One of the most significant aspects of the Great Depression in the United States was the erosion of confidence in the banking system. Weaknesses were apparent by 1930 and a growing wave of failures followed. As banks closed their doors, a chain reaction occurred that spread misery throughout the country.
One immediate result of bank closures was the contraction of the money supply. With less money in circulation, the purchasing power of consumers was sharply reduced. Manufacturers and retail establishments attempted to entice consumers by dropping prices on their goods — a move that was largely in vain. Unable to move their merchandise, factories and stores then resorted to scaling back production and cutting the work force.
By the end of 1932, more than 13 million American workers were unemployed. Anxious citizens withdrew their deposits from banks and hoarded cash and gold. By early the next year, more than 9,000 banks had failed. In early February, 1933, Louisiana needed a one-day bank holiday to allow the Hibernia Bank, which was seeing a run on its cash, enough time to bring in more currency. The governor, in order to find a reason to declare a holiday on Saturday, February 4, could only find the 16th anniversary of the severing of diplomatic relations with Germany in 1917. That was enough, and on February 3, Louisiana declared this new holiday. Of course, it halted more than just the Hibernia Bank, but it had the intended purpose. By the following Monday, the Hibernia Bank had received the necessary funds and remained open, and for that bank at least, the banking crisis was temporarily averted.
The crisis, however, didn't stop. On March 14, the state of Michigan, home of the nearly prostrate auto industry, announced an eight-day holiday and in the process touched off panics in neighboring states.
By Inauguration Day in March, nearly all of the nation’s banks were either closed or had at one point been closed, and of those remaining open, most were operating under special state rules designed to protect them.
Outgoing Herbert Hoover blamed President-elect Franklin Roosevelt for the crisis and the deterioration of public confidence in the banks. Hoover had asked on several occasions for public declarations from Roosevelt that he would maintain balanced budgets and do all within his power to fight inflation — promises that would have meant more to the business and financial communities than to the millions of unemployed. Roosevelt refused to allow his future commitments to be pinned down, which left Hoover angry and anxious to be out of office. The bank crisis of 1933 was front and center when Franklin Roosevelt took office.
On March 6, 1933, in order to keep the banking system in America from complete collapse, the President used the powers given him by the Trading with the Enemy Act of 1917 and suspended all transactions in the Federal Reserve as well as other banks and financial institutions. The bank holiday was the opening step in the New Deal. At the same time, he embargoed the export of silver, gold, and currency until March 9, at which time Congress would meet in special session. On that day, the Emergency Banking Act was passed by Congress and Roosevelt signed it. The President was given the power to recognize all insolvent banks and was provided with the means to reopen sound banks without delay.
By promising unlimited Federal Reserve support for those banks that reopened, FDR effectively provided 100% deposit insurance. Deposits flooded back and within a few weeks had returned most of the money they had withdrawn during the banking crisis before the suspension. The bank holiday had served its purpose.