BLAST from the PAST

By Patton, Carol; Sinken, Bill | Independent Banker, April 2005 | Go to article overview

BLAST from the PAST


Patton, Carol, Sinken, Bill, Independent Banker


Editor's Note: Look for various stories on ICBA's 75th anniversary in every issue of Independent Banker for the next 12 months. Next month's issue features the life and times of the 1940s.

A look back at the tumultuous 1930s in banking and ICBA's founding

Nllions of Americans were glued to their radio on March 12, 1933. The U.S. economy hit rock bottom. The stock market lost 89.5 percent of its value. Unemployment peaked at 24.9 percent. By then, roughly 9,000 banks had failed. Farm foreclosures averaged 20,000 a month. And more than one million people were homeless while one out of every four families was on relief. People were quickly running out of money, out of resources and out of hope.On the radio that evening was the nation's 32nd president, Franklin D. Roosevelt, who was addressing the nation in what would soon be known as his first fireside chat. He would deliver approximately 30 such broadcasts during his four-term presidency, nearly half during the 1930s on topics ranging from the economy and drought conditions to the European war.

This broadcast, however, had one important goal: to alleviate people's fears about the safety and stability of banks, which held their life savings. Just weeks before, millions panicked, storming banks to convert their deposits to cash. By the afternoon of March 3, the majority of banks couldn't open because they could no longer meet the rush of customer demand.

It was then that the president issued a proclamation for the nation's first bank holiday, which closed all banks on March 6 for four days, so they could restructure and restore people's faith in their ability to efficiently manage their money.

"We had a bad banking situation," said President Roosevelt in the radio broadcast. "Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people's funds. They had used the money entrusted to them in speculations and unwise loans. This was, of course, not true in the vast majority of our banks, but it was true in enough of them to shock the people for a time into a sense of insecurity and to put them into a frame of mind where they did not differentiate, but seemed to assume that the acts of a comparative few had tainted them all. It was the government's job to straighten out this situation and do it as quickly as possible-and the job is being performed."

The 1930s were indeed a dark chapter in U.S. banking history. After the Federal Reserve Act was passed in 1913, there were four major banking panics during the decade: one in 1930, two in 1931, a local panic in Chicago in 1932 and the last one in 1933. But good things can be born out of the bad.

This national crisis also prompted the federal government to introduce sweeping banking laws that are still enforced today. In fact, more landmark banking legislation was enacted during the 1930s than in any other decade. At the same time, ICBA-known then as Independent Bankers Association-was formed and, unknown by its founding community bankers at the time, would grow into an influential force that would help independent community banks nationwide survive and flourish into the next millennium.

LEGISLATIVE REMEDIES

Early in 1933, many fingers pointed to corrupt bankers and brokers for the nation's bank failures. Congress responded by creating the Banking Act of 1933.

Better known as the Glass-Steagall Act, it stabilized the economy and restored people's confidence in banks. The act combined two bills. One was from Rep. Henry Bascom Steagall, a four-term Alabama congressman and chairman of the Committee on Banking and Currency, which established the FDIC. The other was from Sen. Carter Glass, a fiscally conservative Virginia Democrat and former Treasury secretary, which separated commercial and investment banking.

Ironically, President Roosevelt and William H. Woodin, U.S. secretary of the Treasury, both opposed an independent federal agency that would guarantee bank deposits because of its expense and the belief that it would subsidize poorly managed banks. …

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