Sometimes, a bank holiday is declared to restrict the right to withdraw deposits, in order to save these banks.
Bank holidays used to save banks
In the United States, mass suspension of specie payment in times of bank troubles became almost a tradition. It started in the War of 1812. Most of the countryâs banks were located in New England, a section unsympathetic to Americaâs entry into the war. These banks refused to lend for war purposes, and so the government borrowed from new banks in the other states. These banks issued new paper money to make the loans. The inflation was so great that calls for redemption flooded into the new banks, especially from the conservative nonexpanding banks of New England, where the government spent most of its money on war goods. As a result, there was a mass "suspension" in 1814, lasting for over two years (well beyond the end of the war); during that time, banks sprouted up, issuing notes with no need to redeem in gold or silver.
Even before the suspension, in 1808, a Bostonian named Hireh Durkee who attempted to demand specie for $9,000 in notes of the state-owned Vermont State Bank, was met by an indictment for an attempt by this "evil-disposed person" to "realize a filthy gain" at the expense of the resources of the state of Vermont and the ability of "good citizens thereof to obtain money."
This suspension set a precedent for succeeding economic crises.
Panic of 1819
The suspensions informally or officially permeated the economy outside of New England during the panic of 1819. Obstacles and intimidation were often the lot of those who attempted to press the banks to fulfill their contractual obligations to pay in specie. Thus, Maryland and Pennsylvania engaged in almost bizarre inconsistency. Maryland, on February 15, 1819, enacted a law "to compel . . . banks to pay specie for their notes, or forfeit their charters." Yet, two days after this seemingly tough action, it passed another law relieving banks of any obligation to redeem notes held by professional money brokers, the major force ensuring such redemption. The latter act was supposed "to relieve the people of this state . . . from the evil arising from the demands made on the banks of this state for gold and silver by brokers." Pennsylvania followed suit a month later. In this way, these states could claim to be enforcing contract and property rights while trying to prevent the most effective means of such enforcement.
Maryland tried to bolster the defense of banks and the attack on brokers by passing a compulsory par law in 1819, prohibiting the exchange of specie for Maryland bank notes at less than par. The law was readily evaded, however, with the penalty merely adding to the discount as compensation for the added risk. Specie furthermore was driven out of the state by the operation of Gresham's Law.
Banks south of Virginia largely went off specie payment during the Panic of 1819, and in Georgia at least general suspension continued almost continuously down to the 1830s. One customer complained during 1819 that in order to collect in specie from the largely state-owned Bank of Darien in Georgia, he was forced to swear before a justice of the peace, five bank directors, and the bank cashier, that each and every note he presented to the bank was his own and that he was not a âmoney brokerâ or an agent for anyone else. Furthermore, he was forced to pay a fee of $1.36 on each note in order to obtain the specie to which he was entitled.
In North Carolina, furthermore, banks were not penalized by the legislature for suspending specie payments to brokers, though they were for suspending payments to other depositors. Thus encouraged, the three leading banks of North Carolina met in June 1819 and agreed not to pay specie to brokers or their agents. Their notes, however, immediately fell to a 15 percent discount outside the state. In the course of this partial default, of course, the banks continued to require their own debtors to pay them at par in specie.
In Kentucky, Tennessee, and Missouri, stay laws were passed requiring creditors to accept depreciated and inconvertible bank paper in payment of debts, else suffer a stay of execution of the debt. In this way, quasiâlegal tender status was conferred on the paper.
Many states permitted banks to suspend specie payment, and four western statesâTennessee, Kentucky, Missouri, and Illinoisâestablished state-owned banks to try to overcome the depression by issuing large issues of inconvertible paper money. In all states trying to prop up inconvertible bank paper, a quasi-legal status was also conferred on the paper by agreeing to receive the notes in taxes or debts due to the state. The result of all the inconvertible paper schemes was rapid and massive depreciation, disappearance of specie, succeeded by speedy liquidation of the new state-owned banks.
Before the Great Depression
General suspensions of cash payments occurred in 1836 (see Panic of 1837), except in New England, where the banks again kept above water. Combined with the exclusion of the entry of new firms, much of the chaos was due to the extreme laxity with which principles of bankruptcy were applied to insolvent banks. For example in the State of New York, in charters granted before 1828 there were provisions that if a bank suspended payment for a certain period (usually three months) it should cease operations unless it obtained permission to continue, after an examination of its affairs, from the Chancellor of the Circuit, and if at the end of a year it still did not resume payment, it should surrender its rights altogether. Charters created after 1828 shortened the unconditional period allowed to ten days. But in 1837 all these rules were made completely ineffectual because the State legislature passed a Suspension Act allowing suspending banks to continue for a year without applying to the Commissioner. Other States followed New Yorkâs example and passed Suspension Laws of an even more pernicious nature.
Further suspensions took place in 1839, but were confined to Pennsylvania and the States further to the south and west. Boston and the eastern States sustained payments. Pennsylvania passed laws legalising the suspension on condition that the banks should make certain loans of money to the State, and it was arranged that they should resume specie payments in January, 1841. The obligation to lend to the Government naturally had the effect of making it more difficult, if not impossible, for the banks to resume payments, and the date for resumption was postponed by another Act which, in return for further subscription to a Government loan, allowed the banks to continue the suspensions until the loan was repaid, which might be any time up to five years.
As a result of this tradition, the banks realized that they need have no fear of bankruptcy after an inflation, and this, of course, stimulated inflation and "wildcat banking." Those writers who point to nineteenth century America as a horrid example of "free banking," fail to realize the importance of this clear dereliction of duty by the states in every financial crisis. The governments and the banks, persuaded the public of the justice of their acts. In fact, anyone trying to get his money back during a crisis was considered "unpatriotic" and a despoiler of his fellowmen, while banks were often commended for patriotically bailing out the community in a time of trouble. Many people, however, were bitter at the entire proceeding and from this sentiment grew the famous "hard money" Jacksonian movement that flourished before the Civil War.
The Civil War brought about a general suspension of specie payments at the end of December 1861. This suspension was followed swiftly by the Treasury itself, which suspended specie payments on its Treasury notes.
In the in June of the Panic of 1893, many banks, national and state, especially in the West and South, were allowed to suspend specie payments. In a few months, Eastern bank suspension occurred, beginning with New York City. Suspension of specie payments resulted in depositsâwhich were no longer immediately redeemable in cashâgoing to a discount in relation to currency during the month of August. As a result, deposits became less useful, and the public tried its best to intensify its exchange of deposits for currency.
During the Great Depression, the American citizens were beginning to lose confidence in the dollar itself.
During the 1920s, a typical year might find 700 banks failing, with deposits totaling $170 million. In 1930, 1350 banks failed, with deposits of $837 million; in 1931, 2,293 banks collapsed, with deposits of $1,690 million; and in 1932, 1,453 banks failed, having $706 million in deposits. This enormous increase in bank failures was enough to give any bank pauseâparticularly when the bankers knew in their hearts that no bank (outside of the nonexisting ideal 100 percent bank) can ever withstand a determined run.
As a reaction, one by one, states imposed "bank holidays", thus permitting the banks to stay in business while refusing to pay virtually all of the just claims of their depositors (a pattern that had become almost traditional in America since the Panic of 1819).
Nevada had begun as early as October, 1932, but only 9 out of 20 banks took advantage of the state holiday, the others remaining open. Louisiana declared a brief holiday for the hard-pressed New Orleans banks in early February, but the bank holiday movement began in earnest with the proclamation of an eight-day holiday on February 14, 1933, by Governor William Comstock of Michigan. This action precipitated the bank runs and deflation of the latter part of February. For if one state could, with impunity, destroy property right in this manner, then others couldâand didâand depositors began an intense scramble to take their money out of the banks.
On the request of bankers for government to save them from the consequences of their own mistakes, state after state, beginning with Indiana, declared moratoria and bank holidays. Governor Ritchie of Maryland declared a three-day bank holiday on February 24. On February 27, the member banks of the Cleveland Clearing House Association decided arbitrarily to limit withdrawals from all their branches, and no state officials acted to stop this blatant infringement of property right. They were promptly followed by Akron and Indianapolis banks. On February 27, the Ohio, Pennsylvania, and Delaware legislatures authorized the state banking officials to restrict the right of withdrawal of deposits.
By March 4, every state in the Union had declared a bank holiday. President Roosevelt closed down all the banks throughout the nation for an entire week, from March 6 to 13, with many banks remaining closed even longer.
The Bank of England went bankrupt after two years of operation, in 1696, and survived because of government granted suspension of payments. Other suspensions followed in 1797-1821 and 1914â1925.
- "bank holiday", Free Online Dictionary, referenced 2013-04-11.
- Murray N. Rothbard. "Americaâs Great Depression" (pdf), 11. The Hoover New Deal of 1932, p. 285-320, 325-326. Referenced 2013-04-12.
- Murray N. Rothbard. What has government done to our money?, p. 66-67. Referenced 2013-04-12.
- Murray N. Rothbard. A History of Money and Banking in the United States: The Colonial Era to World War II (pdf), p.79-82, 95-96, 123, 240. Referenced 2011-01-13.
- Vera C. Smith. "Vera C. Smith, The Rationale of Central Banking and the Free Banking Alternative [1936"], Foreword by Leland Yeager (Indianapolis: Liberty Fund, 1990). http://oll.libertyfund.org/titles/1413 , referenced 2014-12-31.
- JĂ¶rg Guido HĂŒlsmann. "The Ethics of Money Production", online version, Chapter 15. Fiat Monetary Systems in the Realm of the Nation-State p.199-203, referenced 2013-06-30.
- Bank of England website. History, referenced 2013-06-30.
- "When Anticipation Makes Things Worse" by Sean Rosenthal, June 2012
- "Suspension of Payments, Bank Failures, And the Nonbank Public's Losses" (pdf) by Gerald P. Dwyer, Jr. and Iftekhar Hasan. , Federal Reserve Bank of Atlanta, May 1996 (compares bank failures in Wisconsin and Illinois in 1861)
- Bank holiday at Wikipedia