Economics and The Public Welfare

Chapter 39

The Banking Holiday

Banking troubles had quieted down after the clearing up of the Chicago situation in the summer of 1932. Money in circulation had ceased to rise after the summer of 1932 and had even gone down a little, returning to the banks, improving their condition. Gold had come back to the country and the gold monetary stock had risen from $3,622,000,000 on June 15, 1932, to $4,269,000,000 on January 25,1 1933. Member bank reserves had risen from $1,878,000,000 on February 24, 1932, to $2,574,000,000 on January 11, 1933. Rediscounts by member banks with the Federal Reserve banks, which had stood at $846,000,000 on February 17, 1932, had declined steadily to $248,000,000 by January 11, 1933. Bank failures had declined sharply, both in number and in volume of deposits, for the months July to November, 1932, though the figures began to rise again in December of 1932.

Renewed Runs on Banks, January, 1933. But the pressure of all the adverse factors which the preceding chapter has discussed suddenly precipitated a new, violent, and convulsive assault upon the banks. There was the new factor of fear regarding the gold standard in the United States, both abroad and among the American people, growing out of the controversy in the campaign and growing out of fears regarding the new Administration’s intentions. Gold monetary stock began to decline as foreigners withdrew their gold. Money in circulation rose rapidly as the people took their money out of the banks to put it into gold, and member bank reserve balances began to decline rapidly. There came a renewed pressure, and with it a highly important weak spot yielded.

The Detroit Banking Collapse—The Spread of Bank Moratoria. Detroit had had an extraordinary growth in the boom of the 1920’s with the rapid development of the automobile industry. Real estate values had mounted rapidly, and credit against real estate had increased greatly. Too much of this credit had got into the banks themselves. Moreover, there had been a particularly aggressive “group bank” movement centering in Detroit and moving out into Michigan. The stock of the holding company of this group had gone to fantastic levels and had had altogether too much bank credit put behind it.

The Detroit banking situation was vulnerable. In the absence of the renewed general pressure it could have been nursed along and straightened out, with great losses to bank stockholders, but without losses to depositors. Indeed, in the final reckoning which came years later, enough of the assets of these banks were made good to pay off depositors pretty fully.2 If there had been no forced liquidation in a great depression, the thing would have been manageable. Heroic efforts were made to save the Michigan situation. Great loans were made by New York banks to Detroit banks. Local Detroit industrialists made efforts to provide new capital for the banks under greatest pressure. But there came a collapse in the Michigan banking situation, and the Governor of the State proclaimed a moratorium.

Following this, moratoria were proclaimed in State after State. Had the moratoria been complete, had the banks been relieved for a period of making all payments, as happened in 1907 in the banking holidays proclaimed by certain of the Governors, there would have been time to straighten things out in most cases. But the moratoria were partial moratoria. In the typical case they applied to 95% of the deposits, but depositors were allowed to withdraw 5% of their deposits in cash. Superficially this seemed a reasonable thing to do, but practically it meant that the country bank which had a 7% reserve requirement was obliged to pay out 5/7 of its legal reserve in cash, and this in all too many cases meant that it had little or no cash left.

Procedure in 1907 Far Better Than in 1933. We had handled things much better in the Panic of 1907. The banks then had a tradition regarding the matter. We had restricted cash payments by the banks, but had maintained a 100% mobility of deposits so far as checks were concerned. A depositor could not go to his bank and get all the cash he wanted, but he could draw a check on his bank and pay a debt with it. And the recipient of the check could deposit that check in his own bank and have it honored through the clearing house, and could draw checks against the deposit thus created to make his own payments. Absolutely necessary cash was provided by the banks.

Over the country generally in 1907 the clearing houses had provided emergency substitutes for cash in the form of clearing house checks, printed or engraved to look something like paper money, though usually on white paper—payable, not in cash, but “through the clearing house,” endorsed by all the banks of the clearing house. This paper was accepted for local currency. Such currency was not readily accepted far from home. In a typical Missouri town of 35,000 people in 1907 these clearing house checks or certificates were readily obtainable at the banks and were readily accepted by the local merchants. If, however, one needed to make a railroad trip, these certificates were not acceptable by the railroad for railroad tickets, nor were they readily acceptable by the merchants or others in a near-by city. The local banker understood this, and provided enough actual money for the purpose of making these trips. In this community, also, there was a great increase in the drawing of small checks, even as small as 25¢, in making local payments.

Among the banks in this small city, and very generally throughout the country, clearing house loan certificates, “good only between the banks,” were provided. These are to be distinguished from the clearing house checks described above. They did not circulate among the people. They were certificates, again endorsed by all the banks, which a bank, short of cash for meeting deficits at the clearing house, could borrow from the clearing house against good collateral, and which other banks in the clearing house would accept in the settling of clearing house balances.

In New York City in 1907 the banks did not issue clearing house checks to circulate among the people. It was feared that New York currency would be “too good” and would circulate too far from home. They paid out cash for necessary purposes, but restricted cash payments. They provided, for payments inside the clearing house, clearing house loan certificates “good between the banks,” which they issued to individual banks, at 6% interest. In New York, however, important industrial companies issued printed checks for payroll purposes, usually in $5 denominations, which the merchants would accept. Thus the Standard Oil Company printed checks drawn on the National City Bank which it used for payroll purposes, and these had a very considerable circulation as actual currency with these two good names upon it. These checks were good through the clearing house. They would be received by any bank for deposit, and checks could be drawn against the deposits thus created. The deposit was kept mobile.

In New York in 1907 there came a discount on checks, as compared with cash, which ran as high as 4%. But the checks made payments, and the business of the country went on. The banks in New York differed in their policy with respect to making loans and to sending money out of town to country banks and country bank correspondents. Some of them were unduly timid in this matter. Some went very far in the effort to meet the needs of correspondents. But the lines held. Deposits were kept mobile.

Finally, in 1907, the importation of $100,000,000 in gold from Europe eased the pressure on cash. Cash payments were resumed, the emergency currency quickly disappeared, and the money panic was over.

The contrast between the procedure in meeting a money panic in 1907 and in 1933 is thus a startling one. In 1907, with restricted cash payments and with emergency substitutes for cash, deposits were kept 100% mobile and business went on. In 1933, with the banks relieved of paying all but 5% of their deposits, but obliged to pay that 5% in cash, cash reserves were quickly pulled to very low levels. Deposits were 95% unavailable for any use, and banking ceased to serve business in the States where these rules applied.

Calendar of Bank Holidays. The movement to restrict or suspend the banks moved with startling rapidity, as shown by the following schedule:

1933

February

14—Michigan

23—Indiana

25—Maryland

27—Arkansas

28—Ohio

March

1—Alabama, Kentucky, Nevada and Tennessee

2—Arizona, California, Louisiana, Mississippi, Oklahoma and Oregon

3—Georgia, Idaho, New Mexico, Texas, Utah, Washington and Wisconsin

4—Colorado, Connecticut, Delaware, Florida, Illinois, Iowa, Kansas, Maine, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Pennsylvania, Rhode Island, South Dakota, Vermont, Virginia, West Virginia and Wyoming 3

New York City Banks Reluctantly Yield to Governor’s Request Late on March 3. Late at night on March 3 the New York City banks reluctantly yielded to the request of the Governor that they join the Federal Reserve Bank of New York in petitioning the Governor for a banking holiday in New York State. New York City banks did not need to do this. They were strong in the last week. They had paid out great sums to depositors and they had made great loans, and they were prepared to go further. Cash was even returning to them from the interior, as closed banks did not need it. A great deal of cash, for example, was coming back from Michigan which New York had previously sent there. But it appeared that there were up-State banks in New York which could not stand further pressure, and the banks of the City of New York reluctantly met the Governor’s request.

The new Roosevelt Administration came in with almost every bank in the country closed.

New York City Procedure in 1933 Before March 3. The banks and the Governors did not handle the situation well. With the coming of the Federal Reserve System, they had generally assumed that no money panic could ever come again. The great banks of New York, which in the earlier days had felt an immense responsibility for the money market, had abdicated their control of the money market to the Federal Reserve System. The New York Clearing House, which had once been the center of financial responsibility in the country, had long since ceased to feel this responsibility. In the old days the clearing house authorities of every major city had known that there would be money market pressure in the autumn. In 1873, in 1884, in 1893, and in 1907 they had devised a procedure for dealing with it if it became too acute. We had an emergency machinery understood not only by the New York Clearing House, but also by veteran bankers all over the country. There was a ruling by the Attorney General of the United States, issued in 1893, which held that emergency currency “good through the clearing house” was not subject to the 10% tax applied to State bank notes, since cash could not be collected on it in a suit at common law.

Memories Are Short. But men’s memories are short. Men come into positions of great responsibility fairly late in life, and the interval between 1907 and 1933 was too great an interval. There was no man left of the heads of great New York banks in the Panic of 1907 who was still in that position in 1933. And the same thing was generally true over the country.

In the New York Clearing House there was a decision to provide a clearing house note or certificate which should circulate as cash among the people, contrary to the precedent of 1907. A Clearing House Committee sat and passed on collateral. The Committee seemed to move with undue deliberation and it was a very strict Committee. It was proposed that obligations of the City of New York, for example, should be taken in at only 80% of their face value, though whether this was finally decided, is uncertain. Finally, notes were engraved and ready to be issued. One saw a few in the hands of bankers, but probably none was actually issued to the people.

National banks which had unused note issue power considered how rapidly they could get new currency by issuing new National Bank notes. One great bank discovered that its plates could print only a few millions in a week and that a new plate could not be got quickly.4

Very late in the deliberations of the New York Clearing House one fine old veteran came back from his winter place in Florida and talked with vigor and definiteness to the heads of the clearing house banks, explained the procedures of 1907 to them, and had them ready for action along the lines of 1907. But it was already too late. Too much of the country had 95% of its deposits already tied up. Senator Glass 5 remarked at the time that the bankers ought to have had their scrip out some weeks before.

Washington Excludes Banks and Federal Reserve Banks from its Councils. With the coming in of the new Administration with virtually every bank in the country closed, control of the banking situation passed both from the banks and from the Federal Reserve banks to Washington. It was exceedingly difficult, moreover, for the New York Clearing House or banks to find out what was happening in Washington. Information regarding particular points would come in by telephone from Chicago or Boston or St. Louis. Officers of the Federal Reserve Bank of New York even made inquiries of officers of other New York banks as to what was happening in Washington. The new Administration was deliberately shutting out the banking community from its councils as it dealt with an extraordinarily difficult banking situation.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.
• 4O. M. W. Sprague: “Crisis of 1914 in the United States,” American Economic Review, September, 1915; H. G. S. Noble: “The New York Stock Exchange in the Crisis of 1914,” Garden City, N. Y., Country Life Press, 1915. These two papers are classics of permanent value.
• 5The figures of all the State and National banks and trust companies appear only once a year in the Comptroller’s report as of approximately June 30. For dates other than June 30, it is necessary to make estimates. During the war period these estimates are made on the basis of variation in the National Bank figures.