What was the Emergency Banking Act of 1933?
The Emergency Banking Act of 1933 was a bill passed in the midst of the Great Depression that took steps to stabilize and restore confidence in the American banking system. It came in the wake of a series of bank runs following the stock market crash of 1929.
Among its key measures, the act created the Federal Deposit Insurance Corporation (FDIC), which began insuring bank accounts free of charge up to $2,500. Additionally, the presidency was given the executive power to operate independently of the Federal Reserve during times of financial crisis.
Key points to remember
- The Emergency Banking Act of 1933 was a legislative response to the bank failures of the Great Depression and the lack of public confidence in the American financial system.
- The law, which temporarily closed banks for four days for inspection, served immediately to boost confidence in banks and boost the stock market.
- Many of its key provisions have survived to this day, including the Federal Deposit Insurance Corporation’s insurance of bank accounts and the executive powers it granted to the president to respond to financial crises.
The Curse of the Zombie Banks
Explain emergency banking law
The law was designed after other measures failed to fully address the pressure exerted by the Depression on the US monetary system. By early 1933, the Depression had been ravaging the American economy and its banks for nearly four years. Distrust of financial institutions has grown, prompting a growing stream of Americans to withdraw their money from the system rather than risk it in a bank. Despite attempts in many states to limit the amount of money an individual can withdraw from a bank, withdrawals have increased as persistent bank failures increased anxiety and, in a vicious cycle, further spurred more withdrawals and bankruptcies.
While the law originated during the administration of Herbert Hoover, it was passed on March 9, 1933, shortly after the inauguration of Franklin D. Roosevelt. It was the subject of the first of Roosevelt’s legendary fireside chats, in which the new president addressed the nation directly on the state of the country.
Roosevelt used the chat to explain the provisions of the law and why they were needed. This included the need for an unprecedented four-day shutdown of all US banks in order to fully implement the law. Meanwhile, Roosevelt explained, banks would be inspected for their financial stability before being allowed to resume operations. The inspections, along with the other provisions of the law, were intended to reassure Americans that the federal government was closely monitoring the financial system to ensure it met high standards of stability and reliability.
The first banks to reopen, on March 13, were the Federal Reserve’s 12 regional banks. These were followed the next day by banks in cities with federal clearinghouses. The remaining banks deemed fit to operate were allowed to reopen on March 15.
Short and long-term effects of the emergency banking law
Uncertainty, even anxiety, about whether people would heed President Roosevelt’s assurances that their money was now safe all but evaporated when banks reopened to long lines after the end of the closure. The stock market also weighed in enthusiastically, with the Dow Jones Industrial Average rising 8.26 points, a gain of more than 15%, on March 15, when all eligible banks had reopened.
The implications of the Emergency Banking Act continued, some still being felt today. The FDIC continues to operate, of course, and virtually every reputable bank in the United States is a member. Certain provisions, such as the extension of the executive power of the president in times of financial crisis, remain in force. The act also completely changed the face of the US monetary system by removing the United States from the gold standard.
The loss of personal savings due to bankruptcies and bank runs had seriously undermined confidence in the financial system. Perhaps most importantly, the law reminded the country that a lack of confidence in the banking system can become a self-fulfilling prophecy and that a mass panic over the financial system can do it great harm.
Other Laws Similar to the Emergency Banking Law
The Emergency Banking Act was preceded, and superseded, by other laws designed to stabilize and restore confidence in the US financial system. Passed under the administration of Herbert Hoover, the Reconstruction Finance Corporation Act was intended to provide relief to financial institutions and businesses that were in danger of closing due to the lingering economic effects of the depression. The Federal Home Loan Bank Act of 1932 also aimed to strengthen the banking industry and the Federal Reserve.
A few related pieces of legislation were passed shortly after the Emergency Banking Act. The Glass-Steagall Act, also passed in 1933, separated investment banking from commercial banking in order to combat corruption of commercial banks through speculative investing, which had been recognized as one of the main causes of the stock market crash .
However, Glass-Steagall was repealed in 1999 and some thought its demise contributed to the global credit crisis of 2008.
A similar law, the Emergency Economic Stabilization Act of 2008, was passed at the start of the Great Recession. Unlike the Emergency Banking Act, this legislation focused on the mortgage crisis, with lawmakers intent on allowing millions of Americans to keep their homes.