Emergency Banking Act of 1933
What is the Emergency Banking Act?
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.
Emergency Banking Act Importance
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.
- It called for a 4 Day Banking Holiday: The government forced all banks to shut their doors for at least four days as each was inspected for solvency. Only after having passed an inspection was a bank allowed to reopen.
- It increased Executive powers during financial crises: The President and executive branch could now restrict banking operations, regulate all banking functions and make loans to banks.
- It created FDIC Insurance: Without a doubt 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.
Long Term Implications
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.