, too.

Some said speculation hadn't been the root problem. According to the New York Times, “many historians believe that the commercial bank securities practices of the time had little actual effect on the already devastated economy and were not a major contributor to the Depression. Some legislators and bank reformers argued that the act was never necessary, or that it had become outdated and should be repealed.”

For much of the 20th century, the FDIC was hardly used either. “The Federal Deposit Insurance Corporation and the new attitude were not tested for decades," wrote Paul Volcker, former chairman of the Federal Reserve, in his 2009 forward to Gary Stern and Ron Feldman’s book, Too Big to Fail, The Hazards of Bank Bailouts. "The scars of the Great Depression and banking failures led to a more conservative, risk-adverse approach by bankers themselves. For almost a half century, the United States was free of significant bank failures."

This all started to change in the 1970s.

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Act Two: The first bailout leads to the next, and the next