In mid-February 1933, banking difficulties developed in Detroit, Michigan. The RFC was willing to make a loan to the troubled bank, the Union Guardian Trust, to avoid a crisis. The bank was one of Henry Ford's banks, and Ford had deposits of $7 million in this particular bank. Michigan Senator James Couzens demanded that Henry Ford subordinate his deposits in the troubled bank as a condition of the loan. If Ford agreed, he would risk losing all of his deposits before any other depositor lost a penny. Ford and Couzens had once been partners in the automotive business, but had become bitter rivals. Ford refused to agree to Couzens' demand, even though failure to save the bank might start a panic in Detroit. When the negotiations failed, the governor of Michigan declared a statewide bank holiday. In spite of the RFC's willingness to assist the Union Guardian Trust, the crisis could not be averted. The crisis in Michigan resulted in a spread of panic, first to adjacent states, but ultimately throughout the nation. By the day of Roosevelt's inauguration, March 4, all states had declared bank holidays or had restricted the withdrawal of bank deposits for cash. As one of his first acts as president, on March 5 President Roosevelt announced to the nation that he was declaring a nationwide bank holiday. Almost all financial institutions in the nation were closed for business during the following week. The RFC lending program failed to prevent the worst financial crisis in American history.
The crisis in Michigan resulted in a spread of panic, first to adjacent states, but ultimately throughout the nation. By the day of Roosevelt's inauguration, March 4, all states had declared bank holidays or had restricted the withdrawal of bank deposits for cash. As one of his first acts as president, on March 5 President Roosevelt announced to the nation that he was declaring a nationwide bank holiday. Almost all financial institutions in the nation were closed for business during the following week. The RFC lending program failed to prevent the worst financial crisis in American history.
Chicago banking panic, June 1932
James (1938) argues that the panic was triggered by several factors, including declines in real estate values, falling local utility stocks, and a well-publicized local case of bank fraud and mismanagement. In addition to these problems, the Chicago municipal government had been undergoing significant strain since 1931. The government failed to make payments on its municipal bonds in January 1932, and beginning in 1931 intermittently withheld pay from government workers or issued scrip. In March 1932, payments to city workers were suspended indefinitely. The city government's revenue problem weakened the banks by limiting bank revenue from municipal bond coupons, and encouraging withdrawals by illiquid depositors.... James argues that interbank cooperation, and the intervention of informed third-parties, brought an end to the crisis, but his account of the crisis leaves unresolved whether the banks that failed during the panic were those most likely to be insolvent, or whether failing banks simply lacked the protection of the clearing house or correspondent banks for other reasons. In the following sections we address that question. .. In the case of the book net worth ratio, the sign was positive (contrary to our expectation). This is consistent with results from earlier work on similar data by White (1984, 126). In Tables 1b and 1c, we restrict our sample to banks for which we have stock price information, and add to our list of regressors the ratio of the market value of net worth to the market value of assets (assuming par valuation for debt). We also redefine the earnings to net worth ratio using the market rather than the book value of net worth. The market equity to asset ratio has the predicted negative sign and is statistically significant.... We conclude that failures during the panic reflected relative weakness in the face of a common asset value shock rather than contagion. That does not mean contagion was absent, nor does it mean that the run on Chicago banks is a myth. Rather, we think it means that - consistent with James (1938) account of the management of the banking crisis - cooperative intervention by the Chicago clearing house prevented the failure of banks that were known to be solvent until the runs by uninformed depositors subsided. Absent such cooperation, the failure experience during the panic of June 1932 could have been very different. [viz. +$550B redemptions, aborted, "electronically"] As in many other examples of banking panics prior to the Depression (Calomiris and Gorton, 1991, Calomiris and Schweikart, 1991, Calomiris, 1993), bank failures in Chicago in June 1932 were not a costly consequence of panic-induced contagion or confusion on the part of depositors about the riskiness of banks. Indeed, it may have been that identifying and closing insolvent banks helped to resolve the depositor information problems that had threatened solvent banks with runs during the panic. [emphasis added]
In the case of the book net worth ratio, the sign was positive (contrary to our expectation). This is consistent with results from earlier work on similar data by White (1984, 126). In Tables 1b and 1c, we restrict our sample to banks for which we have stock price information, and add to our list of regressors the ratio of the market value of net worth to the market value of assets (assuming par valuation for debt). We also redefine the earnings to net worth ratio using the market rather than the book value of net worth. The market equity to asset ratio has the predicted negative sign and is statistically significant....
We conclude that failures during the panic reflected relative weakness in the face of a common asset value shock rather than contagion. That does not mean contagion was absent, nor does it mean that the run on Chicago banks is a myth. Rather, we think it means that - consistent with James (1938) account of the management of the banking crisis - cooperative intervention by the Chicago clearing house prevented the failure of banks that were known to be solvent until the runs by uninformed depositors subsided. Absent such cooperation, the failure experience during the panic of June 1932 could have been very different. [viz. +$550B redemptions, aborted, "electronically"] As in many other examples of banking panics prior to the Depression (Calomiris and Gorton, 1991, Calomiris and Schweikart, 1991, Calomiris, 1993), bank failures in Chicago in June 1932 were not a costly consequence of panic-induced contagion or confusion on the part of depositors about the riskiness of banks. Indeed, it may have been that identifying and closing insolvent banks helped to resolve the depositor information problems that had threatened solvent banks with runs during the panic. [emphasis added]
Politics was also a factor in the handling of the assets of the closedUnion [Guardian] Trust, then a big prize as the largest bank in the city of Cleveland. Corporate lawyer A. V. CANNON†, one of the few Democrats on Union Trust's board, was instrumental in the city's obtaining funds for 175,000 unemployed in the Depression. He assumed the additional role, in the spring of 1933, of working to protect the saving deposits of thousands of Clevelanders with money in the two closed big banks, Guardian and Union Trusts. In April 1933 he went on radio station WTAM, at the top of the Union Trust building, to announce to the city that he would be chairman of a new national bank, to be created with assets from the two permanently closed banks. In the end, instead of creating a new bank, Cannon brought the large trusts from Union over to National City, until then a relatively small bank. While 1933 was the worst year in banking history in the nation and in Cleveland, it was a banner year for little National City [core bank, 2008], which tripled its assets, obtained the RFC regulator of the closed Guardian Trust as its new president (Sidney Congdon), and the former head of the Fourth Federal Reserve Bank (L. B. Williams) as its new chairman. To do this, National City reorganized its board so that half were trustees from the old Union Trust, including Cannon and GEORGE HUMPHREY† of Hanna Mining. (Cannon died unexpectedly a year later and the PLAIN DEALER ran a headline across the top of the front page because his death was considered important local news.)
While 1933 was the worst year in banking history in the nation and in Cleveland, it was a banner year for little National City [core bank, 2008], which tripled its assets, obtained the RFC regulator of the closed Guardian Trust as its new president (Sidney Congdon), and the former head of the Fourth Federal Reserve Bank (L. B. Williams) as its new chairman. To do this, National City reorganized its board so that half were trustees from the old Union Trust, including Cannon and GEORGE HUMPHREY† of Hanna Mining. (Cannon died unexpectedly a year later and the PLAIN DEALER ran a headline across the top of the front page because his death was considered important local news.)
During the winter of 1932-1933, banking conditions deteriorated rapidly. In retrospect, it is not possible to point to any single factor that precipitated the calamitous events of this period. The general uncertainty with respect to monetary and banking conditions undoubtedly played the major role, although there were specific events that tended to increase liquidity pressures within the system. Banks, especially in states that had declared bank moratoria, accelerated withdrawals from correspondents in an attempt to strengthen their position. Currency holdings increased significantly, partially in anticipation of additional bank moratoria. Additional liquidity pressures were brought about by concern relating to the future of the dollar. With the election of Franklin D. Roosevelt in November 1932, rumors circulated that the new administration would devalue, which led to an increase in speculative holdings of foreign currencies, gold and gold certificates. Unlike the period of international monetary instability in 1931, a significant amount of the conversions from Federal Reserve Notes and deposits to gold came from domestic sources. These demands placed considerable strain on New York City banks and, ultimately, on the Federal Reserve Bank of New York. It was the suddenness of the withdrawal demands in selected parts of the country that started a panic of massive proportions. State after state declared bank holidays. The banking panic reached a peak during the first three days of March 1933. ... As one of his first official acts, President Roosevelt proclaimed a nationwide bank holiday to commence on March 6 and last four days. Administration officials quickly began to draft legislation designed to legalize the holiday and resolve the banking crisis. Early in their deliberations they realized that the success of any proposed plan of action primarily would hinge on favorable public reaction. As noted by Raymond Moley, a key presidential adviser who attended many of the planning sessions: We knew how much of banking depended upon make-believe or, stated more conservatively, the vital part that public confidence had in assuring solvency.4 To secure public support, officials formulated a plan that relied on orthodox banking procedures.[emphasis added]
Additional liquidity pressures were brought about by concern relating to the future of the dollar. With the election of Franklin D. Roosevelt in November 1932, rumors circulated that the new administration would devalue, which led to an increase in speculative holdings of foreign currencies, gold and gold certificates. Unlike the period of international monetary instability in 1931, a significant amount of the conversions from Federal Reserve Notes and deposits to gold came from domestic sources. These demands placed considerable strain on New York City banks and, ultimately, on the Federal Reserve Bank of New York.
It was the suddenness of the withdrawal demands in selected parts of the country that started a panic of massive proportions. State after state declared bank holidays. The banking panic reached a peak during the first three days of March 1933. ...
As one of his first official acts, President Roosevelt proclaimed a nationwide bank holiday to commence on March 6 and last four days. Administration officials quickly began to draft legislation designed to legalize the holiday and resolve the banking crisis. Early in their deliberations they realized that the success of any proposed plan of action primarily would hinge on favorable public reaction. As noted by Raymond Moley, a key presidential adviser who attended many of the planning sessions:
We knew how much of banking depended upon make-believe or, stated more conservatively, the vital part that public confidence had in assuring solvency.4
To secure public support, officials formulated a plan that relied on orthodox banking procedures.[emphasis added]
Schlesinger
The tenets of the First New Deal were that the technological revolution had rendered bigness inevitable; that competition could no longer be relied on to protect social interests; that large units were and opportunity to be seized rather than a danger to be fought; and that the formula for stabilit in the new society must be combination and ooperation under larger federal authority. This meant the creation of new institutions, public and private, to do what competition had once done (or was supposed to have done) in the way of balancing the economy --institutions which might well alter the existing pattern of individual economic diceision, especially on investment, production, and price. ... The United States was not unique, of course, in this self-absorption. Everywhere governments were building economic walls to seal off their lands from the global decline and to protec their national recovery programs from the export of other nations' depression. In looking homeward, the United States was sharing --as it had been for some years-- in a world-wide movement toward economic nationalism. Yet nationalism could take diverse forms; and the nationalism of the First New Deal was different from that of the preceding Republican administration. The nationalism of Herbert Hoover aimed to protect the domestic industrial and agricultural structure by raising the tariff. At the same time, however, it clung to the international gold standard. The nationalism of AAA [Agricultural Adjustment Act, May '33] and NRA [National (Industrial) Recovery Act, June '33], on the other hand, aimed to free the national economy from international monetary institutions which prevented domestic planning; at the same time, it saw little point in increasing tariff barriers. Tte conservative version of economic nationalism was thus nationalist in trade, internationalist in finance; the liberal version, internationalist in trade, nationalist in finance. [1958: 179-185]
The United States was not unique, of course, in this self-absorption. Everywhere governments were building economic walls to seal off their lands from the global decline and to protec their national recovery programs from the export of other nations' depression. In looking homeward, the United States was sharing --as it had been for some years-- in a world-wide movement toward economic nationalism.
Yet nationalism could take diverse forms; and the nationalism of the First New Deal was different from that of the preceding Republican administration. The nationalism of Herbert Hoover aimed to protect the domestic industrial and agricultural structure by raising the tariff. At the same time, however, it clung to the international gold standard. The nationalism of AAA [Agricultural Adjustment Act, May '33] and NRA [National (Industrial) Recovery Act, June '33], on the other hand, aimed to free the national economy from international monetary institutions which prevented domestic planning; at the same time, it saw little point in increasing tariff barriers. Tte conservative version of economic nationalism was thus nationalist in trade, internationalist in finance; the liberal version, internationalist in trade, nationalist in finance. [1958: 179-185]
The "Blueprint for Modernization," of course, resolves a neo-liberal, totalitarian agenda to guarantee income by nationalizing financial products to conform to US Basel Accord (BCBS) accounting standards of international trade. We all will be in this together. Diversity is the key to economic and political evolution.
