Haris Ashley
The New Deal was an amalgam of dozens of programs and agencies created by the Roosevelt Administration and Congress during Roosevelt's first term in 1933. One of the most notable programs was the Emergency Banking Act, which was created to restore public confidence in the nation's financial system after a series of bank runs and the stock market crash of 1929. The Act established the Federal Deposit Insurance Corporation (FDIC), which insured bank deposits of up to $2,500, ending the risk of bank runs and providing stability to the financial system. This program continues to support bank customers' confidence by insuring their deposits to this day.
| Characteristics | Values |
|---|---|
| Name of the program | Emergency Banking Act of 1933 |
| Aim | To restore public confidence in the nation's financial system after a weeklong bank holiday |
| Impact | The Act prevented bank runs by insuring bank deposits up to $2500 at no cost, thus restoring confidence in the banks and boosting the stock market |
| Other Provisions | The Act granted the president greater power to respond to financial crises independently of the Federal Reserve |
| It also created the Federal Deposit Insurance Corporation (FDIC) to insure personal bank accounts |
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What You'll Learn
The Emergency Banking Act of 1933
In March 1933, immediately after his inauguration, President Franklin Roosevelt called a special session of Congress and declared a four-day national banking holiday. All banks, including the Federal Reserve, were shut down to prevent any more runs by depositors. During this time, the federal government inspected all banks, reopening those that were solvent, reorganizing those that could be saved, and closing those beyond repair.
The Emergency Banking Act, introduced on March 9, 1933, was an amendment to the Trading with the Enemy Act of 1917. The Act allowed the twelve Federal Reserve Banks to issue additional currency on good assets, ensuring that reopened banks could meet every legitimate call. It also created the Federal Deposit Insurance Corporation (FDIC), which began insuring bank accounts at no cost for up to $2,500. The Federal Reserve committed to supplying unlimited amounts of currency to reopened banks, creating 100% deposit insurance.
The Act had a significant impact on the Federal Reserve and the president's power during financial crises. Title I of the Act increased the president's authority to conduct monetary policy independently of the Federal Reserve System. Combined with Title IV, they removed the gold standard for the nation's and Federal Reserve's notes, creating a new framework for monetary policy. Title III authorized the Reconstruction Finance Corporation (RFC) to provide capital to financial institutions.
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Federal Deposit Insurance Corporation (FDIC)
The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation that provides deposit insurance to depositors in American commercial banks and savings banks. The FDIC was established by the Banking Act of 1933, which was enacted during the Great Depression to restore trust in the American banking system.
Before the FDIC's creation, more than one-third of banks failed, and bank runs were common. The FDIC's insurance limit was initially US$2,500 per ownership category, but this has been increased several times over the years. Since the enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010, the FDIC insures deposits in member banks up to $250,000 per ownership category. FDIC insurance is backed by the full faith and credit of the United States government, and according to the FDIC, "since its start in 1933, no depositor has ever lost a penny of FDIC-insured funds".
The FDIC has the authority to regulate and supervise state non-member banks, and it provides extensive resources for bankers, including guidance on regulations, information on examinations, legislation insights, and training programs. The FDIC also handles complaints and inquiries about FDIC-insured state banks that are not members of the Federal Reserve System.
FDIC-insured institutions are permitted to display a sign stating the terms of its insurance, including the per-depositor limit and the guarantee of the United States government. This sign is described by the FDIC as a symbol of confidence for depositors. The FDIC also provides protection for depositors in the event of a bank failure, and it works to maximize recoveries for the creditors of the failed institution.
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Glass-Steagall Banking Act
The Glass-Steagall Banking Act, or the Banking Act of 1933, was a landmark piece of legislation in the United States that introduced significant reforms to the banking industry. The Act was passed in response to the financial crises and bank failures during the Great Depression, specifically the 1929 stock market crash. It was signed into law by President Franklin Delano Roosevelt on June 16, 1933, and was part of the New Deal.
The Glass-Steagall Act aimed to prevent banks from using depositors' money for stock speculation and to protect depositors from potential losses. To do this, the Act separated commercial banking from investment banking activities, forcing banks to choose to specialise in one or the other. This created a regulatory firewall between the two types of banking, preventing the combination of commercial and investment banking, which was considered too risky and speculative.
The Act also created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits with a pool of money collected from banks. This was a controversial provision at the time, as it was included to protect small rural banks, and large banks believed they would end up subsidising them. Despite this controversy, the FDIC survived the partial repeal of the Glass-Steagall Act in 1999 and remains in place today, guaranteeing individual deposits.
Another important provision of the Glass-Steagall Act was the introduction of what became known as Regulation Q. This mandated that interest could not be paid on checking accounts and gave the Federal Reserve the authority to establish ceilings on the interest paid on other types of deposits. This was because the payment of interest on deposits led to "excessive" competition among banks, causing them to engage in risky investment and lending policies.
The Glass-Steagall Act was gradually eroded in the 1980s and 1990s, and the most significant repeal came in 1999 with the Gramm-Leach-Bliley Act, or the Financial Services Modernization Act. This eliminated the Act's restrictions on affiliations between commercial and investment banks, allowing them to consolidate. Many economists believe that this repeal led to an increase in speculative and risky activities, including the rise in subprime lending, which contributed to the 2008 financial crisis.
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The Great Depression
The impact of the Depression was widespread, with steep declines in industrial production, prices (deflation), and international trade. Unemployment soared, and poverty and homelessness increased sharply. The banking system collapsed, with many banks failing due to widespread panic. This reduced the money available for loans, further exacerbating the economic crisis.
The United States, where the Depression was most severe, saw industrial production fall by nearly 47% between 1929 and 1933, and gross domestic product (GDP) declined by 30%. Unemployment rates reached over 20%, with 12,830,000 people unemployed at the height of the Depression in 1933. The economic shockwaves caused by the Depression rippled across the globe, affecting both wealthy and poor nations. International trade halved, and countries dependent on primary sector industries, such as heavy industry and agriculture, were devastated.
The outbreak of World War II in 1939 eventually ended the Great Depression. The war effort stimulated factory production and provided jobs for women and unemployed men. Additionally, increased government spending on the military in the years preceding the war helped reduce unemployment and boost the economy.
While the causes of the Great Depression are still debated, it is generally agreed that a combination of factors, including the stock market crash, monetary policy failures, and protectionist trade policies, contributed to the severity and longevity of the crisis.
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President Roosevelt's Fireside Chat
On May 7, 1933, President Franklin D. Roosevelt gave his first Fireside Chat, addressing the nation's banking crisis. In his inaugural address, Roosevelt stated, "we have nothing to fear but fear itself," and his objectives were to calm the economic fears of Americans, develop policies to alleviate the problems of the Great Depression, and gain support for his programs.
In the Fireside Chat, Roosevelt outlined the New Deal Program, which aimed to address the serious problems facing the country. He described how trade and commerce had declined to dangerously low levels, and prices for basic commodities were destroying the value of assets of national institutions such as banks, savings banks, and insurance companies. Roosevelt explained that these institutions were foreclosing on mortgages, calling for loans to be paid, and refusing credit. He presented two alternatives: the first was to allow foreclosures, credit withholding, and money hoarding to continue, leading to the bankruptcy of banks and other institutions, deflation, and extraordinary hardship for property owners and wage earners. The second alternative was to take action to address the crisis. Roosevelt assured Americans that he had concluded that the first alternative was too much to ask of the people and that his administration would pursue the second option.
Roosevelt's Fireside Chats were informal and relaxed radio talks that made Americans feel as if the President was speaking directly to them. Roosevelt used this medium to calm fears, restore confidence, and gain support for his New Deal programs. One of the programs established during the First Hundred Days of his administration was the Federal Deposit Insurance Corporation (FDIC), which was created by the Glass-Steagall Banking Act of 1933 to protect depositors from losing their savings in the event of bank failure. The FDIC insured individual bank accounts and separated commercial banking from investment banking, reducing bank failures and stabilizing the banking system.
In his Fireside Chats, Roosevelt also discussed other aspects of the New Deal, such as the Civilian Conservation Corps (CCC), which provided work for thousands of men on projects in national forests, parks, and public lands, and the Agricultural Adjustment Administration (AAA), which aimed to help farmers during the Depression. Roosevelt continued his Fireside Chats throughout his presidency, addressing the concerns of Americans and updating them on the progress of his administration's initiatives.
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Frequently asked questions
The Emergency Banking Act was a bill passed in the midst of the Great Depression to stabilize and restore confidence in the U.S. banking system. It created the Federal Deposit Insurance Corporation (FDIC) to insure bank deposits and granted the president greater power to respond to financial crises.
The Glass-Steagall Act, also known as the Banking Act of 1933, established the Federal Deposit Insurance Corporation (FDIC) and insured bank deposits of up to $2,500. It also limited the securities activities of commercial banks and their affiliations with securities firms to regulate speculations.
The Federal Deposit Insurance Corporation (FDIC) is a government agency that insures bank deposits in the United States. It was created by the Glass-Steagall Act of 1933 to protect bank customers and their deposits, providing stability to the banking system.
