Back to: BANKING, LENDING, & CREDIT INDUSTRY
Emergency Banking Act of 1933 Definition
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.
A Little More on the Emergency Banking Act of 1933
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.
References for Banking Act of 1933
Academic Research on Banking Act of 1933
- The Banking Act of 1933, Preston, H. H. (1933). The American Economic Review, 585-607. The author outlines the two acts that were passed in a special congress session of 1993. They were Emergency Banking at and Banking act of 1993. In Emergency Bank act, the above guideline was the authorization of national bank conservator, legalizing the issuance of preference shares by national banks and more latitudes in an issue of federal reserve bank notes together with authorizing federal reserve banks more liberal loaning powers. Besides Emergency Bank act provisions, the Banking Act of 1933 is the result of several years of intensive study. Important features of the new law are the separation of investment and commercial banking, restriction upon the use of bank credit for speculation, deposit insurance, authorization of state-wide branch banking, federal supervision of group banking, modification of double liability, regulation of interest on deposits, increased power to supervising officers. These new rules made banks to be more of social enterprises and raises federal governments’ responsibility in maintaining banks stability.
- Guaranty of Deposits under the Banking Act of 1933, Emerson, G. (1990). In Restructuring the American Financial System(pp. 9-22). Springer, Dordrecht. The author in this paper outlines the first act that was meant to provide a guarantee of bank deposits under the federal umbrella. In section 8, the provisions for such guaranty, and a temporary plan commenced on January 1, 1934, was stated. Even though in the act, premiums are levied against participating banks rather than against depositors who represent the beneficiaries, premiums are not graded according to risks involved, and there is no provision for the accumulation of a reserve fund, the essential features of an insurance plan appear to be lacking, and the guaranty proposal was to be reconsidered.
- The banking act of 1933, Westerfield, R. B. (1933). Journal of Political Economy, 41(6), 721-749. The Glass-Steagall as it was commonly known effectively separated commercial banking from investment banking and created the Federal Deposit Insurance Corporation, among other things. It was one of the most widely debated legislative initiatives before being signed into law by President Franklin D. Roosevelt
- American bank failures, Bremer, C. D. (1935). This paper FDR’s first act as President was to declare a national “bank holiday” – closing the banks for a three-day cooling off period. The most memorable line from the President’s speech was directed to the bank crisis – “The only thing we have to fear is fear itself.”
- Some economists and historians have argued that the bank crisis caused the Great Depression. But others have looked at fundamental economic factors and regional histories and argued that banks failed as a result of the economic collapse
- The Banking Act of 1933 in Operation, Willis, H. P. (1935). Colum. L. Rev., 35, 697. The author outlines the policy adopted by the federal government in protecting people’s deposits. Roosevelt, US president, tried streamlining the banking industry by closing the all banks after the great depression and banks were only allowed to undertake their duties once approved fit for operation.
- A public choice perspective of the Banking Act of 1933, Shughart, F. W. (1988). The Financial Services Revolution(pp. 87-105). Springer, Dordrecht. The paper states the core framework of modern banking regulations of USA was outlines I banking act 1933. It provided for the legislation establishing federal deposit insurance, reaffirmed the restrictions on branch banking imposed in 1927 by the McFadden Act, authorized the Federal Reserve to set ceilings on the interest rates payable on savings and time deposits at member banks, and prohibited the payment of interest on demand deposits. The establishment was based on banning banks from engaging in the activities of underwriting, promoting, or selling securities either directly or through an affiliated brokerage firm.
- Bankers’ Balances, Demand Deposit Interest, and Agricultural Credit before the Banking Act of 1933: Note, Gendreau, B. C. (1979). Journal of Money, Credit and Banking, 11(4), 506-514. The author states that Bankers’ balances were interbank deposits, usually demand deposits held by country banks with public correspondent banks. The payment of interest on bankers’ balances, it was contended by its critics, was drawing funds out of productive uses in rural areas to the cities, where they were placed by public banks in call loans financing stock market speculation. l One of the central motivations for the prohibition of interest payments on all demand deposits in the Banking Act of 1933 was the desire to halt the flow of funds out of rural areas through bankers’ balances
- The political economy of banking regulation, 1864–1933, White, E. N. (1982). The Journal of Economic History, 42(1), 33-40. Banking community influenced the laws and regulations that shape the banking industry from civil war followed by the Great Depression. The period involved legal constraints on banks were weakened by competition between state and federal regulators trying to increase membership in their banking systems. Completion on the removal of regulation was never undertaken; however, Units banks contained some influence in regulation preservations.
- The great deposit insurance debate, Flood, M. D. (1996). In Stability in the Financial System (pp. 34-83). Palgrave Macmillan, London. Banks continued growth and thrift failure the major current issue facing regulators, Author stated. The author continues with Failures of federally insured banks and thrifts numbered in the thousands during the 1980s. The problem is especially significant for public policy, because of the potential liability of the federal taxpayer. Flat-rate deposit insurance is said to create a moral hazard: if no one charges bankers a higher rate for assuming risk, then there would be exploitation the risk-return trade-off by bankers by investing in a portfolio that is riskier.
- Universal banking, Benston, G. J. (1994). Journal of Economic Perspectives, 8(3), 121-144. All range of financial services of a bank together with is subsidiaries can be offered by Universal banks which is permitted by most countries although there are only Specialized banks in the United States. Universal banking more so in Germany is compared to specialized banks with regards to their influence in financial stability, economic development of, both political and economic power centralization, consumer choice and conflicts of interests. The author concludes that Universal banks were more beneficial to U.S consumers.
- The Banking Act of 1935, Williams, J. H. (1936). The American Economic Review, 95-105. By signing the Banking act of 1935, restructuring of the Federal Reserve and Financial system that begun during presidents Hoovers administration was brought to completion, the author stated. The Banking act addressed these major issues in the US: Structure, powers, and functions of Federal government, the reorganizations of both cosmetic and consequential changes where the Federal Reserve Board became the Board governor of Federal Reserve System and finally, The Board of Governors’ independence increased from the executive branch of the federal government.