How FDR Cured an American Crisis of Confidence

On this day in economic and financial history...

The rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. ...

The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit. ...

Recognition of the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing. Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, on unselfish performance; without them it cannot live.

Restoration calls, however, not for changes in ethics alone. This Nation asks for action, and action now.

--Inaugural address of President Franklin Delano Roosevelt, March 4, 1933.

Roosevelt's first major executive action took place less than 24 hours into his presidency when he declared a nationwide banking holiday on Sunday, March 5, 1933. This was done to stem the flow of panicked withdrawals that had begun three weeks earlier after Michigan Governor William A. Comstock declared the first statewide banking holiday in the country. Roosevelt proclaimed that all banks would remain closed until March 10. No banking institution would conduct any business during this time, particularly as it pertained to gold and silver, which the people where prohibited from withdrawing to hoard or export. In place of specie payments, banks were authorized to issue certificates and other forms of paper fiat currency.

More than 5,000 banks with more than $3 billion in deposits had failed by this point in the Great Depression, an amount equal to more than 40% of the currency then in circulation -- which was itself a sum greatly swollen by the national rush to withdraw. Roosevelt bought himself four days in which to lay out a more permanent plan. On the final day, emergency banking legislation raced through Congress and reached the President's desk. It validated and expanded the sweeping power Roosevelt exercised in enacting the bank holiday and implicitly took the United States off the gold standard by authorizing the Federal Reserve to print great amounts of paper currency that would not be redeemable in gold.

The New York Times repeatedly called the President's broad new currency powers "dictatorial" in its analysis of the act -- and with penalties for holding any gold set at a maximum fine of $10,000 (more than $175,000 today) and up to 10 years in jail, the paper did have a point. However, despite the President's enhanced powers over the national currency, Roosevelt decided not to reopen the banks. The holiday was extended, and Roosevelt prepared to explain himself in his first radio fireside chat, which took place on March 12. During this chat, Roosevelt laid out his plans for the banks, which would reopen on a limited basis beginning the following day.

It is possible that when the banks resume a very few people who have not recovered from their fear may again begin withdrawals. Let me make it clear to you that the banks will take care of all needs except of course the hysterical demands of hoarders -- and it is my belief that hoarding during the past week has become an exceedingly unfashionable pastime in every part of our nation. It needs no prophet to tell you that when the people find that they can get their money -- that they can get it when they want it for all legitimate purposes -- the phantom of fear will soon be laid. People will again be glad to have their money where it will be safely taken care of and where they can use it conveniently at any time. I can assure you, my friends, that it is safer to keep your money in a reopened bank than it is to keep it under the mattress. ...

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 themselves. 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; and it is up to you to support and make it work.

It is your problem, my friends, your problem no less than it is mine. Together we cannot fail.

Roosevelt's assurance of bank soundness and government support worked. The following day, Americans began to pull money out from under the mattress and stick it back in the banks. Within two weeks, half the money withdrawn in the initial panic was back in the banks. Within two months, 20% less currency circulated in the hands of Americans as they continued to reopen or replenish their checking and savings accounts.

When the markets reopened on March 15 (it's a bit difficult to run a stock exchange without banks), investors offered an incredible show of support. The 15.3% increase of the Dow Jones Industrial Average remains its all-time best single-day performance eight decades later. This was only the first day of the greatest turnaround in Dow history. From the first day of the bank holiday to the end of the year, the Dow gained 83% on its way to one of the sharpest bull-market rallies in history. Roosevelt had been right: The confidence of the American people turned out to be more important than gold. The confidence recovery presaged a dramatic economic recovery, which saw faster real GDP growth than the Roaring '20s as unemployment plunged (though it remained high) and corporations found their profit groove again.

The government's action during our most recent financial crisis was different in tone and more diffident to the whims of the bankers. Today, the phrase "too big to fail" is used both as a defense and as an epithet when discussing big banks, many of which absorbed their weaker peers with the help of massive infusions of federal funds. In 1933, the only business too big to fail was the American enterprise. Today, we hope the banking system rests on sturdier foundations than it did before the Great Depression. If it does not, will American leaders take guidance from Roosevelt's actions, or will we be doomed to repeat this bleak cycle of history all over again?

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