A Disastrous Holiday for the American Economy


On this day in economic and financial history...

President Franklin D. Roosevelt's first days in office are often recalled for the bank holiday proclaimed shortly after his inauguration. However, this was not undertaken in a bubble, nor was it an unprompted act. By March 1933, many states had already declared banking holidays, and the proverbial straw that broke the camel's back fell on Feb. 14, 1933, when Michigan Governor William A. Comstock became the first state executive to implement a statewide banking holiday.

The nation's economic picture had deteriorated through the previous year as unemployment soared and the Dow Jones Industrial Average plummeted, destroying many billions in wealth in a highly leveraged market. Although the Dow had begun to regain ground by 1933, it was not enough to stave off widespread bank failures. Comstock made his decision in part to save the Union Guardian Trust Company, the Ford family and company's bank of choice. Ford stood to lose millions if the bank went under and was unable to agree to a reasonable solution with the Undersecretary of the Treasury that might allow the bank to stay open. This forced Comstock's hand, and the resulting forced closure of Michigan's 550 financial institutions caught everyone by surprise.

The lack of available cash confused and depressed the statewide economy, as many merchants were unable even to dispense change. The Federal Reserve Banks of New York and Chicago committed $40 million to help bail out the state's banks, which held $1.5 billion in depositor assets behind closed doors, while officials in Detroit worked frantically to stave off more failures.

Rather than ameliorate a bad banking situation, Comstock's enforced holiday made the national situation worse. The act was a blatant admission that banks could not be trusted and were not safe stores of assets, and millions across the country took the news as a reason to withdraw their funds. By the time Roosevelt stepped in with a federal guarantee for the nation's banking industry three weeks later, Americans had withdrawn $1.8 billion, increasing the currency in circulation throughout the U.S. by a third. Henry Ford, the man perhaps most responsible for lifting America into the modern age, became in 1933 one of the men most responsible for its descent into economic madness.

A steady hand on the reins of commerce
On Feb. 14, 1903, President Theodore Roosevelt created the United States Department of Commerce and Labor when he signed the bill for its establishment. This new Cabinet-level government agency had been devised during Roosevelt's trust-busting crusade against the business monopolies that controlled much of the American commerce and labor environments. In subsequent years, Commerce and Labor were separated into their own independent departments, with Commerce broadly focused on improving the living standards of Americans through proper business policy and Labor at the vanguard of workers' rights, safety, and benefits issues.

Nearly every facet of America's relationship with the companies doing business on its soil is managed through these two organizations, which, combined, marshaled a $21.6 billion budget and nearly 60,000 employees for the 2012 fiscal year. The U.S. Patent and Trademark Office, the Bureau of Economic Analysis, and the Census are key parts of Commerce, providing a valuable service to many economics and markets bloggers through the vast reams of data generated every year. In addition to giving bloggers something to pore over, these organizations play key roles in guiding business innovation and setting economic policy.

Probably not the best idea
Hey, you! Do you spend a lot of time behind the wheel? Don't you hate not being able to track your stocks in traffic? Well, on Feb. 14, 2001, Fidelity and General Motors had a great idea for you: in-vehicle trading services! Fidelity clients would be able to make real-time moves using GM's OnStar communications service, which boasted about 800,000 subscribers at the time. Little evidence of this partnership's existence can be found beyond 2001, indicating that the two companies might have come to their senses. Hands-free or not, it's tough to imagine anyone maintaining their composure when hearing that one of their holdings just crashed by 20%.

When it has to be there overnight (in Oakland)
On Feb. 14, 1919, United Parcel Service began operating in Oakland, Calif., adopting the name it would retain for the rest of its corporate life. This was its first expansion beyond Seattle, where it was founded and where it had been delivering messages and packages since 1907. Within three years of adopting its modern name, UPS expanded again to Los Angeles, where it acquired a smaller company that provided the service model that would help it grow into a national organization. This "common carrier" model streamlined and enhanced UPS' delivery methods, which brought rates down to levels competitive with the U.S. Postal Service. By 1927, UPS operated in a far-flung 125-mile radius around Los Angeles and had also expanded to all other major cities on the Pacific Coast.

UPS remained a private company for much of its history, but its expansion reached truly national scope by 1975, when it was serving all 48 contiguous states while rival FedEx was still struggling to turn a profit. In the early 1980s UPS' airmail service became the fastest-growing airline in U.S. history as it sprang fully formed onto the scene in less than a year. By 1999 -- by which point it was already making well more than 10 million deliveries per day -- UPS went public for the first time, eight decades after making that fateful move to the Bay Area.

Machines or computing? Why not both?
On Feb. 14, 1924, the Computing Tabulating Recording Company changed its name to International Business Machines , formally adopting a name it had registered in New York six years earlier and which had been in use by its Canadian subsidiary since 1917. This was the final step in IBM's transition from a tabulating company founded by Herman Hollerith to a national business-focused technology powerhouse.

In a report filed the same day as its name change, IBM recorded $1.9 million in profit for the 10-month period ending in October of the prior year, which annualizes out to roughly $2.3 million for the full year. This was an impressive 510% increase over the $376,000 in net income IBM reported for the full year before its 1915 IPO. Eight years after it changed its name, IBM would join the Dow as a money-making machine with $7.4 million in profit -- another 230% gain from its 1923 net income.

IBM has been at the forefront of technological progress both before and after its name change, and five IBM employees have earned Nobel prizes for their efforts. Semiconductor research earned the prize in 1973, the scanning tunneling microscope won in 1986, and superconductivity research won in 1987. IBM has also been instrumental in developing the hard disk drive, the ATM, the UPC, and artificial-intelligence systems. Since its name change, IBM has grown its profit at an annualized rate of 10.5%, well in advance of the 6% annualized increase in U.S. GDP over the same time frame.

The computer that started it all
One computing innovation IBM had nothing to do with was first revealed to the public on Feb. 14, 1946. That was the day the University of Pennsylvania took the wraps off of ENIAC, the world's first electronic general-purpose computer. An Associated Press reporter heralded it as the "Robot Calculator [that] Knocks Out Figures Like Chain Lightning" in his headline, noting also that the wondrous new machine might "possibly open the mathematical way to better living for every man." T.R. Kennedy of The New York Times was less sensational but no less impressed, saying that ENIAC was "heralded as a tool with which to begin to rebuild scientific affairs on new foundations."

The 30-ton computer occupied a 30-by-50 foot room, its 18,000 vacuum tubes operated by central switchboards. Its fantastic abilities included the ability to, in the Tribune's words, "take a five digit number, such as 63,895, and add it to itself 5,000 times in one second. If you did such an addition with pencil, you'd fill space equivalent to two full pages of a newspaper." The first trial ENIAC completed was said to require the equivalent of a "trained pencil and paper computer" (a mathematician?) 100 years, working eight hours a day, to complete. ENIAC finished in two hours of computing time. The cost of this phenomenal computing power was $400,000, equivalent to $4.7 million today.

We've come a long way since ENIAC, at least in terms of computing bang for the buck. An iPhone 4, which fits in your pocket, is a million times faster than ENIAC despite costing more than 60,000 times less when first released. ENIAC was used to calculate the trajectory of ballistic missiles. We use our iPhones to calculate the trajectory at which to fling Angry Birds into pigs. Try explaining that progression to a computer scientist in 1946.

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The article A Disastrous Holiday for the American Economy originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.The Motley Fool recommends FedEx, Ford, General Motors, and United Parcel Service. The Motley Fool owns shares of Ford and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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