The economic depression in the early 1930s had a disastrous impact on the banking system in America. Private banks which had invested in stocks and shares found that the Wall Street Crash had severely reduced their funds. In December, 1930, the Bank of the United States was forced to close. Many banks found it difficult to continue and within a few years a fifth of all banks in America were forced to close. As a consequence, around 15% of people's life-savings had been lost.
By the beginning of 1933 the American people were starting to lose faith in their banking system and a significant proportion were withdrawing their money and keeping it at home. When Franklin D. Roosevelt was elected as president, he made it clear that his first concern would be to solve this banking crisis. The day after his inauguration he called Congress into a special session and declared a 4-day bank holiday.
On 9th March, 1933, Congress passed the Emergency Banking Relief Act which provided for the reopening of the banks as soon as examiners had found them to be financially secure. Within three days, 5,000 banks had been given permission to be re-opened. Later that year Congress passed the 1933 Banking Act. The Federal Reserve Board was given tighter control of the investment practices of banks and the Federal Deposit Insurance Corporation was set up to insure all deposits in banks up to $5,000.
Marriner Eccles was appointed as Governor of the Federal Reserve Board. As William E. Leuchtenburg, the author of Franklin D. Roosevelt and the New Deal (1963), has pointed out: "Eccles had hardly taken office when he helped draft a new banking bill which called for the first radical revision of the Federal Reserve System since its adoption in 1913. Eccles wished to lodge control of the system in the White House; lessen the influence of private bankers, who he believed had taken over the system; and use the Reserve Board as an agency for conscious control of the monetary mechanism. The 20,000-word banking bill introduced in February, 1935, reflected the thinking of Eccles and of certain members of his staff, especially the Keynesian Lauchlin Currie."
In 1935 Marriner Eccles and Lauchlin Currie drafted a new banking bill to secure radical reform of the central bank for the first time since the formation of the Federal Reserve Board in 1913. It emphasized budget deficits as a way out of the Great Depression and it was fiercely resisted by bankers and the conservatives in the Senate. The banker, James P. Warburg commented that the bill was: "Curried Keynes... a large, half-cooked lump of J. Maynard Keynes... liberally seasoned with a sauce prepared by professor Lauchlin Currie." With strong support from California bankers eager to undermine New York City domination of national banking, the 1935 Banking Act was passed by Congress.
All through the Twenties, they were having about six hundred banks a year close. In 1929 and 1930 they got into thousands. Closing every day. There was one bank in New York, the Bank of the United States - in the wake of that closing, two hundred smaller banks closed because of the deposits in that bank from the others.
26th February: Horrible rumours spread through West Hill. Bank officials didn't show up at church services and weren't home at one o'clock to eat the usual big Sunday dinner with their families.
27th February: The Akron banks went on a "restricted withdrawal basis". The lobby of the First-Central Trust Company was a madhouse. Bewildered grocery store owners and frantic housewives stood in line with their passbooks shrilly demanding their money. Soft-voiced clerks explained, over and over, that "everything was all right".
Ist March: The local newspapers spread great cheer over the local banking situation. Pay rolls were said to be passing through the bank, taxes were being paid, business places were finding their operations unhampered.
3rd March: In the nearby empty streetcars, men told scare stories. Hysterical women wept on neighbours' shoulders, "Everything we had is gone. Now we go on relief."
4th March: At nine, the First-Central Trust Company owned for business. The lobby was jammed. Clerks paid out the one per cent allowed. "I didn't get paid this week," men in work clothes shouted. "You've got to give me some of my money." "No!" said the clerks, signalling for the bank guards. At noon the bank guards hustled the crowd out. "Closing time," they shouted.
Less than 34 hours after he became President of the United States, Franklin D. Roosevelt took action unprecedented in American history. By proclamation, under a war-time measure's terms, he closed the doors of every bank in the United States and its possessions.
Some of our bankers have shown themselves either incompetent or dishonest in their handling of the people's funds. They had used money entrusted to them in speculations and unwise loans. This was, of course, not true of the vast majority of our banks, but it was true in enough of them to shock the people for a time into a sense of insecurity. It was the government's job to straighten out this situation and do it as quickly as possible. And the job is being performed. Confidence and courage are the essentials in our plan. We must have faith; you must not be stampeded by rumours. We have provided the machinery to restore our financial system; it is up to you to support and make it work. Together we cannot fail.