Emergency Banking Act Of 1933

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21 Aug, 2024

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The Emergency Banking Act of 1933 refers to legislation passed by the federal government to mitigate the economic problems triggered by the Great Depression of 1929. The purpose of the Emergency Banking Act of 1933 was to reform and re-establish citizens’ faith in American banks, which had taken a hit during this period. Due to the dismal state of economic affairs, people withdrew their deposits.

The Emergency Banking Act (EBA), sometimes called the Emergency Banking Relief Act, introduced several measures, some of which are still in effect. During this period, the Federal Deposit Insurance Corporation (FDIC) was established under the purview of the Banking Act of 1933 as an agency to safeguard customer deposits. It was one of the key measures undertaken to allow the government to handle emergency functions well.

What is the Emergency Banking Act Of 1933?

The Emergency Banking Act (EBA) refers to legislation passed by the Franklin D. Roosevelt government in 1933 to control the effects of the Great Depression and the Stock Market Crash 1929.
The Act included five sections known as Titles, which conferred special powers on government departments during a financial crisis.
The Emergency Banking Act of 1933 purpose was to restore customers’ faith in the American banking system and encourage them to hold their savings as deposits with banks.

Emergency Banking Act Of 1933 Explained

The Emergency Banking Act of 1933 was introduced to cushion the blow, which emerged due to the Great Depression and the Stock Market Crash of 1929. Here is a series of events that occurred in March 1933:

#1 - March 06, 1933, 1:00 pm

US President Franklin D. Roosevelt suspended all banking activities and declared a four-day bank holiday, including the Federal Reserve.

#2 - March 09, 1933

The President signed the Act, and Congress passed the legislation.

#3 - March 10, 1933

Executive Order 6073 facilitated the reopening of banks after the 4-day hiatus.

#4 - March 12, 1933

The President gave his first Fireside Chat, which conferred additional currency-issuing powers to the twelve federal reserve banks. He also divided the Act into five Emergency Banking Act of 1933 titles:

Title 1 conferred upon the President extraordinary powers during a financial or banking crisis. With this, a US President can act independently without consulting the Federal Reserve and make decisions about forex transactions, gold reserves, bank payments, etc.
Title 2 assigned powers to the Office of the Comptroller of Currency (OCC) to control and monitor the activities of banks with impaired assets. For this, a Conservator would be appointed to such banks.
Title 3 allowed the Secretary of Treasury to determine if a bank requires funds to survive or operate with the President’s approval. If the approval is received, the bank can receive capital from the Reconstruction Finance Corporation.
Title 4 granted Federal Reserve the right to issue emergency Federal Reserve Bank notes where the commercial bank’s assets acted as a guarantee.
Title 5 allowed the legislation to come into force, and the provisions were declared effective from that day.

#5 - March 13, 1933

Roosevelt announced that commercial banks in the 12 Federal Reserve cities would reopen immediately.

#6 - March 14, 1933

Banks in about 250 cities with recognized clearing houses were opened. Finally, other banks were also opened on March 15 after they were examined and declared sound.

Examples

Let us discuss a few examples to understand the utility and provisions of the Act well.

Example #1

Consider this hypothetical example. XYZ is a bank established in 1920. On March 06, the government demanded that the bank halt its operations. Over the next few days, a clearing body examined and monitored the bank to evaluate its financial position. The bank was declared sound and was given the green light to operate from March 14.

Example #2

The collapse of Silicon Valley Bank and Signature Bank spread disquiet and trepidation in the United States, which traveled across the globe. According to Forbes, the bank’s collapse might be linked to the government’s policies. The EBA introduced policies to insure customers’ deposits up to a maximum limit of $250,000. Forbes calls Silicon Valley Bank’s collapse a fear-induced liquidity crisis, which could have been addressed if the deposits had been fully insured. Now that 90 years have elapsed since the historic moment, it is time the insurance offers full coverage.

Significance

The immediate effects of the Great Depression in the United States caused unprecedented damage to the booming American economy. Here are some Emergency Banking Act of 1933 facts to study. Customers were withdrawing their deposits, and bank accounts stood empty. People had lost faith in banks and returned to the practice of holding their savings at home. Something had to be done to regain customers’ confidence. Here’s where government assurance helped.

It paved the way for the American financial system to evolve from holding basic deposits to rendering advanced services. The FDIC and the President’s additional powers guaranteed Americans their money would be safe with the banks. The passage of the EBA was so significant that it changed the face of the American banking system forever. The changes introduced almost a century ago still hold relevance.

Most importantly, it was one of the prominent events that made the US the most powerful economy in the world.

Impact

Let us see how the EBA affected the American financial structure:

The establishment of the Federal Deposit Insurance Corporation (FDIC) was a key milestone in boosting people’s confidence in the banking system. It insured customers’ bank accounts.
The President of the US received extraordinary powers to act independently of the Federal Reserve during financial crises.
The US and the dollar were taken off the gold standard monetary system through the introduction of the Emergency Banking Act of 1933, Titles 1 and 4.
The then market indices, Dow Jones Industrial Average and New York Stock Exchange, showed significant price increases after the banks reopened.
The Emergency Banking Act of 1933 strengthened American banks by restoring people’s confidence in American banks. Once the banks reopened, customers instantly returned to banks to deposit their savings, thanks to the FDIC, which insured customers’ bank accounts.

Frequently Asked Questions (FAQs)

1. Is the Emergency Banking Act of 1933 still in effect?

Yes. The EBA is still in effect today. Specifically, two important provisions are still relevant. The Federal Deposit Insurance Corporation (FDIC) insures customer deposits, guaranteeing people the money they have deposited with the banks is safe. However, there is a $250,000 limit on federal insurance. Secondly, the extensive powers conferred by the Act on the President still hold.

2. Was the 1933 Emergency Banking Relief Act successful?

Yes. The EBA was largely successful. Once the banks reopened, customers redeposited more than 66% of the amounts they had previously withdrawn. Further, Dow Jones Industrial Average and New York Stock Exchanges performance rose considerably on the same day.

3. Was the Emergency Banking Act of 1933 relief, recovery, or reform?

The 3 Rs of the Congressional New Deal are Relief, Recovery, and Reform. The EBA is an excellent example of relief policies. EBA’s primary goal was to reassure bankers and encourage them to return their savings to the bank.