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This Week in History:
March 13 - 19, 1933
Emergency Banking Act Goes Into Effect

March 2011

Franklin D. Roosevelt

The week of March 10-16 in 1933, saw the first fruits of President Franklin D. Roosevelt's decisive action to restore confidence to the American banking system, the circulatory system required for animating the real economy. The U.S. Congress, which he had brought into Special Session, passed the Emergency Banking Act on March 9, and that Act went into effect March 13, when the Federal government-imposed bank holiday was lifted. In preparation for the reopening of most of the banks, FDR held his first Fireside Chat, on Sunday evening, March 12.

The crisis which had led the new President to take such drastic action as a Federal bank closure, and emergency legislation, was nothing less than the total bankruptcy of the banking system. When FDR took office March 4, some 38 states had already closed their banks, because depositor runs on them threatened to put them into insolvency, if they were not already there. Gold had been drained from the system, and sent abroad. The system of national credit, upon which industry and the well-being of the nation depended, had frozen up, due to lack of confidence, and out-and-out looting.

Such a banking crisis is almost precisely what has happened in Argentina since December 2001, and what could easily happen here in the United States, or in Europe, at any time, given the unsustainable debt-to-asset ratios which prevail in today's financial system, best described as a worldwide casino. Such an emergency would fully justify measures almost identical to those FDR announced in his Proclamation of the Bank Holiday, where he acted to stop "heavy and unwarranted withdrawals of gold and currency form our banking institutions for the purpose of hoarding" and "continuous and increasingly extensive speculative activity abroad in foreign exchange [which has] resulted in severe drains on the nation's stocks of gold."

In his Fireside Chat, President Roosevelt patiently explained the principles upon which the Federal government would revive, and reorganize, the banking system. An estimated audience of 60 million Americans heard the President describe how the "public welfare" would be served by reopening the banks, and by the new set of "regulations permitting the banks to continue their functions to take care of the distribution of food and household necessities and the payment of payrolls."

There is no reason to worry, Roosevelt said. "This bank holiday, while resulting in many cases in great inconvenience, is affording us the opportunity to supply the currency necessary to meet the situation. No sound bank is a dollar worse off than it was when it closed its doors last Monday. Neither is any bank which may turn out not to be in a position for immediate opening. The new law allows the 12 Federal Reserve Banks to issue additional currency on good assets and thus the banks which reopen will be able to meet every legitimate call. The new currency is being sent out by the Bureau of Engraving and Printing in large volume to every part of the country. It is sound currency because it is backed by actual, good assets."

The President went on to emphasize that "the essential accomplishment of the new legislation is that it makes it possible for banks more readily to convert their assets into cash than was the case before. More liberal provision has been made for banks to borrow on these assets at the Reserve Banks and more liberal provision has also been made for issuing currency on the security of these good assets. This currency is not fiat currency. It is issued only on adequate security, and every good bank has an abundance of such security" (emphasis added).

He said: "We had a bad banking situation. Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people's funds. They had used the money entrusted to them in speculations and unwise loans. This was, of course, not true in the vast majority of our banks, but it was true in enough of them to shock the people for a time into a sense of insecurity and to put them into a frame of mind where they did not differentiate, but seemed to assume that the acts of a comparative few had tainted them all. It was the government's job to straighten out this situation and do it as quickly as possible. And the job is being performed."

The principles here are clearly applicable today as well, although the percentage of banks sucked into dishonest operations, and speculations, is likely much greater. It is government's job to reorganize and straighten out the situation.

As Roosevelt concluded, "After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people. Confidence and courage are the essentials of success in carrying out our plan. You people must have faith; you must not be stampeded by rumors or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system; it is up to you to support and make it work.

"It is your problem no less than it is mine. Together we cannot fail."


The original article was published in the EIR Online’s Electronic Intelligence Weekly, as part of an ongoing series on history, with a special emphasis on American history. We are reprinting and updating these articles now to assist our readers in understanding of the American System of Economy.

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