Why did FDR's Bank Holiday Succeed?

12 Pages Posted: 16 Jul 2009

See all articles by William L. Silber

William L. Silber

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

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Abstract

After a month-long run on American banks, Franklin Delano Roosevelt proclaimed a Bank Holiday, beginning March 6, 1933, that shut down the banking system. When the banks reopened on March 13, depositors stood in line to return their hoarded cash. This article attributes the success of the Bank Holiday and the remarkable turnaround in the public’s confidence to the Emergency Banking Act, passed by Congress on March 9, 1933. Roosevelt used the emergency currency provisions of the Act to encourage the Federal Reserve to create de facto 100 percent deposit insurance in the reopened banks. The contemporary press confirms that the public recognized the implicit guarantee and, as a result, believed that the reopened banks would be safe, as the President explained in his first Fireside Chat on March 12, 1933. Americans responded by returning more than half of their hoarded cash to the banks within two weeks and by bidding up stock prices by the largest ever one-day percentage price increase on March 15, the first trading day after the Bank Holiday ended. The study concludes that the Bank Holiday and the Emergency Banking Act of 1933 reestablished the integrity of the U.S. payments system and demonstrated the power of credible regime-shifting policies.

Keywords: Bank Holiday, Great Depression, Federal Reserve, deposit insurance

JEL Classification: E42, N22, E58

Suggested Citation

Silber, William L., Why did FDR's Bank Holiday Succeed?. Economic Policy Review, Vol. 15, No. 1, pp. 19-30, July 2009. Available at SSRN: https://ssrn.com/abstract=1434110

William L. Silber (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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