Fireside Chat

My friends, I want to talk for a few minutes with the people of the United States about banking — to talk with the comparatively few who understand the mechanics of banking, but more particularly with the overwhelming majority of you…

Franklin Delano Roosevelt, President. 12 March, 1933

It’s been ninety years, and we still haven’t learned the lesson.

No, not that banks and bankers are not to be trusted. We’ve got that one down pat, thanks. Neither is it that of American Mattress and Trust: that money converted to gold and then stuffed in a mattress outperforms the stock market three years out of four. It’s not even “Diversify!” That’s exactly what Silicon Valley Bank did that got them into their recent mess.

I’ll give you some time to figure it out. Meanwhile, let’s look a bit closer at the mess and see what happened, shall we?

Between Black Monday and the great Bank Holiday of 1933, the monetary supply available in the United States dropped significantly. Much of this was due to market losses; in those days, banks were permitted to speculate, and it cost them — and their depositors — greatly. Of rather more concern was a widespread tendency for individual depositors to hoard cash, both in bills and in silver and gold.

FDR’s inauguration came right in the middle of the crisis (inaugurations back then were in March), and he acted immediately. Whereas all the states had already declared individual bank holidays (read: mass forced closings) in order to prevent depositor runs, he announced a national closure, during which the government would review all banks, working to save those they could. Meanwhile, Congress rushed through a bill that had been prepared under Hoover that would underwrite the losses, supplying unlimited cash to every sound bank through an insurance mechanism.

And then came the radio address, during which he told the country, effectively: “Stop hoarding. There’s no point to it now that we’ve provided insurance. In fact, you’ll help the whole thing along by bringing back the piles of cash you have hidden in your mattresses.”

It worked. By noon the next day, long lines of people holding bags of cash were seen across the country.

Later that year, other restrictions were put in place that limited speculation by commercial banks. The FDIC was created as a permanent hedge against future bank runs, and since then things have gone swimmingly.

Well. Not quite.

Periodically, a well-meaning yet ignorant Congress will relax some of the strict regulations, or the industry creates some sort of workaround. Every time, a crisis develops not long after. It’s entirely predictable.

This happened with the Savings & Loan failures in the 1980s and 90s, triggered in part by a sharp change in the capital gains tax. It happened again with the real estate bubble that burst in 2007-8, which was in part triggered by excessively low interest rates. Most recently, banks have begun failing as a result of high interest rates that were kept in place overlong by a government unwilling to employ more direct measures against consumer inflation during an election year — and exacerbated by a combination of massive long-term inflation combined with a lack of increase in either FDIC insurance limits or the available currency supply.

Bear in mind: These were just the triggers. They were 100% predictable, yes, but the failures were still the direct result of banking deregulation.

For what it’s worth: We could easily increase the monetary supply by hiking the minimum wage, opening up temporary immigration while taxing overseas disbursements, printing thousand-dollar bills, and other similar measures. These aren’t done for fear that it will force more inflation on an already overburdened grocery supply market. Nevertheless, it remains true that they could have been done, and that the entire crisis would have been foreseen and avoided by a sufficiently observant administration — either the present or the previous.

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