4 - The banking panic of 1933

Summary

The banking panic of 1933 is an anomaly among US financial panics. In no other financial panic was there suchwidespread use of bank moratoria or bank holidays for forestalling bank suspensions. In no other financial panic did the initiative for closing the banks or restricting deposit withdrawals reside with officials of the individual states. A bank moratorium or banking holiday was a legal artifice for closing a bank or banks temporarily without jeopardizing their solvency. The suspension of cash payment had been a characteristic feature of pre–1914 panics, but the decision to suspend payment had been made by individual banks in smaller towns and Clearing House Associations in the larger cities. The use of statewide moratoria was not new; five states had declared banking holidays in 1907. However, at no time had bank moratoria been used more extensively than in the three weeks following the declaration of the Michigan banking holiday on February 14, 1933. By the end of the day on March 4, banks had been closed in thirty–three states; deposit restrictions were in effect in ten, and optional closing in five. In no other panic had banking operations been curtailed so drastically.

Bank moratoria introduced a new source of depositor uncertainty. In the conventional panic depositor uncertainty had its origin in the questionable solvency of more than one bank. Bank moratoria created additional uncertainty among depositors about when and if state banking officials would close all the banks in a particular state. Moreover, the restrictions on deposit withdrawals increased the demands for currency. The bank holiday was the mechanism for transmitting banking unrest from state to state.