March 5, 2013
On Sunday, Mar. 5, 1933, President Franklin D. Roosevelt, on his first full day in office, declared that a Bank Holiday would begin on March 6, and all banking transactions would be suspended for four days.
U.S. banks had been experiencing “runs,” periods when nervous customers demanded the bank cash out their deposits, since 1930, and by early 1933 thousands of banks had been forced to close; in early 1933, the number of banks was 50 percent of the number in 1929, and those that survived were hanging by a thread.
The U.S. banking system was made up of a large number of small, independent banks, a result of financial regulations (like limited branch banking rules) that reflected Americans’ distrust of large banks and “trusts,” and was historically susceptible to bank failures because of banks’ reliance on demand deposits, as economist, and current chairman of the Federal Reserve, Ben Bernanke wrote in a 1983 article in the American Economic Review. By 1933, virtually every banker was fearful of a run.
The fears were exacerbated by the significant change in business and consumer debt during the 1920s; between 1920 and 1928, corporate debt grew from $26 billion to $47 billion, urban mortgages went from $11 billion to $27 billion, and consumers took on new categories of debt to pay for cars and other new durable goods.
The collapse of the stock market in 1929, and the subsequent declines in economic output and prices added more stress to the U.S. financial system; defaults increased, deposits decreased, and banks had little money to loan.
President Herbert Hoover’s administration tried propping up the various financial institutions – commercial banks, building and loans, mutual savings banks and insurance companies – with loans to maintain “normal” operations and lending so that employers would re-hire workers. But the self-reinforcing negative cycle seemed immune to stimulus, and unemployment rose to over 24 percent; Roosevelt’s election surprised few people. When Roosevelt took the oath of office on Saturday, March 4, 1933, Americans were in a panic.
On Sunday, the new president declared that banks would be closed for four days, and on Thursday, March 9, he extended the holiday to March 13. Also on March 9, Congress passed the Emergency Banking Act, which affirmed the bank holiday and gave the president and Secretary of the Treasury significant emergency powers to control the financial system. The Act empowered the Federal Reserve to make unsecured loans to member banks, to convert US debt obligations (bonds) into cash at par and other financial instruments like checks, drafts, and banker acceptances into cash at 90 percent of the face value.
The effect of the Act was to create a federal deposit insurance program (the official Federal Deposit Insurance Corporation did not come into being until June 1933).
The stock markets closed during the week as well.
On Sunday, March 12, Roosevelt delivered his first “fireside chat” (the term was coined by the manager of the CBS Radio Network station manager in Washington, DC, in a press release before the president’s second chat on May 7, 1933).
Roosevelt told Americans that only sound banks would be allowed to reopened, and that: “I can assure you that it is safer to keep your money in a reopened bank than under the mattress.”
The pause afforded by the bank holiday and the calm manner of his address served to stem the bank panic much like a “slap in the face.”
“By arresting all banking functions, government removed the source on which fear might thrive; and it gave people time to collect themselves,” wrote Charles Beard and George Smith in their 1940 analysis, “The Old Deal and the New.”
On Monday, March 13, people lined up at the banks, but this time to put money back, and within two weeks more than half of the withdrawn funds were re-deposited. The stock market surged as well, rising 15 percent.
The crisis was averted, but it would be six more years before the country emerged from the Depression.