By John Steele Gordon
In 1921 there were 29,798 banks in operation in the United States. On March 6, 1933, there were none.
Most American banks in 1921 were rural, single-branch, state-chartered and were not members of the Federal Reserve.
Rural America had prospered as never before during the First World War, as the U.S. greatly increased agricultural exports to make up for the fall in European exports. But as European agriculture recovered beginning in 1919, that rural prosperity ended.
Worse, as horses and mules rapidly gave way to automobiles and tractors in these years, the third of farmland that had been planted to fodder crops, such as hay and oats, was shifted over to food for people. As the food supply rose quickly while demand rose slowly, prices fell and farmers faced depression far earlier than did urban America.
As depression spread, the weak rural banks began to fail. By the late 1920s, they were going under at the rate of over 600 a year. The situation got much worse with the stock market crash in late 1929, as the whole country slid into depression.
As the Great Depression deepened in 1930, bank failure increased, but not alarmingly—at least not until the last two months of the year, when 600 banks failed, making a yearly total of 1,352.
In May 1931, Creditanstalt, Austria’s largest bank, failed, followed two months later by Danat Bank, Germany’s largest. Faith in all banking systems sharply eroded. After all, if banks as large as these could fail, what bank couldn’t?
In September 1931, Britain went off the gold standard, a severe psychological blow. In just the next month, 500 American banks failed. A total of 2,293 banks had failed in this country that year.
In 1932, the American economy imploded. The federal deficit soared while GDP was a mere 56 percent of what it had been three years earlier. The number of hours worked was fully 40 percent below the level of 1929. Bank failures that year reached 1,453, making a three-year total of 5,098.
On February 14, 1933, two weeks before Franklin Roosevelt would be inaugurated, the governor of Michigan had to order all his state banks closed for eight days to stop a fast-spreading panic from destroying the state’s banking system altogether.
The panic immediately spread to other states. By inauguration day, banks were entirely closed in 32 states and nearly all closed in six others. Even in the 10 states that still had functioning banking systems, withdrawals were sharply limited, often to just $10 a day.
On inauguration day itself, the New York Stock Exchange announced it would not open that day and did not say when it would resume business. The financial heart of the country’s economy had nearly ceased to beat.
In office, Roosevelt immediately ordered all the nation’s banks closed while the government prepared the Emergency Banking Relief Act. Presented to the House on March 9, 1933, it passed by acclamation 38 minutes later. The Senate passed it the same day and FDR signed it into law that evening.
It set Monday, March 13, 1933, as the day for banks declared sound to reopen, and Roosevelt gave his first fireside chat the night before. With a vast audience, he told the American people that it would be “safer to keep your money in a reopened bank than under the mattress.”
They believed him. Money and gold began to flow back into the banking system and the heart of the American economy began to beat again.
But it had been a very, very near-run thing.
