Edward Griffin
F.D.R. SPEECH ON BANK HOLIDAY

In previous announcements, we have focused on debt-cancellation programs. For those who missed the lively exchange, it is now permanently available from the Freedom Force web site at: www.freedomforceinternational.org/
freedom.cfm?fuseaction=issue.

One of the more interesting aspects of this topic is the realization that, even though banks create money for loans out of nothing, they actually provide a valuable service by doing so. That is because the newly created money, which is valueless by itself, takes on value when it is coupled to a loan contract that pledges tangible assets as collateral. In other words, loans make it possible to back money, not merely with gold and silver, but with other types of assets as well, and that is very useful for a dynamic economy. Our complaint with the banks is not that they "monetize debt", as they call it, but that they charge exorbitant service fees for doing so and get away with it by inaccurately calling it interest.

The reason for touching on this topic again is that I recently came across a recording of a historic speech (included as an audio file at the end of this section) that dealt with exactly this aspect of banking. It was delivered from the White House on March 12, 1933, by President Franklin Delano Roosevelt. It was broadcast over the NBC radio network and was the first of what later became known as "fireside chats." The occasion was to explain why the nation's banks had been ordered to close their doors the previous week in what he called a "bank holiday." The reason for this move was to stop a nation-wide run on the banks in which too many depositors were simultaneously withdrawing their money.

As many of you know 'especially those who have read The Creature from Jekyll Island ' this occasionally happens because banks keep only a small percentage of their monetary obligations in the vault in the form of cash. The rest is in circulation either as privately held currency or checkbook money. So, if more than two or three percent of depositors demand their money in the form of cash at the same time, the banks will not be able to give it to them.

That would not be a troublesome matter if banks were totally honest and announced in advance that they reserve the right to deny withdrawals for a specified waiting period. Such accounts are called time deposits because they require the passage of time before money can be withdrawn. Certificates of deposit (CDs) are typical time deposits that may have a deferred withdrawal of anywhere from seven days to five years. On the other hand, checking accounts generally are classified as demand-deposits, because they carry the bank's promise to deliver all the money on demand any time depositors want it. It wouldn't make much sense any other way, because a checking account would be useless for paying routine bills if the bank could take two or three months to clear your checks. It is for this reason that demand-deposit accounts should always be 100% funded by money in the vault. There is no other way that banks can make an unconditional promise to give back all our money on demand. Furthermore, if coin and currency is in the vault, it must not be used as reserves for loans of checking account money. Otherwise, there would be multiple claims against the same currency, and we would be right back where we started: not enough currency to unconditionally honor the promise to pay everyone on demand.

Banks, of course, do not do this. They play the averages, knowing that, most of the time, only a small percentage of depositors will demand their money at the same time. They routinely make promises to depositors that they know they cannot keep under extreme circumstances. Since they are in partnership with the government through the Federal Reserve System, they know that the Treasury will bail them out by supplying whatever amount of currency may be needed.

On the surface, this may sound like a perfectly logical and sensible thing to do. In the recording at the end of this section, you will hear FDR say that this is not fiat money (which means money without backing, created by government decree). He defends that statement by saying that the newly created currency is backed by sound assets in the banks. That is true as far as it goes, but there is much more to it than that. When people withdraw their deposits, they exchange checkbook money for currency, so no new money is created or extinguished at that time. It merely changes form. However, as a consequence of the withdrawal, the money supply does become smaller. That is because deposits are used by the bank as reserves for loans. Contrary to popular belief, most money deposited into banks is not loaned out but is used as reserves upon which to create bookkeeping entries that become new money, and it is this new money that is loaned out. Typically, the ratio is nine dollars loaned for every one dollar held in deposit. (For an explanation of this multiplier effect, see The Creature from Jekyll Island: A Second Look at the Federal Reserve

Therefore, when depositors withdraw their money, the banks must reduce their loans. Since virtually all the money in our present system is loaned into existence, reducing loans leads to a reduction of the nation's money supply.

With this in mind, we can better understand the plight of the banks in 1933. Depositors were asking for their money (FDR called them hoarders), and the banks were in a pickle. To keep their books in balance, they had to call in loans, but that was impossible, because most of the loan contracts did not allow for that. Even if they did, very few borrowers could have come up with the cash. The result would have been massive foreclosures. Foreclosure is a viable option for banks in normal times; but it is of little value when they are facing a liquidity crisis. They don't need property or other assets which they then must sell in a tumbling market, they need cash. So, the banks were facing insolvency and bankruptcy. It was the moment of truth for a system based on dishonesty, and it was FDR's job to bail them out.

In the recording, you will hear the President explain that, in the final analysis, there is no solution possible without public confidence in the system. Unfortunately, he was correct. Ideally, a banking system should be sound whether the public has confidence in it or not. It should work even if people distrust it and want to withdraw their money just to be sure. But our present system does not work that way. It truly is a confidence game. The goal of the monetary and political scientists who run the Federal Reserve is not to build integrity into the system but primarily to build public confidence in it so that it never needs to be put to the test.

In this amazing speech, FDR not only soothed the fears of the American public about the soundness of the banking industry, he also implied that it would be unpatriotic not to put money back into the banks when they opened within the next few days. And that is exactly what happened. By the end of the week, the panic was ended, thanks largely to this speech.

The First National Bank in St. Petersburg, Florida, experiences a run on June 12, 1930. Angry depositors want their money, but the bank cannot pay them. Even though they were told they could have their money on demand any time they want it, most of it was loaned out to others. This scene has been repeated thousands of times throughout history and in every country. It is the consequence of fractional-reserve banking.

Pragmatists have argued that the emergency measures were justified because they broke the deadlock and got the wheels of commerce turning again. They say that most of the new currency eventually was deposited back into the banks and exchanged for checkbook money again, so it was merely a temporary measure that did no lasting harm. Those who place principle above pragmatism are not satisfied with that answer. They are not content when checking accounts continue to be based on impossible promises, when periodic failures are inevitable, when the coercive power of government is needed to make things work, when the cost of these failures is passed on to taxpayers, and when, in spite of all this, banks continue to enjoy profits far in excess of what they could earn without the protection given them by their partners in government.

FDR's fireside chats marked the beginning of a new era and a new style of political oratory in America. The fiery and bombastic style traditionally used before large gatherings at political rallies was soon to be replaced by a softer, more personal tone. The 60 million people who listened to that first fireside chat may not have fully understood what was being said, but they judged the President for sincerity and competence from the way in which he said it. Unfortunately, that is still the way it works today.

To hear FDR's fireside chat on The Banking Holiday, click on this link: www.freedom-force.org/audio/FDRbanks.mp3