Emergency Banking Act of 1933 - Explained
What is the Emergency Banking Act of 1933?
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Table of ContentsWhat is the Emergency Banking Act of 1933?How Does the Emergency Banking Act of 1933 Work?
What is the Emergency Banking Act of 1933?
Emergency Banking Act of 1933 was put into law during the reign of President Franklin D. Roosevelt of USA following poor financial situation during the great depression. A four day mandatory close of US banks was passed to enable their inspections before they could resume duty. The close was to facilitate the restoration of investors confidence in addition to banking systems stability. Banks were to resume on condition that they were deemed to be financially sound. This statute was passed considering the close with anticipation of renewed confidence on banks by Americans once were re-opened. The statute also brought President executive powers during such times of tough times allowing to undertake decisions of economic restoration. Twelve regional Federal Reserve banks were the first one to resume their activities on March 13.the following day, banks in the city with federal clearinghouses followed, and finally, all the banks deemed fit resumed two days later after the first ones.
How Does the Emergency Banking Act of 1933 Work?
The bill was brought for the initial time when Herbert Hoover was the president but was never passed until he was replaced and during the inauguration of Roosevelt. A lot of discussions were undertaken, and he addressed the nation concerning the US economic condition. Roosevelt decided to confirm the US by a chart reminding citizens that the bank's closure never affected the trustworthiness and security of banks regardless of the depression. Many savings were lost in the banks by Americans as a result of never insuring deposits by the federal government. Many customers panicked due to this instability. Masses ran to the banks leaving intuitions without funds with no option but to close as there was no money with the banks. Roosevelt was aware of the need to not only fix to banks but also restore people's trust before the economy could change favorably. Depression was preceded by the less known stock market crash of 1929 that strained the US monetary system. There were numerous runs within the banks caused by fear of losing saving among customers. Many people resolved for home banking rather than banks until credibility in the bank system was restored by Roosevelt. More permanent solutions were provided by the formation of Federal Deposit Insurance Corporation(FDIC) in addition to assurance made by banks of government refunding people in case they a bank is liquidated with their fund. FDIC brought more confidence restoration by ensuring people with up to $2,500 at ago with the number of people and insured increasing over time. The Emergency Banking Act was cushioned by pieces of legislation approved during Herbert Hoover's administration. Reconstruction Finance Corporation law aimed at assisting companies and financial institutions facing the danger of liquidation as a result of economic shrinkage similarly 1932 banking act was to strengthen the banking industry and Federal Reserve. Other similar legislation was enacted after the Emergency banking act. They included the Glass-Steagall Act that stopped speculations in investments and corrupted commercial banks that were one of the causes of stock market crash separating investment from commercial banking, in addition to Emergency Economic Stabilization Act passed just before the great depression, and it focuses on mortgage crisis with anticipation of enabling Americans to keep their homes. The bill was subdivided into:
- Title I extended the executive power of the president during a time of crisis so that the president could operate independently from the Federal Reserve. This power applied to both domestic and foreign transactions.
- Title II sought to redeem those banks with compromised assets, by limiting their operation and installing a conservator to take over bookkeeping.
- Title III gave the treasury secretary the power to determine which banks needed financial assistance, and to provide that assistance in the form of loans.
- Title IV allowed the Federal Reserve to issue emergency currency through commercial banks, in the form of banknotes.
- Title V provided the necessary funds and put the act into effect.
Although it was tight in winning peoples confidence in the safety of their funds in banks, People turned up to backs immediately they were re-opened. There was a success in the Emergency Banking act in convincing Americans in restoring their trust in banking and depositing their funds. Stock market outperformed other previous years with The Dow Jones Industrial Average (DJIA), the most watched market index in the world, rose 8.26 points on March 15 when all eligible banks re-opened, boasting a gain of over 15%. The measures taken as a result of the Emergency Banking Act ended the banking crisis and set the economy on the path to recovery. The effects of this act that include the extension of the president's executive power, specified in Title, remained in effect. The bill also completely changed the face of the American currency system by taking the United States off the gold standard. Importantly, the act reminded the country that a lack of confidence in the banking system could become a self-fulfilling prophecy, and a mass panic does more danger than good.