The 1933 Banking Crisis

January 13, 2005
MONEY - THEN AND NOW
Part XII

The banking crisis of 1933 was the result of the fear in the US 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 Hoover was a lame duck republican president with a democratic congress. 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 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 Whenever everyone wants all their money withdrawn at one time a "run on the bank" happens.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 US banks. Gold was being shipped offshore and went into hiding. By March 2nd 21 states had closed their banks. Over 200 million dollars in gold had been taken out of US 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 4 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 bases 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 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 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 10 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 3 short generations ago - right?

Larry LaBorde

www.silvertrading.net

January 13, 2005

Larry and Puddy (his wife of 28 years) live in the occupied South along with their two semi-grown children and Haley the wonder dog. Larry manages the family drilling business and also sells precious metals at Silver Trading Company. www.silvertrading.net.

Send questions, comments, corrections or threats to Llaborde@silvertrading.net

Larry LaBorde is a precious metals broker in Louisiana with a worldwide customer base.  Larry also is involved in several family businesses including contracting, commercial real estate, private investing and wholesale distribution.  Larry has been married for 35 years and has two grown children.  Larry is an active member at First United Methodist Church, a 32 degree mason, a member of Downtown Shreveport Development Corp, the Lions Club, the Shreveport Yacht Club and the Bonner Family Office.  Larry enjoys sailing, writing and traveling around the world.  Visit Silver Trading Company, LLC at www.silvertrading.net for all your precious metals & storage needs. 

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