#33 The 1933 Banking Act (New Deal)

The Emergency Banking Act of 1933 was a series of reforms made by the Federal government (driven by the FDR administration) to stabilize the banking system. We will find many common threads in our coverage of these historical events. Manufactured or perpetuated crises followed by sweeping government reform of the free market economic system.

The act came directly on the heels of a nationwide banking holiday declared by FDR. These holidays were intended to halt the widespread bank runs. As discussed previously (here and here) FDR made a great number of reforms during just the first year of his presidency. We must cover each in detail as well as the conditions which led up to the Great Depression.

The EBA was an amendment to the Trading with the Enemy Act of 1917 that originally gave the president power to restrict trade between the US and foreign nations during a time of war (in particular WWI), however, the TWEA was changed to also be usable in times of peace via a congressional amendment.

The EBA amendment was passed in a single night of chaos on the congress floor with such haste that only a single copy was available to the House and was voted on after being read aloud. The act had two significant goals.

1. To reaffirm the Federal Reserve’s commitment to supply “unlimited currency” to banks which re-opened after the end of the banking holiday
2. The establish a 100% deposit insurance for banks

One month after this banking reform, is when America saw the introduction of EO6102 which we’ve also previously discussed. All of these, were temporary measures until the much more cohesive 1933 Banking Act.

The 1933 Banking Act was wide in scope it had many significant goals:

-Creation of the FDIC (will be covered in detail tomorrow)
Separation of Commercial and Investment Banking
-Creation of the Federal Open Market Committee (FOMC)
-Reduction in competition between commercial banks
-Restriction in “speculative” uses of bank credit and removal of limits on total amount of loans that could be made by member banks
-Elimination of personal liability for new shareholders of national banks
-Tightly regulate national banks to the federal reserve, requiring member banks and holding companies to make three annual reports, given to the Fed
-Give national banks the same ability to establish branches in their home state as state chartered banks

It’s an awful lot of information that may not mean a whole lot to you, but the key takeaway here is: A massive consolidation of regulatory financial power was given to the federal reserve, and a series of safety nets was created backed by the lender of last resort (The Fed) to ensure total solvency of bank deposits.

Understanding these stepping stones is crucial to forming our complete picture of how we ended up where we are today. The modern paradigm is a far cry from the laissez-faire system the government “saved us from”. Rather than allowing mal-investment to liquidate and allowing under capitalized banks to fail, the government stepped in and put a stop to this natural forest fire of underbrush.

A decision we would come to find, over the next century, encouraged a series of blazes which could seldom be calmed. The great liquidation can only be postponed through increasingly drastic measures.


Book of the Month:

The Ethics of Money Production by Jorg Guido Huulsman

-“Governments have issued paper money along with the legal obligation for each citizen to accept it as legal tender”

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