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The
Banking Crisis of 1933 was the result of the fear in the U.S. after the
market crash in the fall of 1929. There have been many volumes written
as to why the market crashed in '29 and why the banking crisis came to a head
in early 1933. I believe the easy money policy of the Federal Reserve
throughout the 1920's was a major contributing factor. However, this
story is not about the causes of the banking crisis, but about some of the
players involved.
In
January of 1933, Herbert Hoover was a "lame duck" Republican
President with a Democratic U.S. Congress. Franklin D. Roosevelt (FDR)
had been elected and was waiting to be sworn in early in the month of
March. President Hoover was qualified to deal with the crisis.
Back when he was Secretary of Commerce, he commissioned a number of studies
on the business cycle and was very familiar with those findings. Hoover
tried to restore confidence in the banking system and save banks that were
threatened.
He started the Reconstruction Finance Corporation to help banks with
emergency funds that were threatened with runs. With fractional reserve
banking, very little of the deposits made at a bank are actually on
hand. Only a small fraction of the deposits are held in reserve, the
balance is loaned out to individuals and businesses.
Whenever everyone wants all his/her money withdrawn at one time, a "run
on the bank" happens. The bank must move quickly to bolster
confidence and hope the people's faith is restored before the money in the
vault runs out. Banks can make emergency loans with other banks or
institutions, instruct the tellers to count out the money slowly (twice even for
accuracy) and hope that closing time arrives before the vault is empty or
simply just close their doors early. The problem with closing the doors
early is that the lines the next morning are twice as long. The best way for
a bank to close was by order of the government. The banks would then be
forced to close by law and could close their doors without losing face while
the public cooled down.
At any rate, Hoover had a plan to combat the depression. First, he
demanded that all government expenses be cut. Next, he demanded for
Congress to balance the budget. Third, he insisted that all aid should
come from the States and private organizations. He did feel that the
federal government should assist the States by loaning money to the states
through the purchase of State issued bonds. Finally, as a result of
studying the business cycle, he felt that worthwhile public works such as
dams, roads, harbor improvements, etc., should be designed and planned during
periods of prosperity, but never built at that time, as they might over
stimulate the economy at the wrong time. At the first signs of
depression, these projects would be brought forward to give the economy a
boost. The Democratic Congress, in power at the time, simply did not go
along with the deal. The Democrats simply saw the depression as an
opportunity to smear Hoover and the Republicans with all the blame of the
last decade's excesses.
By January of 1933, many banks were closing their doors for good.
Detroit lost two large banks, and the governor of Michigan declared a bank
holiday throughout the State. The entire country sat up and took
notice. President-elect Roosevelt was almost assassinated, and Mayor
Cermak of Chicago instead was killed in February. Hoover sent a letter to
President-elect Roosevelt, on the 17th of February, that pointed out the
current threat to the entire national banking system. Rumors of
inflation, going off the gold standard, and complete anarchy were floated
around the country. "These", said Hoover in his
letter, "had now culminated in a state of alarm which is rapidly
reaching the proportions of a crisis." Hoover said that he felt the
only way to calm the public was to make a joint proclamation.
Roosevelt's response was to simply ignore Hoover.
On March 1st, Roosevelt finally responded to President Hoover and said that
his earlier response had been lost, but that there was nothing he could
do. So, while President Hoover was desperately trying to save as many
banks as he could in his final days, the Democratic Congress and
President-elect Roosevelt were not in any mood to help.
Hoover's plan that he wanted to implement in early February was to close all
the banks for one day. Each bank would send in a detailed financial
statement. The next day all solvent banks would reopen. The
government would then guarantee them for the duration of the crisis.
The insolvent banks would be liquidated in an orderly manner and their
remaining assets paid out to the depositors. This would have stopped
the runs on the banks, but would have required the cooperation of the
Democrats in Congress.
At the time that President Hoover wrote to Roosevelt, $5 to $15 million
dollars a day of gold withdrawals were bleeding from U.S. banks. Gold
was being shipped offshore and went into hiding. By March 2nd,
twenty-one states had closed their banks. Over $200 million dollars in
gold had been taken out of U.S. banks. The following day, panic spread
to the Federal Reserve as $110 million dollars in gold was paid out to
foreign banks from New York and Chicago banks. Another $40 million
dollars in gold was paid out by other banks on that same day.
On March 3rd, Hoover made one last personal appeal to issue a joint statement
to close the banks. Roosevelt said that he did not feel it was
necessary. Finally, on March 4th, Roosevelt was sworn in. On
Monday, the 6th of March, Roosevelt closed the banks for four days by
declaring a national bank holiday; the very thing that Hoover had begged
for. Even though it was an illegal act to do so, the Democratic
Congress went along with Roosevelt. FDR used the Trading with the Enemy
Act passed during WWI as the basis for his actions. While Roosevelt was
still busy trying to work out the details of how he was going to reopen the
banks, a friendly Congress blindly passed his bill (represented by a
newspaper thrown into the hopper), before it was even written down on
paper! (Sounds a little like the Patriot Act, doesn't it?) The
day after Congress convened and passed the bill, FDR sent a message to
Congress that was extremely critical of Hoover's excessive spending.
This from FDR, the man who eventually spent THREE TIMES MORE federal money
than ALL 31 PRESIDENTS before him COMBINED! On Sunday, March 12th, FDR
delivered his first fireside chat to calm the nation. As it turns out,
the speech was written by Arthur Ballantine, undersecretary of the Treasury
under Hoover. Both Treasury Secretary Ogden Mills and undersecretary
Ballantine from the old Hoover administration stayed on to help Roosevelt guide
the country through the banking crisis.
Roosevelt's indecision prior to his inauguration was purely political.
He decided it would make better political sense to let the whole banking
system crash during Hoover's administration rather than allow Hoover to check
the crisis. This way he would begin his new administration from a
position with no way to go but up.
In our own state of Louisiana, Hibernia Bank in New Orleans had just received
an emergency $4 million dollar loan to cover a loss from a failed insurance
company. When news of the loan leaked out, citizens of New Orleans
feared the worst and started a run on Hibernia Bank. On Friday,
February 3rd, the bank called Senator Huey Long, and said that they could not
open their doors the next day on Saturday because there simply was not enough
cash left in the vault to last the day. Long worked all Friday night
and arranged a loan for Hibernia from the Federal Reserve and the
State. The money however, could not be delivered to the bank in time to
open Saturday morning. Long insisted that the governor declare a general
state holiday for Saturday, February the 4th. The governor woke up a
librarian late Friday night and asked the librarian to come up with any
reason to declare a state holiday. The best that the librarian could
come up with was the 16th anniversary of the severing of diplomatic relations
with Germany in 1917. So confused Louisiana citizens celebrated their
new holiday on Saturday, cash was transferred to Hibernia Bank on Sunday, and
the banking crisis in Louisiana was averted. A month later, FDR was
sworn in and closed all the banks across the country for four days.
Could banks fail again after ten years of loose money and excessive lending
practices, followed by foreign cash withdrawals, and Democrats and
Republicans fighting amongst themselves? That would be impossible,
after learning the lessons of history, just three short generations ago...
right?
Larry Laborde
Silver Trading
Company
www.silvertrading.net
Larry lives in the occupied South with his wife Puddy and sells
precious metals at the Silver Trading Company. Larry can be contacted
at llabord@aol.com. You can view
his web site at www.silvertrading.net.
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