THE BANKING CRISIS

“This nation asks for action and action now,” Roosevelt announced on taking office on March 4,1933. The country, wrote the journalist and political commentator Walter Lippmann, “was in such a state of confused desperation that it would have followed almost any leader anywhere he chose to go.” FDR spent much of 1933 trying to reassure the public. In his inaugural address, he declared that “the only thing we have to fear is fear itself.” (See the Appendix for the full text.)

A “run” on a bank: crowds of people wait outside a New York City bank hoping to withdraw their money.

Roosevelt confronted a banking system on the verge of collapse. As bank funds invested in the stock market lost their value and panicked depositors withdrew their savings, bank after bank had closed its doors. By March 1933, banking had been suspended in a majority of the states—that is, people could not gain access to money in their bank accounts. Roosevelt declared a “bank holiday,” temporarily halting all bank operations, and called Congress into special session. On March 9, it rushed to pass the Emergency Banking Act, which provided funds to shore up threatened institutions.

Further measures soon followed that transformed the American financial system. The Glass-Steagall Act barred commercial banks from becoming involved in the buying and selling of stocks. Until its repeal in the 1990s, the law prevented many of the irresponsible practices that had contributed to the stock market crash. The same law established the Federal Deposit Insurance Corporation (FDIC), a government system that insured the accounts of individual depositors. And Roosevelt took the United States off the gold standard— that is, he severed the link between the country’s currency and its gold reserves, thus making possible the issuance of more money in the hope of stimulating business activity. Together, these measures rescued the financial system and greatly increased the government’s power over it. About 5,000 banks—one-third of the nation’s total—had failed between 1929 and 1933, representing a loss of tens of millions of dollars to depositors. In 1936, not a single bank failed in the United States.

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