FDR and the Bank Holiday
In early March of 1933, Franklin Roosevelt had just began the job of being President, a job he would hold for over 12 years. He had gotten elected promising action to address the great depression that the country was in, in contrast to what he characterized as the hands off approach which had been taken by the man he had just defeated, Herbert Hoover. One of the first things Franklin D. Roosevelt did was to declare a "bank holiday."
I wondered what that was and why it would make any difference in fighting a depression. For answers I went to one of my favorite historians, H. W. Brands and his 2008 historical work entitled Traitor to His Class: The Privileged Life and Radical Presidency of Franklin D. Roosevelt. Rather than fumbling with my own explanation of the answer to these questions, Brands explains the problem and Roosevelt's response at pages 287-9, much better than I ever could, as follows:
At the moment of Roosevelt's inauguration the American banking system verged on dissolution. Banking law in America in the early 1930s was a federal-state hodgepodge. National banks - which was to say nationally chartered banks; individual bank corporations didn't yet operate across state lines - were controlled by federal law, while state banks followed state laws. Some banks, both national and state, were members of the Federal Reserve system; others were not. As various governors watched banks in their states succumb to "runs" - uncontrolled withdrawal demands by depositors, which frequently ended with the failure of the banks - several pondered the drastic step of declaring "bank holidays," that is, simply closing the banks to business. The idea, or hope, was that the panic would pass: that if depositors were temporarily prevented from withdrawing their funds, they would calm down and decide they really didn't need the money. In fact most neither needed nor really wanted the money. Bank deposits earned interest; cash in a can in the garden or in a shoe box under the bed did not. If the depositors could have been sure that their money was safe in the banks, nearly all of them would have been happy to leave it there. With this in mind, the Governor of Louisiana declared a state bank holiday in early February. Michigan did the same at mid-month, followed by Maryland, Indiana, Arkansas and Ohio. At the beginning of March, twenty other states closed the doors of their banks. By inauguration day, the American banking system was nearly at a standstill.
The crisis in banking daunted Roosevelt, but also afforded him an opportunity. Hoover and the Republicans blamed the new president for the financial paralysis, charging that his attacks on business had sapped the confidence that in ordinary times underwrote the banking system. Some conservatives, apparently including the former president, detected a design in Roosevelt's words and actions; by encouraging the collapse, they said, Roosevelt was paving the way to socialism. Roosevelt had no such plans, as events would soon prove. But the paralysis of the banks left him free to address the problem in almost any way he chose. His first step was to make the de facto bank holiday official. Inauguration day was a Saturday; on Sunday the banks were all closed anyway; and at one o'clock on Monday morning, Roosevelt declared a four-day national bank holiday. From Monday through Thursday, his executive order said, "all banking transactions shall be suspended." In particular, no bank or branch "shall pay out, export, earmark or permit the withdrawal or transfer in any manner or by any device whatsoever, of any gold or silver coin or bullion or currency or take any action which might facilitate the hoarding thereof."
Roosevelt's closing of the banks was the kind of bold action his inaugural address had promised. Whether it was legal or not was another matter. He cited a section of the 1917 Trading with the Enemy Act as justification. The act had never been formally repealed, but a body of legal theory held that the law, along with other wartime legislation, had expired upon the signing of the peace treaty with Germany in 1921. (After the Senate rejected Wilson's Treaty of Versailles, the United States had negotiated separate treaties with its wartime adversaries.) Roosevelt solicited the opinion of Thomas Walsh, a Montana senator who was his first choice to be attorney general. Walsh delivered the opinion Roosevelt wanted: that the law was still in effect and that it allowed the President to close the country's banks. But Walsh never had to defend this opinion before a court of law, for he died on March 2 while traveling to Washington for the inauguration.
Had the emergency not seemed so dire, and had the banking system not been paralyzed anyway, Roosevelt surely would have met greater resistance. But even the Wall Street Journal, the principal organ of institutional capital, acknowledged that the unprecedented circumstances required strong measures. "A common adversity has much subdued the recalcitrance of groups bent upon self interest," the paper observed. "All of us the country over are now ready to make sacrifices to a common necessity and to accept realities as we would not have done three months ago."
Moreover, the brief duration of the bank holiday meant that Roosevelt's affront to the corporate sector, if affront it was, would be passing. And it would shortly be submitted to congress for approval or rejection. Even as Roosevelt closed the banks, he acted to reopen Congress, calling the legislature into emergency session. The lawmakers would meet at noon on Thursday, March 9; their first order of business would be banking reform.
The nature of the reform remained to be seen - and to be decided. Hoover and the conspiracy-minded conservatives gave Roosevelt too much credit for foresight and conceptual coherence. Within days it became apparent that the hallmark of Roosevelt's New Deal was improvisation. "I have been so occupied since noon on Saturday that I have not had a chance to prepare any formal remarks." Roosevelt told the annual governors' conference on Monday, March 6. But he extemporized regarding his "four or five main objectives" in closing the banks and calling the legislature into special session. The first objective was to prevent further withdrawals from the banks. The second was "to provide some form of circulating medium for the country in addition to the outstanding currency" so much of which had gone into hiding. A third was to arrange the timely reopening of the banks and their subsequent smooth operation. A fourth - and here he came closest to Hoover's dark forebodings - was to reform the banking system to prevent a repetition of the current crisis. "We want if possible to have a general banking system," Roosevelt explained, "that is to say one covering national banks and state banks, as uniform as possible throughout the country."
I wondered what that was and why it would make any difference in fighting a depression. For answers I went to one of my favorite historians, H. W. Brands and his 2008 historical work entitled Traitor to His Class: The Privileged Life and Radical Presidency of Franklin D. Roosevelt. Rather than fumbling with my own explanation of the answer to these questions, Brands explains the problem and Roosevelt's response at pages 287-9, much better than I ever could, as follows:
At the moment of Roosevelt's inauguration the American banking system verged on dissolution. Banking law in America in the early 1930s was a federal-state hodgepodge. National banks - which was to say nationally chartered banks; individual bank corporations didn't yet operate across state lines - were controlled by federal law, while state banks followed state laws. Some banks, both national and state, were members of the Federal Reserve system; others were not. As various governors watched banks in their states succumb to "runs" - uncontrolled withdrawal demands by depositors, which frequently ended with the failure of the banks - several pondered the drastic step of declaring "bank holidays," that is, simply closing the banks to business. The idea, or hope, was that the panic would pass: that if depositors were temporarily prevented from withdrawing their funds, they would calm down and decide they really didn't need the money. In fact most neither needed nor really wanted the money. Bank deposits earned interest; cash in a can in the garden or in a shoe box under the bed did not. If the depositors could have been sure that their money was safe in the banks, nearly all of them would have been happy to leave it there. With this in mind, the Governor of Louisiana declared a state bank holiday in early February. Michigan did the same at mid-month, followed by Maryland, Indiana, Arkansas and Ohio. At the beginning of March, twenty other states closed the doors of their banks. By inauguration day, the American banking system was nearly at a standstill.
The crisis in banking daunted Roosevelt, but also afforded him an opportunity. Hoover and the Republicans blamed the new president for the financial paralysis, charging that his attacks on business had sapped the confidence that in ordinary times underwrote the banking system. Some conservatives, apparently including the former president, detected a design in Roosevelt's words and actions; by encouraging the collapse, they said, Roosevelt was paving the way to socialism. Roosevelt had no such plans, as events would soon prove. But the paralysis of the banks left him free to address the problem in almost any way he chose. His first step was to make the de facto bank holiday official. Inauguration day was a Saturday; on Sunday the banks were all closed anyway; and at one o'clock on Monday morning, Roosevelt declared a four-day national bank holiday. From Monday through Thursday, his executive order said, "all banking transactions shall be suspended." In particular, no bank or branch "shall pay out, export, earmark or permit the withdrawal or transfer in any manner or by any device whatsoever, of any gold or silver coin or bullion or currency or take any action which might facilitate the hoarding thereof."
Roosevelt's closing of the banks was the kind of bold action his inaugural address had promised. Whether it was legal or not was another matter. He cited a section of the 1917 Trading with the Enemy Act as justification. The act had never been formally repealed, but a body of legal theory held that the law, along with other wartime legislation, had expired upon the signing of the peace treaty with Germany in 1921. (After the Senate rejected Wilson's Treaty of Versailles, the United States had negotiated separate treaties with its wartime adversaries.) Roosevelt solicited the opinion of Thomas Walsh, a Montana senator who was his first choice to be attorney general. Walsh delivered the opinion Roosevelt wanted: that the law was still in effect and that it allowed the President to close the country's banks. But Walsh never had to defend this opinion before a court of law, for he died on March 2 while traveling to Washington for the inauguration.
Had the emergency not seemed so dire, and had the banking system not been paralyzed anyway, Roosevelt surely would have met greater resistance. But even the Wall Street Journal, the principal organ of institutional capital, acknowledged that the unprecedented circumstances required strong measures. "A common adversity has much subdued the recalcitrance of groups bent upon self interest," the paper observed. "All of us the country over are now ready to make sacrifices to a common necessity and to accept realities as we would not have done three months ago."
Moreover, the brief duration of the bank holiday meant that Roosevelt's affront to the corporate sector, if affront it was, would be passing. And it would shortly be submitted to congress for approval or rejection. Even as Roosevelt closed the banks, he acted to reopen Congress, calling the legislature into emergency session. The lawmakers would meet at noon on Thursday, March 9; their first order of business would be banking reform.
The nature of the reform remained to be seen - and to be decided. Hoover and the conspiracy-minded conservatives gave Roosevelt too much credit for foresight and conceptual coherence. Within days it became apparent that the hallmark of Roosevelt's New Deal was improvisation. "I have been so occupied since noon on Saturday that I have not had a chance to prepare any formal remarks." Roosevelt told the annual governors' conference on Monday, March 6. But he extemporized regarding his "four or five main objectives" in closing the banks and calling the legislature into special session. The first objective was to prevent further withdrawals from the banks. The second was "to provide some form of circulating medium for the country in addition to the outstanding currency" so much of which had gone into hiding. A third was to arrange the timely reopening of the banks and their subsequent smooth operation. A fourth - and here he came closest to Hoover's dark forebodings - was to reform the banking system to prevent a repetition of the current crisis. "We want if possible to have a general banking system," Roosevelt explained, "that is to say one covering national banks and state banks, as uniform as possible throughout the country."