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Posts Tagged ‘US banking crisis 1933’

The communication of a banking crisis: it’s all about confidence!

During a visit to the National Portrait Gallery in Washington DC (‘The Reynolds Center for American Art and Portraiture’) I visited the Presidents’ gallery and found Franklin Delano Roosevelt‘s portrait accompanied by an interactive panel with some of his very popular at the time ‘fireside (radio) chats’ with the nation. One of them caught my attention; it was his address to the nation on the 13th of March of 1933 on the occasion of a major financial panic which led to the suspension of all banking activities for a week (the proclamation of 5 days of bank holiday). Of course the explanation of it would take us to the Great Depression and the massive fall in banks’ deposits in the country (as calculated by M. Friedman and A. Schwartz in their seminal Monetary History of the US, more than a third of the money supply since 1929). But what this brief post is about today is on just the communication of the suspension of the banking activities by the President himself to the nation: as you will hear in this audio recording, it is a very good explanation, and very easy to follow, of how the financial system in a modern economy operates and how fragile it becomes when confidence is lost and people run suddenly on their banks for liquidity. Even at that time, when the US was still on the gold standard and thus paper notes were ultimately backed by gold, the system relied on the confidence of the depositors on the soundness of the banks. Being very well aware of it, all the President tries to do with in this ‘fireside chat’ on the banking crisis was to restore the confidence lost by reassuring the american  people the monetary authorities were willing (and had already) to lend to sound banks to meet the liquidity needs of their customers. It is a good example of how to educate the people on these complex issues and to communicate how the crisis was being tackled.

Do not miss the opportunity to listen to it; in just a two-minute recording you will easily recognise all the elements involved in a banking panic and in the solutions needed: run on liquidity, fractional reserve, fiat versus backed money, lender of last resort, confidence, … . It is an excellent teaching material for a lecture in macroeconomics or money and banking.

However, involved in a massive fiscal expansionary program, only three months later the President suspended the convertibility of the US$ notes in gold, which left more room for the government and the baking sector as a whole to expand the amount of (fiat) money in circulation.

Juan Castañeda

PS. This audio and others of FDR and other Presidents can be found at ‘The American Presidency Project‘ website (http://www.presidency.ucsb.edu/medialist.php?presid=32).

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(Franklin Delano Roosevelt, picture taken at the National Portrait Gallery, Washington DC)

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