One of Franklin Roosevelt’s first acts as President was to declare a national banking holiday. It was an unprecedented move to meet an unprecedented crisis. It also worked–and worked well. Amid renewed fears about the health of our nation’s banks and financial institutions, perhaps it is time to consider a repeat performance?(See recent comments by Marshall Auerback on ND20).
By the time Franklin Roosevelt assume office on March 4, 1933, the U.S. banking system had collapsed. The origins of the crisis can be traced to the 1920s, when it should have been obvious to anyone concerned that the US banking system was in trouble. To start with, there were far too many banks with far too little capital. To make matters worse, many banks chose to make risky loans to financial speculators and invest their profits in securities rather than bonds. Thanks to these inherent weaknesses (which led to numerous bank failures even before the onset of the Great Depression) the financial crash of 1929 had a devastating effect on the entire system. Between January 1930 and March 1933 over 5,200 banks went bankrupt; with some 249 banks closing their doors in January 1933 alone. In the midst of this whirlwind of devastation cries for action on the part of the federal government grew louder and louder. But thanks to the dualism inherent in the American banking system-whereby supervisory authority is shared by the federal government and the banking departments of individual states-coordinated action was thought to be extremely difficult, if not impossible.
All of this changed when FDR assumed office. Using the powers granted to the President under the 1917 Trading with the Enemy Act, FDR issued a proclamation at 1:00 am March 6 ordering a three-day national banking holiday. He then instructed his officials to come up with an emergency banking bill that would be ready in time for a special emergency session of Congress he had convened for March 9. Thanks in part to work that had already been carried out by the Treasury Department in the final weeks of the Hoover Administration, and to the round-the-clock efforts of many members of his “brains trust,” the bill was presented to both houses at noon on the 9th (it had to be read aloud as there were no printed copies available) and was signed into law later the same day.
The legislation gave Congressional sanction to the closure of the banks; provided financial aid on a much larger scale than that attempted under the Hoover Administration through soft Reconstruction Finance Corporation (RFC) loans and advances by the Federal Reserve; authorized banks to issue 6 % preferred stock in return for RFC capital loans; prohibited the export of gold except under license by the Treasury; and gave the Comptroller of the Currency the power to appoint conservators for closed banks with the authority to liquidate or re-open.
This last provision was extremely important, for the Treasury estimated that upwards of a third of the banks in the country should not be re-opened. Equally important was the need to restore the confidence of the public in the re-opened banks. To accomplish this task, FDR gave the first of his famous “fireside chats,” where with simple yet eloquent language he explained to the American people what the government intended to do and why it was safer for them to keep their money in a re-opened bank than it was “to keep it under a mattress.”
The Fireside chat was a resounding success. On the following day more money flowed into the banks than was withdrawn and with that the crisis was essentially over. In the course of the next few weeks more than 12,000 banks deemed solvent were allowed to re-open-some 3,000 of which had to be re-organized-while roughly 1100 were liquidated. The whole episode went so well that it inspired FDR and the leaders of Congress to press on to enact further legislation over the next “100 days,” including a more permanent effort at banking reform that ultimately resulted in the passage of the all important Glass-Steagall bill that established the Federal Deposit Insurance Corporation.
It took courage to shut down the nation’s banking system–and courage to close those banks that were deemed insolvent. But weeding out the bad apples was the right thing to do. Our banking system emerged all the stronger because of it and with the advent of federal deposit insurance widespread bank failures became a thing of the past. No one is advocating that President Obama instigate a nation-wide bank closure, but if we find ourselves facing a renewed crisis among our financial institutions, perhaps it may be time to adopt a limited version of the bank holiday, so that we too may have the opportunity to take stock, assess which institutions are truly solvent, and which need to be closed for the betterment of all.
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.