FDR and the Bank Holiday

FDR Campaigning 1932

FDR Campaigning 1932

Immediately following his inauguration as President, on Sunday, March 5, 1933 Franklin Delano Roosevelt declared a bank holiday, a four day suspension of all banking transactions (subsequently extended). The new president’s proclamation followed hard upon a month-long run on American banks, and represented the first act of his fledgling administration to counter the deep and widening crisis of the Great Depression.

Writing in the Economic Policy Review of the New York Federal Reserve Bank, William A. Silber, Professor of Finance and Economics at New York University’s Stern School of Business, has asked Why Did FDR’s Bank Holiday Succeed?

In a nutshell, the thrust of the 12-page article is that “the Bank Holiday that began on March 6, 1933, marked the end of an old regime, and the Fireside Chat a week later inaugurated a new one. The Emergency Banking Act of 1933, passed by Congress on March 9 — combined with the Federal Reserve’s commitment to supply unlimited amounts of currency to reopened banks — created de facto 100 percent deposit insurance. Moreover, the evidence shows that people recognized this guarantee and, as a result, believed the President on March 12, 1933, when he said that the reopened banks would be safer than the proverbial ‘money under the mattress.’ Confirmation of the turnaround in expectations came in two parts: the Dow Jones Industrial Average rose by a statistically significant 15.34 percent on March 15, 1933 (taking into account the two-week trading halt during the Bank Holiday), and by the end of the month, the public had returned to the banks two-thirds of the currency hoarded since the onset of the panic.

“Together, the Emergency Banking Act and the de facto 100 percent deposit insurance created a safety net for banks and produced a regime shift with instantaneous results, similar to Sargent’s (1986) description of ‘The Ends of Four Big Inflations.’ This result would come as no surprise to Friedman and Schwartz (1963, p. 434), who observe that ‘Federal insurance of bank deposits was the most important structural change in the banking system to result from the 1933 panic, and . . . the structural change most conducive to monetary stability since state bank notes were taxed out of existence
immediately after the Civil War.’”

The Great Depression rolled on for the remainder of the decade, oblivious of, impervious to and often exacerbated by the policies of the New Deal, until the imperatives of the Second World War extirpated it for good. But Roosevelt had at least interrupted the precipitous decline, and engendered new hope among the American people.

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Published in: on July 9, 2009 at 11:38 am  Comments (3)  

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3 CommentsLeave a comment

  1. Nice articles

  2. banking evolution is the best thing to ever happen to mankind.

  3. w0w.thiz.iz.very.interistinq


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