The Federal Reserve Bank of New York today released Why Did FDR’s Bank Holiday Succeed?, a new forthcoming article in the Bank’s Economic Policy Review series.
Author William L. Silber indentifies a number of forces that contributed to the success of the nationwide Bank Holiday declared by President Franklin Delano Roosevelt in March 1933, which formally suspended all banking transactions. These include the federal government assuming responsibility for the integrity of the payments system, de facto 100 percent deposit guarantees at reopened banks and the willingness of the President to act quickly and decisively.
The Emergency Banking Act of 1933, passed by Congress during the Bank Holiday, contained key provisions that allowed the Federal Reserve Banks to issue emergency currency. President Roosevelt used the emergency currency provisions to encourage the Federal Reserve to create de facto 100 percent deposit insurance at reopened banks, restoring public confidence and preventing a resumption of bank withdrawals following the Bank Holiday.
Silber notes that the government’s willingness to take quick, substantive action to reestablish the integrity of the payments system demonstrates the power of credible regime-shifting policies.
William L. Silber is the Marcus Nadler Professor of Finance and Economics at New York University’s Stern School of Business.