By 1933, the Great Depression had been ravaging the United States economy for years. President Herbert Hoover had attempted to use conventional tools to stabilize the economy, but nothing had worked. The Emergency Bank Act of 1933 was the tool that finally worked. It restored consumer confidence in the financial industry and put a halt to the economic tailspin the US was in with legislation that shapes the US banking industry even today. The economy was in a vicious cycle, as the situation got worse, consumers lost confidence in the banking sector so they sold their investments and withdrew their money from banks, making the situation even worse. To stop this, the Act was aimed at restoring consumer confidence in the banking sector. The Act took the following steps. Restoring confidence in the banking sector is synonymous with guaranteeing banks will not fail. Some believe these government guarantees are what lead to the 2008 financial crisis. Banks, investors and depositors knew that governments would bail out banks with the powers created in the 1933 Act, so they were not as careful with how the banks were managed. These people knew that the systemic risk that these "too big to fail" banks posed, made them extra safe; encouraging moral hazard.What Is the Emergency Banking Act?
Emergency Banking Act Importance
Long Term Implications
Emergency Banking Act of 1933 FAQs
The Emergency Banking Act of 1933 was introduced following the Great Depression to halt the national economic tailspin and restore consumer confidence.
The Depression was ravaging the US economy. President Hoover had unsuccessfully tried conventional tools to stabilize the economy. After his inauguration, incoming president Franklin Delano Roosevelt's Emergency Banking Act of 1933 was what finally worked.
The most important and lasting section of the Act was the creation of Federal Depository Insurance, a promise that any money deposited with a bank would be guaranteed by the government, even if the bank failed.
The President and executive branch could now restrict banking operations, regulate all banking functions and make loans to banks.
Banks, investors and depositors knew that governments would bail out banks with the powers created in the 1933 Act, so they were not as careful in their management as they should have been. They knew that the systemic risk that these “too big to fail” banks posed made them extra safe no matter how morally suspect their actions were.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.