The Fed again raised discount rates and acceptance buying rates in February 1933, as it had during the fall of 1931, to help slow the drain on gold reserves. (For additional information, see the Federal Reserve Board’s annual report for 1933.) Thousands of people stand in line to receive 30% of their deposits during the National Banking Emergency of 1933.(Photo: Bettmann/Bettmann/Getty Images) According to Wicker, following Michigan’s banking holiday, which was declared on February 14 after troubled Detroit banks were unable to secure loans from the RFC, the drain on gold reserves accelerated. During this period, fears that Roosevelt would devalue the currency led private banks and others with dollar assets to accumulate foreign currencies (Friedman and Schwartz 1963). The Fed and commercial banks once again were concerned about a potential external drain of the US gold stock. The spread of these statewide banking holidays increased the demand for currency in other states, with New York City banks feeling the most pressure.

For this reason, states began declaring state banking holidays (Nevada was first, on October 31, 1932), which temporarily relieved banks of meeting their debt obligations. Banks could have borrowed from the RFC but were reluctant to do so, in part because their names would be published and their action might be seen as a sign of weakness, which might then lead to a run on the bank (Friedman and Schwartz 1963).Ī bank run on individual banks in a given state threatened other banks in that state. Many factors contributed to the national banking panic, including uncertainty over the economic policies of President Roosevelt, who was elected in November 1932 but did not take office until March 1933. The Midwest and West, especially, saw an increase in bank failures toward the end of 1932 in early 1933, a national panic arose.

During the first half of 1932, the bank failure epidemic ended (Friedman and Schwartz 1963).Įconomic conditions improved by the summer of 1932, but relief did not last. In addition, the Fed began a program of large-scale open market purchases in April 1932 by the time the program had ended in August, the Fed had purchased about $1 billion in government securities. To try to relieve the strain in the banking system, in January 1932, the US Congress created the Reconstruction Finance Corporation (RFC), which had the authority to lend to banks, other financial institutions, and railroads. According to Friedman and Schwartz, the internal drain wouldn’t have been so severe if the Fed had increased open market purchases as well.Īlthough the external drain on the US gold stock ended by late October, bank failures continued. The goal was to encourage investors to deposit money in the United States by providing a relatively higher relative yield on US financial assets (Wheelock 1992). The Federal Reserve Bank of New York responded to the external drain in the gold stock by raising its discount rate and acceptance buying rate in early October (Friedman and Schwartz 1963). Together, these external and internal drains reduced the money supply, deepening the deflation which propagated the depression. At the same time, depositors became concerned about the safety of banks and withdrew currency from their accounts, creating an internal drain on the banking system (Friedman and Schwartz 1963). This external drain caused a large reduction in the US gold supply. Foreigners became concerned the United States would do the same and began converting their dollar assets to gold. On September 21, 1931, Great Britain left the gold standard-that is, withdrew its promise to provide a specific amount of gold in exchange for its bank notes (Wicker 1996). The nature of the financial crisis changed in the fall of 1931, when the commercial banking crisis spread throughout the entire nation.

The banking panics in 1930 and early 1931 were regional in nature.

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