By Larry Parks
January 21, 2015
After the Bank of the United States, a large New York regional bank, closed on December 10, 1930, for about 2½ years U.S. banks began failing in ever-increasing numbers. This was before so-called Federal Deposit Insurance, which is not insurance but a subsidy to the banking system, had been enacted.
Thus, when banks failed, savings were lost. As a result, to be safe people began withdrawing their savings from banks. At that time, Federal Reserve Notes were redeemable on demand for gold. Just in case, many began asking for their gold, as they were entitled to do.
Because there were many more Federal Reserve Notes outstanding than for which the banking system had gold, it became clear that there could be a systemic default. Indeed, “. . . by March 3, 1933, the gold drain at the Federal Reserve Bank of New York reduced its gold reserve ratio to 24 percent.” At that time, the law required a reserve ratio of 40 percent.
By Monday, March 6th, 1933, roughly 90% of U.S. banks had either gone out of business or had closed on account of various state-initiated bank holidays. It was inconceivable that the remaining 10%, which consisted primarily of the very largest and soundest banks, would close.
On that day, his first day in office at 1:00am, President Franklin Roosevelt, some say improperly, relying on the authority of an obscure and mostly thought expired section 5(b) of the “Act of October 6, 1917,” called the Trading With the Enemy Act of 1917, issued Proclamation 2039 closing for four days the remaining open banks, a.k.a. the Bank Holiday of 1933. At the same time, as a prelude to seizing all privately held monetary gold, he also froze all gold transactions.
Because almost no one conceived that these very large and sound banks would close, many were left short of day-to-day currency. What to do?
The Federal Reserve Bank of Boston tells the story:
“At one point, Treasury officials seriously considered issuing large amounts of government scrip (an emergency substitute to take the place of scarce cash). They even went so far as to print more than $10 million worth. But on Tuesday, March 7, Treasury Secretary Woodin decided against the plan, primarily out of concern that the public would not accept scrip at face value. ‘Where would we be,’ Woodin wondered aloud, ‘if we had I.O.U.’s, scrip, and certificates floating all around the country?’
Instead he decided to ‘issue currency against the sound assets of the banks. [As opposed to issuing currency against gold.] The Federal Reserve Act lets us print all we’ll need. And it won’t frighten the people. It won’t look like stage money. It’ll be money that looks like real money.’” [Emphasis added.]
So here we have the Secretary of the Treasury declaring that the money henceforth issued was in fact “stage money” that looks like real money.” Stage money is the stuff actors pass around during a performance instead of real money. President Roosevelt soon got rid of Secretary Woodin, replacing him with Henry Morgenthau, Jr. who had the good sense never to suggest that our money had been transmogrified into “stage money,” a.k.a. make-believe money.
While the federal scrip never circulated, there are many examples of banks, merchants and local governments issuing their own scrip.
Here is an example from the Bank of Newberry in Newberry Florida:
On Sunday, March 12, 1933, President Roosevelt gave his first Fireside Chat. He explained:
“Remember that the essential accomplishment of the new legislation [The Emergency Banking Act of 1933] is that it makes it possible for banks more readily to convert their assets into cash than was the case before. More liberal provision has been made for banks to borrow on these assets at the Reserve Banks and more liberal provision has also been made for issuing currency on the security of those good assets. This currency is not fiat currency.” [Emphasis added.]
Did people grasp the importance of this statement? Do they fathom it now?
There’s a lesson to be learned from this. Rather than referring to our money as “fiat,” although technically and linguistically correct, because almost everyone thinks the word “fiat” refers to a little Italian car, better to use the more understandable term: “make-believe money.”
In this way, people will have a better chance of comprehending what has happened to our money so that they may seek to protect themselves.
Larry Parks is the Executive Director of the Foundation for the Advancement of Monetary Education, and the author of What Does Mr. Greenspan Really Think?
 “Why Did FDR’s Bank Holiday Succeed?” by William L. Silber, FRBNY Policy Review/July 2009; pp23.
 “Closed for the Holiday, The Bank Holiday of 1933”; Federal Reserve Bank of Boston pp20