THE NEW FEDERALIST

June 6, 1994

Page 5

American Almanac

How Presidential Emergency Action Opened the Banks In 1933
by Lei !ohnson

Prints and Photographs Division/Library of Congress

President "oose#elt$ with %ecretary o the &reas'ry (oodin$ signed his )arch *$ 1933 proclamation to bring the banking crisis 'nder control.

n the first !ee" of #ar$h 19%%, !or"ers !ere busy in front of the &hite 'ouse, ere$ting the p(atfor) !here the ne! President !ou(d ta"e offi$e at noon, *aturday, #ar$h 4. n Detroit that !ee", !or"ers !ere fainting at their !or"p(a$es fro) hunger. +here !as no $ash (eft in the $ity, the ban"s in the state of #i$higan had been shut sin$e -eb. 14, and by the $(ose of business on #ar$h %, 19%%, virtua((y every state had either de$(ared a ban" ho(iday or !as on the verge of doing so. .ine days after his inaugura(, the ne! President, -ran"(in /ooseve(t, by his o!n persona( authority and e)ergen$y po!ers, !or"ing !ith a terrified Congress, began to re0open the ban"s, preventing a standsti(( of the entire e$ono)y !hi$h !ou(d have resu(ted in !idespread starvation !ithin !ee"s.

+he story of the 19%% ban"ing $risis and the )easures ta"en by the President and Congress has i))ediate app(i$abi(ity to the i)pending ban"ing $risis. t is an e1$e((ent e1a)p(e of the use of the e)ergen$y po!ers of the Presi0 dent, and proof that an e)ergen$y of the )agnitude of a $o)p(ete ban"ing shutdo!n $an be 2ui$"(y and effi$ient(y hand(ed !ithin the s$ope of the )eans provided by the 3.*. Constitution. +he )easures ta"en during the 19%% ban"ing $o((apse returned $ash to the po$"ets of 4)eri$an $iti5ens and revived the nor)a( ban"ing fun$tions of the e$ono)y. 6ut those )easures did not end the depression. +he so(ution to the i)pending $risis today )ust do both. How the +risis Began 6et!een the sto$" )ar"et $o((apse of 7$tober 1989 and depths of the Depression in 19%%, industria( produ$tion in the 3.*. disintegrated. 6y 19%%, auto produ$tion !as do!n 65 per$ent, stee( do!n 59 per$ent, $on0 stru$tion do!n 95 per$ent, and residentia( $onstru$tion off by :8 per$ent. 4ssets he(d by the ban"s;bonds, sto$"s, )ortgages;)e(ted a!ay. n 19%1, 6ritish ban"s $o((apsed the huge <reditansta(t ban" in =ienna, 4ustria, on(y to have the 6ritish pound $o((apse, !hi$h triggered a run on 3.*. go(d and $urren$y. 4(ready !ea"ened by the def(ation of assets, ban"s !ere no! $onfronted !ith runs on their go(d and $urren$y deposits. n si1 !ee"s fo((o!ing the pound deva(uation, >985,???,??? !orth of 3.*. go(d, 15 per$ent of our tota( sto$", f(o!ed out to @urope. n that sa)e ti)e span, >45? )i((ion of $urren$y !as !ithdra!n fro) ban"s, a)ounting to 1? per$ent of the tota( $urren$y then in $ir$u(ation. @ven in the best of ti)es, no ban" $an (ong !ithstand a $ontinuous ArunA or !ithdra!a( of assets, sin$e the ban" (ends out the depositorsB )oney. 6an"s "eep on(y a AreserveA or a fra$tion of tota( deposits on hand. 6y the end of 19%8, 8? per$ent of the ban"s in e1isten$e in 1989 had fai(ed. Depositors of those ban"s re$eived (itt(e or nothing of their deposits, and pani$ began to spread. +he .e! Cor" -edera( /eserve noted that, at yearBs end, (arge !ithdra!a(s of go(d had begun. 4(ready in .ove)ber 19%8, .evada had de$(ared a ban" ho(iday to ha(t the ban"ing runs. /uns then spread to *an -ran$is$o, .e! 7r(eans, <ansas City, and .ashvi((e. #aDor pani$ hit the nation !ith the -eb. 4, 19%%, Louisiana ban" ho(iday, and !hen the #i$higan ban"s $(osed on -ebruary 14, pande)oniu) ensued.

/egiona( ban"s !ithdre! their ba(an$es fro) the $ity ban"s, !hi(e @urope $ontinued to drain 3.*. go(d. +he .e! Cor" -ed absorbed (arge nu)bers of bi((s and a$$eptan$es to print )ore /eserve .otes but then found it didnBt have the 4? per$ent go(d reserve to $over the notes. E@a$h -edera( /eserve .ote in 19%8 had to be $overed by 4? per$ent go(d reserve.F +he .e! Cor" -ed !as fina((y redu$ed to begging e)ergen$y (oans fro) the Chi$ago -ed. Herbert Hoo#er$ %windler 4(though /ooseve(t !as e(e$ted on .ov. :, 19%8, 'erbert 'oover !as sti(( President unti( noon of #ar$h 4, 19%%. 'oover !as un)ista"ab(y a 6ritish asset. 'e started (ife pro)oting bui(ding (ots for >85 ea$h in *i(ver -a((s City, 7regon, on beha(f of the 7regon Land Co)pany. 7regon Land e1isted, and too" peop(eBs )oney, but there !as no su$h p(a$e as *i(ver -a((s City. -or the ne1t 8? years, 'oover trave(ed as a sto$" s!ind(er for 6ritish )ining $o)panies fro) .i$aragua to 4ustra(ia, *outh 4fri$a, China, and /ussia. +he 6ritish !ho, together !ith the .e! Cor" -edera( /eserve had detonated the 1989 sto$" pani$, !ere deter)ined to i)pose a pro(onged e$ono)i$ depression on the !or(d, parti$u(ar(y Ger)any and the 3nited *tates. n the ensuing industria( ruin, the @)pire !ou(d insta(( a g(oba( 6ritish -abian *o$ia(is) u(ti)ate(y supervised by the League of .ations. Ger)any !as given to 'it(er, ta(y to #usso(ini, @ast @urope and other nations to sundry fas$is)s, !hi(e /ussia !as a!arded 6o(shevis). n an effort to save the -edera( /eserve ban"s, 'oover in 19%8 ena$ted the /e$onstru$tion -inan$e Corporation E/-CF to add >1.5 bi((ion in reserves to the -edera( /eserve and nationa( ban"s. +he pa$e of ban" fo(dings at first abated, but by De$e)ber 19%8, !ith heavy 6ritish go(d and $urren$y !ith0 dra!a(s fue(ing the fire, pani$ !ithdra!a(s a$$e(erated, and so did the ban" fai(ures. +he 2uestion on the nationBs )ind !asH &hat !ou(d /ooseve(t doI 'oover and his friends !ere great(y agitated that -D/ )ight per)it the nation to bui(d itse(f out of the Depression. 7n -eb. 1:, 'oover passed a note to -D/ at a ban2uet at the 'ote( 4stor in .e! Cor" !hi$h b(a)ed -D/Bs e(e$tion for the finan$ia( $risis and stern(y !arned the President0e(e$t to sti$" to Asound )oney.A +he note de)anded Apro)pt assuran$e that there !i(( be no ta)pering or inf(ation of the $urren$y, that the budget !i(( be un2uestion0

ab(y ba(an$ed even if further ta1ation is ne$essary, that the govern)ent $redit !i(( be )aintained by refusa( to e1haust it in issue of se$urities.A 'ooverBs Asound )oneyA appea( !as se$onded by finan$ia( guru 6ernard 6aru$h, the .e! Cor" -edera( /eserve, and nu)erous .e! Cor" ban"ers. #ean!hi(e ru)ors f(e! that /ooseve(t !ou(d engage in Ainf(ationaryA $redit e1pansion;or that, on the $ontrary, he !as rea((y a Asound )oneyA )an at heart. +he (atter !as far )ore be(ievab(eH !hi(e 'oover had $a)paigned on a p(edge to $ut the federa( budget by >95? )i((ion E8? per$entF, -D/ !anted to $ut a $(ean bi((ion, or 85 per$ent of the budgetJ #ean!hi(e the ban"ing )e(t0do!n gathered heat. 6y the end of -ebruary, #i$higan, #ary(and, and +ennessee suspended ban"ing entire(y, 4(aba)a and Louisiana fo((o!ed the ne1t day, !hi(e <entu$"y and &est =irginia a((o!ed ban"s to $(ose at their o!n dis$retion. daho and #innesota author0 i5ed their governors to shut the ban"s. 4ri5ona, Ca(ifornia, #ississippi, 7"(aho)a, and 7regon $(osed their ban"s #ar$h 8. 6y the $(ose of the business day, #ar$h %, 19%%, virtua((y every state had either fu((, (i)ited, or dis$retionary ban" $(osings. +he nation had $o)e to a standsti((. +he entire nation no! fa$ed !hat Detroit had a(ready suffered. +here, !or"ers $ou(d not $ash $he$"s, e)p(oyers had no $ash to pay !or"ers, and $oins, street$ar to"ens, and pro)issory notes !ere used in p(a$e of $ash. 'unger began to ta"e its to((, as individua(s fainted in !or"p(a$es or on the streets, and food (ooting began. +he nationa( press began a b(a$"out of ne!s fro) Detroit. +he (arge ban"ers the)se(ves no! rea(i5ed that the situation !as beyond their $ontro(. +heir reserves !ere drained and p(ans !ere readied to use $(earinghouse $ertifi$ates and s$rip to add reserves to the syste).

.ationa( 4r$hives

4t top, a s$ene of pani$ on &a(( *treet, as depositors (ine up to !ithdra! their )oney, during the ban"ing $risis of 19%%. +he hu)an to(( of the Great DepressionH right, one of the )ass of une)p(oyed, be(o!, a disp(a$ed Great P(ains far)er on the road !ith his fa)i(y.

Prints and Photographs Division/Library of Congress

Prints and Photographs Division/Library of Congress/6en *hahn

(hat "oose#elt ,id 7n the )orning of #ar$h 4, 'oover and /ooseve(t rode in an open $ar to the Capito(, 'oover sitting i)passive(y !hi(e /ooseve(t !aved to the $ro!ds. -D/ had refused de)ands to $an$e( the inaugura( parade be$ause of the $risis, and at 1H?6 p.)., -ran"(in De(ano /ooseve(t be$a)e the %8nd President of the 3nited *tates. +he ne! PresidentBs inaugura( spee$h !as )e)orab(eH ALet )e assert )y fir) be(ief that the on(y thing !e have to fear is fear itse(f; na)e(ess, unreasoning, unDustified terror !hi$h para(y5es needed efforts to $onvert retreat into advan$e.A 'e de$(ared that Athe )oney $hangers have f(ed fro) their high seats in the te)p(e of our $ivi(i5ationA and that Aso$ia( va(ues are )ore nob(e than )ere )onetary profit.A /ooseve(t de)anded that Congress give hi) Abroad e1e$utive po!er to !age a !ar against the e)ergen$y.A 'e added pointed(y, A7ur Constitution is so si)p(e and pra$ti$a(, that it is possi0 b(e a(!ays to )eet e1traordinary needs by $hange in e)phasis and arrange0 )ent !ithout (oss of essentia( for).A 7ver the ne1t five days, /ooseve(t pro$(ai)ed a(( the ban"s in the nation $(osed for four days beginning #ar$h 6, $a((ed a spe$ia( session of Congress to affir) his a$tion, and to pass, by +hursday evening of #ar$h 9, an @)er0 gen$y 6an"ing 4$t giving the President and the +reasury e1traordinary po!ers to investigate the ban"s and re0open the )aDority of the) by #on0 day, #ar$h 1%. 6y *aturday, #ar$h 11, the President announ$ed that Ate$hni$a( diffi$u(ties !hi$h operated to de(ay the opening of the ban"s have fina((y been substan0 tia((y over$o)e,A and that re0opening !ou(d o$$ur on #ar$h 1%, 14, and 15 for various types of ban"s. n his *unday evening A-ireside Chat,A /oose0 ve(t to(d 6? )i((ion 4)eri$ans, A assure you it is safer to "eep your )oney in a re0opened ban" than under the )attress.A +he re0opening !as an i))ediate su$$ess. 6y the end of #ar$h, >1.8 bi((ion had been returned to the ban"s, of !hi$h ha(f !as go(d $oin and $ertifi$ates. +he return of go(d !as so (arge that the President did not issue an e1e$utive order $a((ing in a(( go(d to be e1$hanged for $urren$y unti( 4pri( 5. 6y 4pri( 18, 18,:19 ban"s !ith >%1 bi((ion in deposits had been re0 opened. +he deposit base !as no! appro1i)ate(y the sa)e as it had been in January 19%%.

(hat +linton )'st ,o t is instru$tive no! to (oo" at so)e of the spe$ifi$ )easures ta"en, so !e )ay Dudge ho! the $urrent President )ust respond to the $o)ing $risis. +he #ar$h 5 Pro$(a)ation ha(ted a(( ban"ing a$tivities e1$ept those a((o!ed by the *e$retary of +reasury. +he ne! *e$retary, &i((ia) '. &oodin, authori5ed ban"s to )a"e $hange, a((o! a$$ess to safety deposit bo1es, $ash $he$"s dra!n on the 3.*. +reasury, a$$ept pay)ents for ob(igations, and $reate a spe$ia( trust fund for ne! deposits. +his (ast )easure is high(y signifi$ant be$ause it $reated Adua( ban"ing,A )aintaining a free5e on the )ass of assets and (iabi(ities of the ban"s, !hi(e a((o!ing ne! deposits to be fu((y !ithdra!ab(e. .e! ban"ing fun$tions $ou(d pro$eed !ithout regard to the great )ass of no!0fro5en ban" assets and (iabi(ities, !hi$h $ou(d ta"e so)e ti)e to eva(uate. +he need for su$h a )easure in the $o)ing $risis is a(( the )ore urgent sin$e the huge vo(u)e of i)paired and va(ue(ess assets and (iabi(ities !i(( ta"e (onger to sort out. 7n Day +!o of the )oratoriu), +uesday, #ar$h 9, &oodin a((o!ed $he$"s dra!n prior to #ar$h 4 to be $(eared, a((o!ed $(earinghouse $ertifi$ates Ea for) of s$rip a)ong ban"sF to be issued to provide te)porary (i2uidity, and )ost i)portant, a((o!ed ban"s to e1er$ise Ausua( ban"ing fun$tions to su$h e1tent as its situation sha(( per)it and sha(( be abso(ute(y ne$essary to )eet the needs of its $o))unity.A +hus depositors $ou(d !ithdra! s)a(( su)s for su$h ite)s as food, )edi$ine and Aother ne$essities of (ife . . . re(ief of distress . . . and pay)ent of usua( sa(aries and !ages.A 7f $ourse, these )easures did not so(ve the prob(e) of ho! to re0open the ban"s !ithout another orgy of hoarding, nor ho! to put the ban"s on a per)anent(y sound basis. 7n *unday )orning, #ar$h 5, &oodin and his +reasury offi$ia(s Ea(( ho(dovers fro) the 'oover regi)eF )et !ith ban"ers fro) .e! Cor", Chi$ago, and other finan$ia( $enters. 4(so present !ere t!o -D/ A6rain +rustersA fro) Co(u)bia 3niversity, /ay)ond #o(ey and 4do(ph 6er(e. +heir tas" !as to $o)p(ete an e)ergen$y ban"ing bi(( for sub)ission to the spe$ia( session of Congress. +hey had (ess than 1?? hours unti( that session began, #ar$h 9. +he *unday )orning )eeting at +reasury !as utter(y $haoti$. Petu(ant re$ri)inations, and !rang(ing over an issue that the President had a(ready vetoed, !re$"ed the )orning session. +he ban"ers be$a)e hope(ess(y bogged do!n in a dis$ussion over deposit guarantees !hi$h they "ne! -D/

opposed, and in bi$"ering over the AarbitrarinessA of .e! Cor" and Chi$ago ban"s bypassing the -edera( /eserve. +he afternoon session !as )ore absurd, #o(ey (ater !ondered ho! &oodin )anaged not to be Atota((y $onfounded by the deafening babb(e of tongues.A 'oping to find so)e $onsensus a)ong these prestigious ban"ers, &oodin appointed a sub$o))ittee !hose singu(ar a$hieve)ent that night !as a unani)ous vote de$(aring that Aso)ething )ust be done.A +he ne1t day, the sub$o))ittee !itnessed a (eading Chi$ago ban"er be$o)e repeated(y enraged, then (apse into tears. 6rain +rusters #o(ey and 6er(e !ere at ea$h otherBs throats and severa( )e)bers snea"ed off to &oodin to $o)p(ain about the other )e)bers of the sub$o))ittee. +he $ro!ning )o)ent of the day $a)e !hen Char(es #i$he(son, a &hite 'ouse press aide, announ$ed to the sub$o))ittee that they shou(d issue no state)ents that he $ou(dnBt understand. +his !as the (ast b(o! to the dignity of these barons of finan$e. #i$he(son reported the rea$tion to his re)ar"s as Aa()ost an earth2ua"e.A C(ear(y, these august ban"ers, representing the very pinna$(e of their profession, hadnBt the faintest idea !hat to do. &oodin fina((y dis)issed the sub$o))ittee after t!o !asted days and re)ar"ed that the de$isions no! rested !ith the President, his advisers, and hi)se(f. +he ban"ers !ent ho)e. "e-Opening the Banks &oodin first ta$"(ed the prob(e) of re0opening the ban"s. 'e borro!ed a p(an drafted by 'oover +reasury offi$ia(s that estab(ished three $ategories of ban"sH C(ass 4, !hi$h )ight re0open i))ediate(y, C(ass 6, !hi$h )ight re0open subDe$t to a $apita( infusion, and C(ass C, !hi$h )ust be (i2uidated. n pra$ti$e, this heavi(y favored the .e! Cor" ban"s and !as used in parti$0 u(ar to da)age industria(ists (i"e 'enry -ord. +he Detroit ban"s in !hi$h -ord had a substantia( invest)ent !ere (i2uidated, and one -ord a((y $o)0 p(ained that Ano! Detroit is fu((y in the hands of #organ.A +he rea( diffi$u(ty !as to produ$e the substantia( a)ounts of ne! (i2uidity to operate the ne!(y opened ban"s. &oodinBs #ar$h 6, Treasury Bulletin a((o!ed the ban" $(earinghouses to issue s$rip, and that day, Governor 'erbert Leh)an of .e! Cor" Ehi)se(f a (arge ban"erF suggested that a state $urren$y Es$ripF be issued against the se$urities of a(( state ban"s. +he ne1t day ban" note printers had produ$ed spe$i)ens of the issue, and other $ities and states !ere preparing si)i(ar s$rip.

4t this point /ooseve(t $a((ed in &oodin and proposed that a(( govern)ent bonds;then >81 bi((ion !orth;be i))ediate(y $onvertib(e to $ash, at par va(ue, no )atter !hat the )aturity date. t !as an e1$e((ent proposa(, $onverting the bondho(dersB AfaithA in future repay)ent, into i))ediate A$redit.A t !as entire(y sound;far )ore so than the p(an u(ti)ate(y adopted; sin$e it !as based on the Afaith and $redit of the govern)ent.A +hat faith and $redit is not a fi$tion but rather a shorthand ter) for the tota( produ$tive output of the nation, !hi$h !ou(d be great(y in$reased by the issuan$e of this ne! $redit. -ro) the standpoint of the finan$ia( e(ite, ho!ever, there !as a $at$h. Putting >81 bi((ion !orth of $redit into a ban"ing syste) !hose tota( deposits !ere on(y >%1 bi((ion !ou(d have added an e1traordinary (ending $apa$ity to the nationBs ban"s. f any substantia( portion of this ne! (ending $apa$ity had gone into produ$tive endeavors;agri$u(ture, )ining, $onstru$0 tion, or )anufa$turing and transportation;the 3nited *tates !ou(d have e)erged as rapid(y out of the Depression, as it fina((y did in 1941 !hen great su)s of ne! govern)ent $redit !as issued. +his possibi(ity definite(y a(ar)ed the 4ng(o0=enetian finan$ia( o(igar$hs. A nf(ationaryJA $horused the -edera( /eserve ban"ers (i"e @ugene #eyer, hi)se(f an a((y of the =enetian &arburg ban"ing fa)i(y. 4$$ording to one author, A+reasury offi$ia(s turned (ivid at the thought of su$h outrageous inf(ation.A +op +reasury offi$ia(s George Les(ie 'arrison and Ja$"son /eyno(ds, both 'oover ho(dovers, persuaded their boss &oodin to ta(" /ooseve(t Aout of this )ad s$he)e.A /eyno(ds fe(t he had so )any top ban"ers behind hi) that he de$(ared, A f the President does this Dob, heB(( be a $apon a(( right and heB(( never get ba$" to being a rooster.A +he ban"ers behind /eyno(ds !ere presu)ab(y )any of the sa)e )en !ho the day before $ou(d on(y reso(ve that Aso)ething shou(d be done.A &oodin !as persuaded to infor) /ooseve(t that this !ou(d $o)p(ete(y destroy the $redit of the 3nited *tates govern)ent and that it further)ore offered no )eans of $ontra$ting $urren$y after the $risis had passed. &oodinBs first argu)ent !as the height of absurdity. +he $redit of the 3nited *tates rested on the industria( )ight and the s"i((s and brains of its $iti5ens;and in that, despite depression, the 3.*.4. !as se$ond to no nation on earth. f &oodin )eant that the ban"ers !ou(d go on stri"e against the govern)ent, this !as e1a$t(y the "ind of $ha((enge -D/ $ou(d have ta"en on fours2uare.

+he se$ond argu)ent, that the $urren$y $ou(d not be $ontra$ted after the e)ergen$y, !as Dust another !ay of saying that the 4ng(o0=enetians !anted the ban"ing syste) to be bai(ed out, but the Depression to $ontinue. +his po(i$y !as "no!n derisive(y as Aso$ia(is) for the ri$h.A &oodin offered -D/ a $ounter0proposa( !ritten by #i((s and 6a((antine, another pair of 'oover ho(dovers at +reasury. &oodin proposed to a((o! the -edera( /eserve 6an"s to print )oney ba$"ed by dire$t ob(igations of the 3.*. or ban"ers notes and drafts dis$ounted by the -ed. &hat an ironyJ +he ban"ers and offi$ia(s !ho ho!(ed Ainf(ationA !hen /ooseve(t proposed that the govern)ent )oneti5e the debt !ere no! de)anding to per)it a private ban", the -edera( /eserve *yste), to )oneti5e that sa)e govern)ent debt, and !orse, a((o! the -ed to )oneti5e the ban"ing paper !hose very !ea"0 ness had triggered the entire ban"ing e)ergen$y. &orse sti((, the e)ergen$y (egis(ation a((o!ed the /e$onstru$tion -inan$e Corporation Ea 3.*. Govern0 )ent institutionF to buy the preferred sto$"s and bonds of sha"y ban"s, thereby )oneti5ing these ne!(y $reated;and other!ise !orth(ess; se$urities. B'ilding O't o a ,epression nstead of bai(ing out the ban"s dire$t(y, the proper so(ution !ou(d have been to (ead the e$ono)y as a !ho(e out of the Depression, !ith federa( e1penditures for roads, da)s, (and re$(a)ation, irrigation, f(ood $ontro(, and po!er proDe$ts. 7n$e the nation !as ba$" produ$ing again, as -D/Bs proposa( to )oneti5e the >81 bi((ion federa( debt )ight have a$$o)p(ished, ban" profits and assets !ou(d have been restored. 3nhappi(y, -D/ did not press his p(an, and together !ith sundry ban"ing refor)s, and stri$t $ontro(s on go(d, the &oodin p(an, a$tua((y !ritten by &a(ter &yatt of the -edera( /eserve 6oard, !as for!arded to Congress as the @)ergen$y 6an"ing 4$t of 19%%. -e! Congress)en had any notion of !hat the ban"ing bi(( $ontained. t !as introdu$ed into the *enate 6an"ing Co))ittee at 1H4? p.)., +hursday, #ar$h 9, reported out at 4H1? p.)., and approved by the entire body by 9H8% p.). that evening. +he 'ouse vote !as yet )ore dra)ati$. .o /epresenta0 tive had a $opy of the bi((;not even the )aDority (eader, !ho !aved a fo(ded ne!spaper to represent the bi((. 'e refused to a((o! any a)end)ents on his ne!spaper and the bi(( !as passed in an hour and ten )inutes. 6y :H%6 p.)., President /ooseve(t had signed it into (a!.

+hus ended the ban"ing $risis of 19%%. t stands as an e1e)p(ary )ode( of the use of Presidentia( po!ers to so(ve a nation0threatening finan$ia( e)ergen$y.

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