The Chicago Plan & New Deal Banking Reform

The Chicago Plan & New Deal Banking Reform

The Chicago Plan & New Deal Banking Reform

The Chicago Plan & New Deal Banking Reform

Synopsis

This work presents a comprehensive history and evaluation of the role of the 100 percent reserve plan in the banking legislation of the New Deal reform era from its inception in 1933 to its re-emergence in the current financial reform debate in the US.

Excerpt

More than sixty years have passed, since the U.S. economy degenerated into virtual chaos during the four months from Roosevelt's election in November of 1932 to his inauguration on March 4, 1933. Aspects of this chaotic downward process included an unprecedented wave of bank failures, a collapse of output and asset prices, and an explosion of unemployment. The popular story, that upon being inaugurated President Roosevelt closed the banks, misrepresents what happened. The banks in more than thirty states had been closed by their governors before inauguration day. After his inauguration, which was on a Saturday, the new President was confronted with the news that the New York banks would not be able to open on the following Monday. The closing of the banks was a preemptive strike, aimed to prevent a further cataclysmic explosion of bank and financial institution failures which would be accompanied by a horrendous decline of asset prices.

The closing of the banks moved the solution of the immediate problem of broad insolvency of banks to the legislative sphere of Washington, rather than leaving it to the machinations of the financial community.

The resolution of the bank holiday took the form of a quick examination of the closed banks, which divided banks into three classes: those that could reopen without any aid, those that were deemed so thoroughly bankrupt that they were. to remain closed and be liquidated and those that were reopened after an infusion of equity from the Reconstruction Finance Corporation, art agency of the federal government. Some 50 percent of the banks that reopened after the bank holiday received an equity infusion, that is, were at least partially government owned.

The Federal Reserve System, which had been created, in the aftermath of the banking panic of 1907, in the belief that a central bank could contain panics, was unable to prevent the collapse of the financial system from 1929 to 1933. Furthermore, it was not the main player in the reopening of the banks. In 1933 the Federal Reserve System, itself, was a failure.

As a result of this history of bank failures and the inability of the . . .

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