The Banking Crisis

The Banking Crisis

The provisions of the Twentieth Amendment to the Constitution shortened the time period between the November election and inauguration of the president from March 4 to January 22. This interim was known as the “lame duck” period and featured several months where the outgoing president remained in office. Because the Twentieth Amendment would not take effect until 1933, Hoover continued to preside over a nation whose banking system was teetering toward collapse.

An assassin’s bullet just missed president-elect Roosevelt in February of that year, instead killing Chicago mayor Anton Cermak while the two men were talking. Cermak’s death was mourned by Chicagoans and supporters of Progressivism nationwide. The Czech immigrant had risen through Chicago politics and defeated the Republican machine that was operated by city boss “Big Bill” Thompson. Thompson’s political machine had dominated the city in previous decades and was allegedly connected to organized crime figures such as Al Capone. Cermak reportedly turned to Roosevelt after the bullet hit him and said that he was glad the new president had been spared. While this mythical expression of the nation’s support for their president-elect became legend, most Americans were skeptical that their future leader was up to the challenge before him.

The new president still had not offered many specific details of how he planned to combat the Depression, and news of political gamesmanship between the outgoing and incoming presidents concerned the nation. Communications between Hoover and Roosevelt were full of posturing and intrigue. Hoover insisted that any meeting be held at the White House—a not-so-subtle reminder that he was still the president. Roosevelt wanted Hoover to meet him outside of the White House for similar prideful reasons. Hoover sought Roosevelt’s endorsement of several of his plans, a defensible request given the impending transfer of power. However, Roosevelt was suspicious that Hoover’s apparent goodwill was really an attempt to transfer responsibility for any consequences onto the new president. By Hoover’s perspective, Roosevelt’s intransigence was a political calculation based on making sure the nation’s economy did not turn the corner until he took office. The tragic result was that little was accomplished in the months between the election and Roosevelt’s inauguration.

Figure 7.2

Hoover and Roosevelt sit together on Inauguration Day. As the photo indicates, the two men shared reservations toward each other and did not work together during the period between the election and Roosevelt’s inauguration.

Bank foreclosures and bank failure did not wait for Inauguration Day. Every state placed restrictions preventing depositors from withdrawing more than a certain amount or a percentage of their holdings each day. Some areas suspended banking operations completely in an attempt to keep the entire system from imploding. Upon assuming office, the president declared his first priority was to restore order in the banking system. He announced that all banks would close for a four-day “holiday” while Congress met in an emergency session. Roosevelt assured the American people that the “nameless, unreasoning, unjustified terror” that gripped the nation was the only thing they needed to fear. The nation’s factories and farms were still productive, the president reminded his listeners. These productive centers had fueled the growth of America and would continue to do so if only they could recover from the financial instability that was born of uncertainty rather than any fundamental flaw in their design, the nation’s infrastructure, or the national character.

The president’s Emergency Banking Relief BillA law granting federal examiners the authority to examine the records of banks and determine which institutions were financially sound. All banks that passed this examination were permitted to reopen with the added security of the federal government’s commitment to provide additional funds if needed to ensure the financial stability of the bank. helped to restore confidence by pledging federal backing of the nation’s banking system. The bill was passed by unanimous consent in the House and by an overwhelming margin in the Senate on March 9, 1933. Due to the pervasive sense of emergency at that time, there was very little debate on the bill and most legislators never even read the legislation. However, most legislators understood and supported the fundamental changes to the banking system that would result. The new law granted the government the power to evaluate the financial strength of each bank. Those banks that passed inspection were allowed to receive unsecured loans from the federal government at low interest rates to help them through the crisis. The law also granted the federal government the authority to reorganize and reopen banks. Most importantly, Roosevelt committed the federal government to provide loans to banks to prevent them from failing.

The emergency law did not yet create the explicit guarantee of federal insurance for banks, although this guarantee would be part of legislation that would be passed later in Roosevelt’s term. However, the president delivered a well-conceived speech that was broadcast throughout the country. In this address, Roosevelt explained how the emergency law would prevent bank failures in the near term. The president’s radio address succeeded as banks reopened to long lines of depositors—a welcome sight given the recent history of panicked crowds waiting outside banks to withdraw funds. Conservatives and business interests were relieved that the president had used the power of the federal government to bolster the existing financial system rather than seek more radical change. Consumers were equally pleased to find that the government would take steps to protect the money they deposited in banks. The sudden wave of depositors also demonstrated the trust most Americans still had in government and the basic infrastructure of America’s financial system. Roosevelt would continue to use radio addresses, which he later dubbed “fireside chats,” to explain his policies directly to the people.

Figure 7.3

President Roosevelt sought to explain his policies directly to the public through a series of radio addresses he called “fireside chats.”

At the same time, Congress’s ready acceptance of a sweeping law that effectively gave the Roosevelt administration control over the fate of every private bank in the nation alarmed some observers. Even those who favored the banking bill worried that the balance of power between the executive and legislative branches had shifted in ways that could lead to unintended consequences. In addition, over one hundred members of the legislature were newly elected Democrats unaccustomed to Washington politics and perhaps overly eager to support the Roosevelt administration. Roosevelt’s unassuming personality and apparent sincerity helped to reduce this criticism, but not all in Washington or in the nation supported the new president. Others who were more skeptical had grown so frustrated by the perceived inaction of the previous years that they seemed willing to let Roosevelt and the Democrat-controlled Congress try anything.

Roosevelt enjoyed Democratic majorities in both the Senate and the House, and so in 1933, his critics could do little but warn of the possibility that the new president might abuse his powers. This message of warning and dissent remained largely in the background until 1937 when the economic recovery of the president’s first term crumbled in the midst of a second Wall Street crash. Until that time, Roosevelt sought to create goodwill among the various interests of labor and capital by inviting representatives of unions and businesses to help shape legislation. Throughout his first four years in office, Roosevelt enjoyed widespread popular support. Although he was able to pass nearly every one of the laws his advisors recommended during these years, securing lasting economic recovery would prove more difficult for the new president.