The Emergency Banking Relief Act was signed into law by President Roosevelt on March 9, 1933 [1]. The law was one of the first acts of the new administration and was designed to repair the nation’s crumbling bank system. Like some other New Deal legislation, this one was gestated by the Hoover Administration, which failed to take decisive action.
As the country’s economy plunged into the Great Depression, the banking system imploded as loans made during the boom years of the 1920s were not repaid. During the years 1929-1933 nearly 10,000 banks failed in the United States [2]. Furthermore, depositors would lose their money when a bank failed. As a consequence, many Americans no longer trusted banks and there were frequent “bank runs” where citizens rushed to withdraw money from their accounts at the first sign of trouble. These panicked actions made it harder to stabilize problem banks.
To stem the tide, Roosevelt declared a national bank holiday on March 5, 1933, shuttering the nation’s banks for several days [3]. The Emergency Banking Relief Act was quickly enacted by Congress to allow for the reopening of individual banks “as soon as examiners found them to be financially secure.” In a fireside chat on March 12, Roosevelt told Americans, “I can assure you that it is safer to keep your money in a reopened bank than under your mattress” [4].
In addition to examining the health of banks, the Emergency Banking Relief Act expanded presidential authority to deal with a banking crisis, gave the Comptroller of the Currency power to take over troubled banks, allowed the Secretary of the Treasury to shore up bank finances when needed, and “gave the Federal Reserve the flexibility to issue emergency currency” [5]. The latter actions were especially important because the Treasury and the Fed had made matters worse by pursuing a deflationary policy rather than easing up on banks and debtors [6]
The Emergency Banking Relief Act succeeded in restoring the confidence of both Main Street and Wall Street: “When banks reopened on March 13, it was common to see long lines of customers returning their stashed cash to their bank accounts. Currency held by the public had increased by $1.78 billion in the four weeks ending March 8. By the end of March, though, the public had redeposited about two-thirds of this cash. Wall Street registered its approval, as well. On March 15, the first day of stock trading after the extended closure of Wall Street, the New York Stock Exchange recorded the largest one-day percentage price increase ever, with the Dow Jones Industrial Average gaining 8.26 points to close at 62.10; a gain of 15.34 percent” [7].
The massive bank failures of the time show that the Great Depression was a severe financial crisis as well as a downturn in the economy [8], and stabilizing the monetary and credit system was essential to the rapid recovery of 1933-36 [9]. To restore the financial system, bank restructuring would be followed up by other key reform acts dealing with gold, stock markets, deposit insurance, savings and loans, and mortgage lending.
Sources
(1) “Historical Timeline, the 1930s,” Federal Deposit Insurance Corporation, https://www.fdic.gov/about/history/timeline/1930s.html, accessed April 21, 2015. (2) “The FDIC: A History of Confidence and Stability,” Federal Deposit Insurance Corporation, https://www.fdic.gov/exhibit/p1.html#/10, accessed April 21, 2015. (3) William L. Silber, “Why Did FDR’s Bank Holiday Succeed?” Federal Reserve Bank of New York Economic Policy Review, July 2009, p. 19, https://www.newyorkfed.org/research/epr/09v15n1/0907silb.pdf, accessed April 21, 2015. (4) “Emergency Banking Act of 1933,” Federal Reserve History, https://www.federalreservehistory.org/Events/DetailView/23, (website managed by the Federal Reserve Bank of Richmond) accessed April 21, 2015. (5) Ibid. (6) Christina Romer, “The Great Crash and the Onset of the Great Depression,” Quarterly Journal of Economics, 1990, vol. 105/3: 567-62. (7) See note 4. (8) Charles Kindleberger, Manias, Panics and Crashes: A History of Financial Crises, New York: Wiley, 2005. (9) Christina Romer, “What Ended the Great Depression?” Journal of Economic History, 1992, v. 52, no. 4: 757-84.
« Back to Glossary Index