What was the Emergency Banking Act of 1933
The Emergency Banking Act of 1933 was a bill passed during the administration of U.S. President Franklin D. Roosevelt in reaction to the financially adverse conditions of the Great Depression. The measure, which called for a four-day mandatory shutdown of U.S. banks for inspections before they could be reopened, sought to restore investor confidence and stability in the banking system. Banks were only allowed to re-open once they were deemed financially sound.
The act was passed during this shutdown, in hopes that Americans would renew their confidence by the time the banks re-opened. It also extended the power of the president during this time of hardship, allowing him the executive power to make the decisions necessary to salvage the economy.
The first banks to re-open were the 12 regional Federal Reserve banks, on March 13. These were followed the next day by banks in cities with federal clearing houses, and the remaining banks deemed fit to operate were allowed to re-open on March 15.
The Curse Of Zombie Banks
BREAKING DOWN Emergency Banking Act of 1933
Legislation on the act was initiated during Herbert Hoover's administration, but it was not passed until March 9, 1933, shortly after Roosevelt was inaugurated. It was discussed in greater detail during the first of Roosevelt's series of fireside chats, during which he would address the nation directly about the U.S. economy. Roosevelt sought to reassure the country in his chat by reminding people that the shutdown had no effect on the security or trustworthiness of the banks, and despite the hard times it was still much safer to keep money in banks than at home.
Why the The Emergency Banking Act of 1933 Was Created
During the Great Depression, many Americans' savings were lost in bank runs because at that time deposits were not insured by the federal government. The instability of the banks caused a panic and compelled people to rush the banks in masses, forcing institutions to close down when they ran out of money, despite many states' attempts to limit the amount of money an individual could withdraw. Roosevelt knew he needed to not only fix the banks, but also restore people's trust, before the economy could take a turn for the better.
The infamous Stock Market Crash of 1929, which preceded the Great Depression, put great strain on the U.S. monetary system. Collective fears of loss of individual savings as a result of bank failures caused massive runs on the banks. At the time of the Emergency Banking Act, the Depression had been ravaging the country for four years. Many people preferred to keep money hidden in their homes rather than keeping it in the banks. Roosevelt's actions helped restore credibility (and thus functionality) to the banking system.
The creation of the Federal Deposit Insurance Corporation (FDIC) under this legislation helped provide a more permanent solution. The FDIC backed up the banks and assured people that even if their banks closed down, the government would refund them so they would not lose their money. The FDIC initially insured people for up to $2,500, though that number has increased over time. The creation of the FDIC played a large role in restoring confidence in banks.
The Emergency Banking Act was bolstered by pieces of legislation approved during Herbert Hoover's administration. The Reconstruction Finance Corporation Act sought to provide aid for financial institutions and companies in danger of shutting down due to the Depression. The Banking Act of 1932 similarly sought to strengthen the banking industry and the Federal Reserve. A few related pieces of legislation were also passed shortly after the Emergency Banking Act. One, the Glass-Steagall Act, also passed in 1933, separated investment banking from commercial banking in order to combat speculative investing and corrupted commercial banks, which was one of the reasons for the stock market crash. This act was repealed in 1999.
A similar act, the Emergency Economic Stabilization Act of 2008, was passed at the beginning of the Great Recession. In contrast to the Emergency Banking Act of 1933, the focus of this act was the mortgage crisis, in hopes of enabling millions of Americans to keep their homes.
Five Sections of the Emergency Banking Act
The bill was divided into five sections:
- Title I extended the executive power of the president during a time of crisis, so that the president could operate independent from the Federal Reserve. This power applied to both domestic and foreign transactions.
- Title II sought to redeem those banks with compromised assets, by limiting their operation and installing a conservator to take over bookkeeping.
- Title III gave the treasury secretary the power to determine which banks were in need of financial assistance, and to provide that assistance in the form of loans.
- Title IV allowed the Federal Reserve to issue emergency currency through commercial banks, in the form of banknotes.
- Title V provided the necessary funds and put the act into effect.
Short-Term and Long-Term Effects of the Act
It was uncertain whether people would listen to the assurances that their money would be safe in banks, but when the banks re-opened after the shutdown, people were lined up at the doors. The Emergency Banking Act was successful in convincing large numbers of the American population to restore their faith in banking and deposit their money. The stock market soared compared to recent years. The Dow Jones Industrial Average (DJIA), the most watched market index in the world, rose 8.26 points on March 15 when all eligible banks re-opened, boasting a gain of over 15%. The measures taken as a result of the Emergency Banking Act ended the banking crisis and set the economy on the path to recovery.
The implications of the Emergency Banking Act were felt long after it had been enacted, and some effects are still felt today. Certain provisions, such as the extension of the president's executive power, specified in Title I, remained in effect. The act also completely changed the face of the American currency system by taking the United States off the gold standard. Importantly, the act reminded the country that a lack of confidence in the banking system can become a self-fulfilling prophecy, and a mass panic does more harm than good. To read more on the Emergency Banking Act and its effects, read "The Federal Reserve History's Emergency Banking Act of 1933."