Emergency Banking Relief Act

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Definition of Emergency Banking Relief Act:

The Emergency Banking Relief Act (EBA) was passed on March 9, 1933, to end bank runs and restore confidence in the United States’ banking system.

Detailed Explanation:

The failure of many banks during the Great Depression destroyed the nation’s confidence in its banking system. Many people lost their life savings because their bank failed, and their deposits were not insured. Understandably, a rumor of a bank being in trouble frequently resulted in a bank run because people who feared the worst lined up to withdraw all their money. Many banks were unable to handle the volume of withdrawals. Economic recovery depended on restoring confidence in the banking system. Just one day after taking office, President Roosevelt followed the lead of many states and closed all banks calling it a National Bank holiday on March 6, 1933.

The Emergency Banking Relief Act was passed by Congress on March 9, 1933. The bill had been prepared by President Hoover’s Treasury. The election that President Roosevelt easily won also swept many democrats into office. Shortly after taking office, they were asked to pass the EBA. Few had reviewed the bill, but the EBA passed after 40 minutes of chaotic debate. During the holiday, bank examiners identified banks that were solvent and those that should remain closed. Banks were only allowed to re-open when they were deemed financially sound. On March 13th the 12 regional Federal Reserve banks re-opened. Many more opened on March 14th and 15th. 

The EBA had several provisions.

• It formally legalized President Roosevelt’s decision to call for a banking holiday. It also gave the President broad authority in a banking crisis.
• It gave the controller of currency the authority to restrict operations of a troubled bank and appoint a conservator who oversaw the liquidation of some national banks and the reorganization of others.
• The EBA authorized the Reconstruction Finance Corporation (RFC) to buy stock in banks in order to provide them with the capital they needed to pay off short-term debts and provide long-term capital.
• The Act addressed the currency shortage by allowing new currency to be issued. These were Federal Reserve Notes and were backed by assets at a commercial bank.
• Congress also appropriated the funds ($2 million) to implement the EBA.

The Act’s success depended on ending bank runs by restoring the general public’s confidence in the banking system. President Roosevelt addressed the nation in his first “fireside” chat. (Listen – FDR’s Fireside Chat 1) The next day, people lined up to deposit their hoarded money back into a bank. The stock market responded on March 15th with what remains the largest percentage gain ever. The Dow Jones Industrial Average increased 15.34% when it gained 8.26 points to close at 62.10. 

The long-term impact was enormous. The EBA was a precursor to the Banking Act, which established the Federal Insurance Deposit Corporation to insure depositors. Beginning in January 1934 deposits were insured up to $2,500. Today, the FDIC insures deposits up to $250,000. Another consequence of the EBA was that it effectively took the country off the Gold Standard by granting the Federal government the ability to increase the money supply without having the gold to support the increase.

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