2015 Feb 7, 5:17pm
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The Unnecessary February 1933 Bank Panic: FDRâ€™s 10-Day Fumble
In truth, the banking liquidation was over by Election Day, failures and losses had virtually disappeared, and as late as the first week of February 1933, according the Fedâ€™s daily currency reports, there were no unusual demands for cash.
The legendary â€œbank runsâ€ occurred almost entirely during the last two weeks before FDRâ€™s inauguration. The trigger was Henry Fordâ€™s vicious spat with his former partner and then Michigan Senator, James Couzens, over responsibility for the failure of a go-go banking group in Detroit that had been started by his son Edsel and Goldman Sachs. Always Goldman!
The hapless Herbert Hoover secretly wrote FDR begging him to cooperate in resolving the Michigan banking crisis. Instead, Roosevelt failed to answer the Presidentâ€™s letter for two weeks; lost Carter Glass as his Treasury Secretary because the President-elect refused to affirm his commitment to the sound money platform on which he had campaigned; and allowed Tugwell to leak to the press a radical plan to reflate the economy by reneging on the dollarâ€™s 100-year old linkage to one-twentieth ounce of gold.
Within days there was a massive run on gold at the New York Fed and a scramble for cash at teller windows across the land. Unlike historians today, citizens back then knew that the Fed could not legally issue more currency unless it had 40 percent gold-backingâ€”hence the sudden outbreak of currency hoarding.
In this context, the daily figures for currency outstanding give ringing evidence of FDRâ€™s culpability for the midnight-hour run on the banks. After rising by a trivial $8 million per day in early in the month, cash outstanding rose by $200 million per day by late February and by a staggering half billion dollars on the day before the FDRâ€™s inauguration. All told, 80 percent of the increase in currency outstandingâ€”from $5.6 billion to $7.5 billionâ€”occurred in the last ten days before FDR took office.
Then, even more fantastically, nearly all of the hoarded cash flowed back into the banking system on its own when 95 percent of the banks were re-opened in an â€œas is, where isâ€ condition during the three weeks after FDRâ€™s inauguration. Moreover, the mass re-opening scheme was actually drafted and executed by Hoover hold-overs at the Treasury, and had been completely accomplished before the heralded banking reforms of the New Deal and deposit insurance had even had Congressional hearings.
In short, the banking system never did really collapse and the true problem was bad debt and insolvencyâ€”not Fed errors or an existential crisis of capitalism.