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Wednesday, March 20, 2013

Understanding the Bank Holiday of 1933

Not much is really talked about concerning the Bank Holiday which took place in the US back in March, 1933.  A few perhaps heard of it in the most general of ways but ultimately doesn't ring a bell..

We want to take a moment to explain why it occurred, why it was successful at the time and most importantly why if we ever come anywhere close to it again, we will not be saved, at least in the same way..

Prior to March, 1933 there had been a full month of continual and steady savings withdrawls from citizens who were very nervous about the future and solvency of the nation, especially with this brand new President, FDR just recently inaugurated.

This was entering year four of the Depression and people had simply no faith anymore that their money would be protected.   So the government had to put a stop to these continual runs..  
FDR instituted a week long national 'holiday', thereby closing the banks so no one could get access to their funds (actually 9 days when weekends taken into consideration) and re-opened only after Congress passed a hastily pushed piece of legislation known as the Emergency Banking Act of 1933 on March 9th.

So what did this do?

Among other things, if gave the President "the ability to declare a national emergency and have absolute control over the national finances and foreign exchange of the United States in the event of such an emergency." (Title 1, Section 2)

In addition, it authorized the Secretary of the Treasury "to order any individual or organization in the United States to deliver any gold that they possess or have custody of to the Treasury in return for "any other form of coin or currency coined or issued under the laws of the United States"." (Title 1, Section 3)

That's was the part about being forced to turn in your gold so it could be re-pegged i.e. devalued
But the success of the legislation and the reason why confidence was soon restored in banking was the Act created de facto 100 percent deposit insurance.

Prior, if a bank closed and you had money deposited, you lost everything...  Gone.  The FDIC which provides insurance on deposits did not come into existence until a year later.

Now after the Act, you could put all your cash back into the bank and 'trust' if that institution crumbled, you'd be reimbursed 100%

But you see in its success then, it can not be duplicated today...

What do we mean?
For one year to basically calm everyone, the government guaranteed the totality of all depositors' cash for a full 100%.  Then when FDIC went into effect, it provided 100% coverage of depositor's cash.... up to $2,500.   Anything above that and if there was another bank crash, well, you'd lose it...

By this point, people were a little more complacent and ultimately would keep their money in banks even if above that $2,500 demarcation.  And 80 years later, nothing has changed in the psychology of most Americans... they believe the FDIC will rescue them if the market crashed or banks collapsed.

But remember, the key in restoring public confidence back then was the government guaranteeing 100% of Everything.  As of Jan 2009, US banks held a total of just over $10 Trillion in deposits.

Could the President honestly say today in a 'fireside chat' that he could guarantee 100% of $10 Trillion to be covered when our National Debt is over $16 Trillion and every year we spend more than we take in, thus expanding the deficit as well?
As it is, the FDIC has enough in its war-chest to cover at most 5% of the total deposits in US banks if there was actual calamity that couldn't be contained through mainstream-news mouthpieces.

The insurance protection is mainly psychological..

If a couple hundred banks fail like between 2008-2011, the FDIC can come in, flex its muscle and demonstrate its in control...  But how about a couple thousand banks faltering?  

For instance, there are over 6,000 Bank of America branches-- its the largest bank in the US.   If it failed, the losses to be covered would be hundreds of billions if not trillions...

So the only thing keeping the game afoot is confidence...
How confident do you feel in your President (we don't mean Obama specifically).. How confident do you feel in the banks... the Fed..  the System...  How successfully have they earned your confidence?

Confidence... confidence game... con

So when something happens like in Cyprus this week, it should give shivers to everyone for never in history have everyday depositor's savings been open to instant tax seizure..

And what was the lesson learned?  Did the powerful banking interests and national big-wigs realize they were wrong and never to try such a fiendish coup?   No..  the lesson was you don't pass legislation making it legal for government to confiscate funds so soon before you actually are to do it!
Instead you simply pass such legislation on a Friday night at midnight... or right before a holiday when no one's paying attention...and you let it stay dormant.  Then when the government needs to, it simply implements it while coordinating a bank holiday, and the 1-2 punch will leave the populace staggered and confused.

Meanwhile you, the government got the 5-10% from each depositor that you needed to pay the banks or the Investors holding onto your government bonds.

That is the lesson..

There really is no reason to keep more of your $$ in banks than you need for monthly bills and emergency situations..  You'd earn just about as much interest hiding the cash in a box of Cocoa Puffs than a bank..