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Initial Attempts at Insurance and the Deepening Banking Crisis

Initial Attempts at Insurance and the Deepening Banking Crisis

The number of bills submitted to both the House and Senate for deposit insurance began to rise in late 193 1. In the 7 1st Congress (April 1929-March 1931), six bills were submitted to the House of Representatives, where they died in committee. 

Between the opening of the first session of the 72d Congress in December 1931 and its closure in July 1932, five bills were submitted to the Senate and fifteen to the House of Representatives. The only bill to leave committee was Steagall’s second bill introduced on 14 April 1932. 

The House passed the bill quickly on 27 May 1932, when, after a voice vote, it was given unanimous assent. Despite this success, the bill died in the Senate Banking and Currency Committee, where Senator Glass, an adamant opponent of deposit insurance, held sway. 

Pushing his own panacea, the separation of commercial and investment banking, Glass sponsored banking reform bills that made no progress in Congress, especially the House, where there was strong sentiment for some form of deposit insurance. 

By the end of the year, Glass would not accede to deposit insurance, but he did include a provision for a Liquidation Corporation to speed up the liquidation of failed banks (Bums 1974, 25). 

An impasse had been reached in Congress where Congressman Steagall would not agree to any bill that failed to include deposit insurance, and Senator Glass would not consent to any bill that included it. There was little in the elections of 1932 to encourage the supporters of deposit insurance. 

Sensing victory in the elections, the Democratic Party adopted several planks on bank reform, but these all bore the imprimatur of Senator Glass. 

The party called for quicker methods of realizing on assets for the relief of deposits in suspended banks, more rigid supervision to protect deposits, and the separation of commercial and investment banking. Roosevelt supported these planks and took Glass’s side. 

The presidential candidate was himself strongly opposed to the idea of guaranteeing deposits (Bums 1974,22-24). Clearly, the Democratic landslide did not make the adoption of deposit insurance certain. The banking situation continued to deteriorate in late 1932. 

The most important source of trouble, the continued deflationary monetary policy, was not reversed. In addition, the effectiveness of the RFC may have been compromised. In July 1932, Congress required that the names of banks receiving RFC loans be published beginning in August. 

Banks may have feared damage to their reputation or a run if they borrowed from the RFC. The problem became worse when, in January 1933, after a House resolution, the RFC made public all loans extended before 1933. 

Although the law only required reports to be made to the president and the Congress, the Speaker of the House, John Nance Garner, instructed the clerk to make the reports public on the grounds that they wanted to prevent favoritism in the loans. 

Availability of funds was not reduced, but new loans to open banks in the fourth quarter of 1932 were smaller than in any of the previous three quarters (Friedman and Schwartz 1963, 325; Upham and Lamke 1934, 148). 

As more banks failed, the crisis in the payments systems intensified. Restrictions on withdrawals that had been local or voluntary proved insufficient. The first state banking holiday was declared in Nevada on 31 October 1932, when runs on individual banks threatened to involve the whole state. 

This holiday was originally set for a twelve-day period but was subsequently extended (Friedman and Schwartz 1963, 429). Iowa declared a holiday on 20 January 1933, and Louisiana declared a holiday to help the banks in New Orleans on 3 February. 

Grave banking problems spread to the industrial Midwest. The Detroit banks were on the verge of collapse with over a million depositors, and Michigan declared a bank holiday 14 February. In the second week of the holiday, depositors were permitted to draw out only 5 percent of their balances. 

In Cleveland, all but one bank suspended payments on 27 February, restricting withdrawals to under 5 percent (Jones 1951, 69-70). Even when the RFC stepped in, it could not halt suspensions. 

By July 1932, sixty-five Chicago banks had obtained RFC loans, but by February 1933 only eighteen remained open (Upham and Lamke 1934, 156). Declarations of holidays and moratoria picked up momentum. 

By 3 March, holidays limiting withdrawals had been declared by executive order or legislation in thirty-six states. On 4 March, the banking-center states of Illinois, Pennsylvania, New York, and Massachusetts were among six more states that declared holidays (Patrick 1993, 132). 

The holidays increased withdrawal pressures on banks in other states, especially on the New York City banks. There was also fear of a run on the dollar, as many believed the new administration would devalue the dollar (Wigmore 1987). 

The Federal Reserve responded by raising discount rates in February 1933, and it failed to offset this contractionary move, scarcely increasing its total holdings of government securities (Friedman and Schwartz 1963,326).

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