Stockman (4) Banking Crisis 1933

In his book The Great Deformation, David Stockman argues that Franklin Roosevelt created the banking crisis of 1933. On the eve of his inauguration, most of the US banking system was still solvent, including the great money center banks of New York: the Chase Nation Bank, First National Bank, and the Morgan Bank. There had been no bank runs on Wall Street, because the great banks had been fully and adequately collateralised on the stock loans and were sitting on cash reserves up to 20 percent of their deposits.

The run of bank failures was largely contained within the border of the oversized agricultural industrial export economy. When they collapsed, over-loaned banks in industrial boom towns like Chicago , Detroit Toledo, Youngstown Cleveland and Pittsburgh had taken heavy hits.

In the agricultural hinterlands, the problems went back to the agricultural boom caused by the disruption of European agriculture during the 1914-18 war. This resulted in an orgy of land speculation. Once the agricultural lands in Europe came back into production in 1920, farm prices dropped dramatically and continued sinking for the rest of the decade. Thousands of small banks that had been caught up into the land boom failed. Most of these were small rural banks located in small towns. This was partly the result of anti-branch laws that rural legislators had forced on the state. These small banks were insolvent and had to be closed.

After the 1929 share market crash, the rate of bank failure increased significantly, but were not national in scope. They were concentrated in the agriculture and industrial interior and were centred on cities or banking chains which had indulged heavily in speculative real estate lending and other unsound practices. In contrast, the Great Loop banks remained solvent and experienced no lines at their teller windows. When banks failures shifted eastward, it was among newly formed “trust banks” which had been charted under state law with far less stringent requirements for capital and cash reserves than was the case with the nation banks. By the time of the election, bank failure had slowed significantly.

Prior to his inauguration Roosevelt created uncertainty by remaining silent about his plans for gold and the currency. Twenty percent of the nation’s gold stock was withdrawn. Once in power he announced a four-day bank holiday. However, when the banks were opened, they continued operating without any significant changes. Within the following ten days, nearly all of the hoarded currency had flowed back into the banking system, and the Feds gold reserves soon reached pre-crisis levels.