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Bank holiday

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A bank holiday is a day on which banks are legally closed.[1]

Sometimes, a bank holiday is declared to restrict the right of withdrawal of depositors, in order to save these banks.[2]

Bank holidays used to save banks[edit]

United States[edit]

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 country’s banks were located in New England, a section unsympathetic to America’s 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.

This suspension set a precedent for succeeding economic crises.[3] The suspensions informally or officially permeated the economy outside of New England during the panic of 1819, occurred everywhere outside of New England in 1837, and in all states south and west of New Jersey in 1839. A general suspension of specie payments occurred throughout the country once again in the panic of 1857.[4]

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.[3]

Other examples:

  • Wisconsin in 1861[5]

Great Depression[edit]

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 pause—particularly 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 could—and did—and 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.[2]


United Kingdom[edit]

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 1914–1925.[6][7]

References[edit]

  1. "bank holiday", Free Online Dictionary, referenced 2013-04-11.
  2. 2.0 2.1 Murray N. Rothbard. "America’s Great Depression" (pdf), 11. The Hoover New Deal of 1932, p. 285-320, 325-326. Referenced 2013-04-12.
  3. 3.0 3.1 Murray N. Rothbard. What has government done to our money?, p. 66-67. Referenced 2013-04-12.
  4. Murray N. Rothbard. A History of Money and Banking in the United States: The Colonial Era to World War II (pdf), p.95-96. Referenced 2011-01-13.
  5. Gerald P. Dwyer, Jr., and Iftekhar Hasan. "Suspension of Payments, Bank Failures, And the Nonbank Public's Losses" (pdf), Federal Reserve Bank of Atlanta, Working Paper 96-3, May 1996. Referenced 2013-06-30.
  6. Jörg Guido Hülsmann. "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.
  7. Bank of England website. History, referenced 2013-06-30.

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