Financial History 144 Winter 2023 | Page 21

City of Allentown , PA official photograph
Notice issued by the banks of Allentown , Pennsylvania , on March 13 , 1933 , announcing the end of the federal bank holiday .
Scrip currency issued in Chico , California during the 1933 bank holiday .
Oakland Museum of California extend it . In November 1931 , a small group of them provided only 30 % of the $ 500 million in capital President Hoover requested to fund the National Credit Corporation ( NCC ), a voluntary affiliate of the New York Clearing House Association . The President expected the NCC to lend those funds to weakly capitalized state banks that could not access the Federal Reserve ’ s lending facility . However , that organization proved totally inadequate to the task of buttressing the banking system .
Therefore , in January 1932 , the President signed the act creating the Reconstruction Finance Corporation ( RFC ), a new government agency authorized to loan money primarily to banks and other financial institutions so they could then extend more credit to the nation ’ s businessmen , farmers and consumers . During the next six months , the RFC loaned more than $ 1 billion to more than 4,000 borrowers . It did indeed help many banks become more solvent . Nevertheless , banking panics that had become self-fulfilling causes of many failures in the past continued to occur .
On October 31 , Governor Fred B . Balzar of Nevada declared a moratorium on all banking activities in the state for the next 12 days . He hoped that declaring what would prove to be the first of many state-imposed banking holidays would give those institutions time to arrange for infusions of capital sufficient to meet the growing demands for withdrawals that were threatening the stability of the state ’ s financial system .
Nevada ’ s banks had borrowed more than $ 5 million from the RFC during the preceding months . But the value of their loans and investment securities had continued to decline , making it almost impossible for them to meet all depositors ’ demands for withdrawals . The RFC rejected a last-minute attempt to borrow another $ 2 million , forcing the governor to take his unprecedented action . He ended that official holiday in mid-December when the state and national banking authorities took control of the 12-unit Wingfield chain that held Nevada ’ s public funds and served as the financial nerve center of the state .
Nevada ’ s banking crisis did not have a significant impact on the national economy . But the episode exposed the difficulties state officials faced when trying to cope with a financial problem too big for them to manage . In the opening weeks of 1933 , bankers in several other states declared isolated banking holidays and / or placed restrictions on depositors ’ freedom to withdraw their funds . Those actions did not directly impact most Americans ’ pocketbooks . But people stood up and took notice in mid-February when Michigan ’ s governor closed his state ’ s banks , initially for only eight days .
The auto manufacturers in Detroit had been particularly hard-hit by the depression ; so too had the banks in that one-industry town . Two banks in particular , Guardian Group and Detroit Bankers Company , were also suffering from their illiquid real estate
investments and declining securities portfolios . On February 6 , Guardian requested a $ 50 million loan from the RFC . But the agency ’ s board was concerned about the lack of adequate collateral .
Secretary of Commerce Roy D . Chapin and Undersecretary of the Treasury Arthur A . Ballantine developed a plan for the RFC to lend Guardian $ 37.7 million , providing that Ford Motor Company ’ s Henry Ford would agree to subordinate his firm ’ s deposits of $ 7.5 million in the flagship unit of that bank . Not only did he refuse , but he also threatened to remove his $ 25 million from Detroit Bankers ’ flagship unit if the government permitted Guardian Group to fail . The day after the February 13 observance of Abraham Lincoln ’ s Birthday , Governor William A . Comstock closed all of Michigan ’ s banks .
The need to take this drastic action in an important industrial center set off alarm bells in a way that the actions in Nevada and isolated communities had not . During the next few weeks , bankers or legislatures in three dozen other states declared moratoriums , holidays or restrictions on withdrawals . Many people were reading a continuing litany of newspaper stories of various states ’ banking difficulties ; others were following accounts of the US Senate ’ s investigation of the shameful and dishonorable business practices of many bankers ; more than a few began to doubt the soundness of their own banks . Nationwide , depositors acted in their own best interests by withdrawing unprecedented
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