Why Did FDR’s Bank Holiday Succeed?

1. Introduction On Sunday, March 5, 1933, after a month-long run on American banks, the newly inaugurated President of the United States, Franklin Delano Roosevelt, proclaimed a four-day suspension of all banking transactions, beginning the following day. The nation's stock exchanges also closed, even though they were not mentioned in the President's executive order. On Thursday, March 9, Roosevelt did not reopen the banks as planned; rather, he extended the closure for three days. Americans should have reacted in horror to the President's proclamation and his decision to abandon his original schedule. Instead, they waited to hear his plan. Roosevelt's fifteen-minute radio address to the American people on Sunday evening, March 12-his first Fireside Chat--informed the public that only sound banks would be licensed to reopen by the U.S. Treasury: "I can assure you that it is safer to keep your money in a reopened bank than under the mattress." (1) Much to everyone's relief, when the institutions reopened for business on March 13, depositors stood in line to return their hoarded cash to neighborhood banks. Within two weeks, Americans had redeposited more than half of the currency that they had squirreled away before the suspension. The market registered its approval as well. On March 15, 1933, the first day of trading after the extended closure, the New York Stock Exchange recorded the largest one-day percentage price increase ever. (2) With the benefit of hindsight, the nationwide Bank Holiday in March 1933 ended the bank runs that had plagued the Great Depression. How, then, did Roosevelt manage to accomplish in one week what Herbert Hoover failed to do in three years? Contemporary observers consider the Bank Holiday and the Fireside Chat a one-two punch that broke the back of the Great Depression. According to Beard and Smith (1940, p. 78), "the sudden nationwide holiday performed the same function for the bank panic as may a slap in the face for a person gripped by unreasoning hysteria." Allen (1939, p. 111) notes that the bank reopening succeeded because "the people had been catapulted and persuaded by a president who seemed to believe in them and was giving them action...." Alter (2006, p. 269) confirms the importance of Roosevelt's communication skills by quoting Will Rogers on the President's description of the reopening: "He made everyone understand it, even the bankers." Roosevelt's oratory certainly played an important role, but only the financially naive would have believed that the government could examine thousands of banks in one week to identify those that should survive. According to Wigmore (1987, p. 752), "The federal review procedure for reopening banks also had too many weaknesses to create much confidence, given the number of banks reopened, the speed with which they opened, and the lack of current information on them. There were no standards for judging which banks should reopen." Thus, Temin and Wigmore (1990, p. 491) dismiss the importance of the Bank Holiday: "The value of stocks ... rose sharply from its trough in March-at the time of the Bank Holiday-to a peak in July.... This abrupt turnaround was hardly the result of the interregnum or the Bank Holiday itself. They contained bad news about the health of the economy. Only after Roosevelt's commitment to inflationary policies became clear during the Hundred Days did the value of stocks rise. The stock market rose and fell with the value of the dollar during 1933, illustrating dramatically the link between devaluation and expectations for the economy." Temin and Wigmore (pp. 488-9) ignore the March 15, 1933, stock price increase in their assessment of the Bank Holiday. They go further to state: "For the first month the administration was absorbed with the Bank Holiday and preparing for action. Stock, bond, foreign exchange, and commodities markets were quiet and little changed" [italics added]. …