Emergency Banking Relief Act

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Definition of Emergency Banking Relief Act:

The Emergency Banking Relief Act (EBA) was passed on March 9, 1933, intended to end bank runs and restore confidence in the United States’ banking system.

Detailed Explanation:

The collapse of numerous banks during the Great Depression eroded the nation’s trust in its banking system. Countless individuals saw their life savings vanish as their banks failed, and since deposits were not insured, the loss was devastating. Predictably, the mere hint of a troubled bank often triggered a bank run, where anxious individuals lined up to withdraw all their funds, overwhelming many banks unable to cope with the mass withdrawals. Restoring confidence in the banking system became crucial for economic recovery.

Just one day into his presidency, President Roosevelt, following the lead of several states, declared a National Bank Holiday on March 6, 1933, closing all banks. On March 9, 1933, Congress passed the Emergency Banking Relief Act (EBA), a bill prepared by President Hoover’s Treasury. President Roosevelt’s electoral triumph ushered in a wave of Democrats into office, and shortly after taking office, they swiftly passed the EBA after minimal review and chaotic debate.

During the bank holiday, examiners identified solvent banks and those requiring closure. Only financially sound banks were permitted to reopen. On March 13, the 12 regional Federal Reserve banks resumed operations, followed by many commercial banks on March 14th and 15th.

The EBA had several provisions:

• It formally legalized President Roosevelt’s decision to call for a banking holiday. It also gave the President broad authority in a banking crisis.
• It gave the controller of currency the authority to restrict operations of a troubled bank and appoint a conservator who oversaw the liquidation of some national banks and the reorganization of others.
• The EBA authorized the Reconstruction Finance Corporation (RFC) to buy stock in banks in order to provide them with the capital they needed to pay off short-term debts and provide long-term capital.
• The Act addressed the currency shortage by allowing new currency to be issued. These were Federal Reserve Notes and were backed by assets at a commercial bank.
• Congress also appropriated the funds ($2 million) to implement the EBA.

The Act’s success hinged on ending bank runs and restoring public confidence. President Roosevelt’s first “fireside chat” directly addressed the nation, and shortly after, there was a surge in deposits as people returned their hoarded money to banks. (Listen – FDR’s Fireside Chat 1) On March 15th, the stock market responded with the largest-ever percentage gain, as the Dow Jones Industrial Average rose 15.34%, gaining 8.26 points to close at 62.10.

Source: Wikimedia Commons 

The long-term repercussions were significant. The EBA served as a precursor to the Banking Act, which led to the establishment of the Federal Deposit Insurance Corporation (FDIC) to safeguard depositors. Starting in January 1934, deposits were insured up to $2,500. Today, the FDIC provides insurance for deposits up to $250,000. A notable outcome of the EBA was its effective role in removing the United States from the Gold Standard. This shift granted the federal government the authority to expand the money supply without the requisite gold backing. (Note: The Gold Reserve Act partially reinstated the gold standard in 1934, and the U.S. remained on the gold standard until 1971.)

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