I want to talk for a few minutes with the people of the United States about banking -- not just the few who understand the mechanics of banking, but with the overwhelming majority who use banks both for making deposits and writing checks. I want to tell you what has been done in the last few days, why it was done, and what the next steps are going to be. I know that the many notices from state capitals and from @Washington, and all the new laws and regulations, are for the most part in banking and legal terms. They should be explained for the benefit of the average citizen. I feel I owe this especially because of the good temper with which everybody has accepted the inconvenience of the banking holiday. I know that when you understand what we in Washington have been about I shall continue to have your cooperation as fully as I have had your sympathy and help during the past week.
First of all let me state the simple fact that when you deposit money in a bank, the bank does not put the money into a safe deposit vault. It invests your money in many different forms of credit. These may be bonds, commercial paper, mortgages, and many other kinds of loans. In other words, the bank puts your money to work to keep the wheels of industry and of agriculture turning around. Only a small part of the money you put into the bank is kept in currency -- an amount which in normal times is enough to cover the cash needs of the average citizen. In other words, the total amount of all the currency in the country is only a small fraction of the total deposits in all of the banks.
What, then, happened during the last few days of February and the first few days of March? Because the public confidence in the system was shaken, there was a general rush by a large portion of our population to turn bank deposits into currency or gold. The rush was so great that the soundest banks could not get enough currency to meet the demand. The reason for this was that on such short notice it was, of course, impossible to sell perfectly sound assets of a bank and convert them into cash except at panic prices far below their real value.
By the afternoon of March 3rd, scarcely a bank in the country was open to do business. Notices temporarily closing them in whole or in part had been issued by the governors in almost all the states.
It was then that I issued the notice providing for the nation-wide bank holiday. This was the first step in the government's repair of our financial and economic fabric.
The second step was the legislation promptly and patriotically passed by the @Congress. It confirmed my proclamation and broadened my powers so that it became possible to extend the holiday and lift the ban of that holiday gradually. This law also gave authority to develop a program of rehabilitation of our banking facilities. I want to tell our citizens in every part of the nation that the national Congress -- Republicans and Democrats alike -- showed by this action a devotion to public welfare. They demonstrated a realization of the emergency and the necessity for speed that is difficult to match in our history.
The third stage has been the series of regulations permitting the banks to continue their functions to take care of the distribution of food and household necessities and the payment of payrolls.
This bank holiday, while resulting in many cases in great inconvenience, is giving us the chance to supply the currency necessary to meet the situation. No sound bank is a dollar worse off than it was when it closed its doors last Monday. Neither is any bank which may turn out not to be in a position for immediate opening. The new law allows the twelve Federal Reserve Banks to issue additional currency on good assets. Therefore, the banks that reopen will be able to meet every legitimate call. The new currency is being sent out by the Bureau of Engraving and Printing in large volume to every part of the country. It is sound currency because it is backed by actual, good assets.
A question you will ask is this: why are all the banks not to be reopened at the same time? The answer is simple. Your government does not intend that the history of the past few years shall be repeated. We do not want and will not have another epidemic of bank failures.
As a result, we start tomorrow, Monday, with the opening of banks in the twelve Federal Reserve Bank cities. These are the banks which, on first examination by the treasury, have already been found to be all right. This will be followed on Tuesday by the return of all functions by banks already found to be sound in cities where there are recognized clearing houses. That means about 250 cities of the United States.
On Wednesday and succeeding days, banks in smaller places all through the country will resume business. This is subject, of course, to the government's physical ability to complete its survey. It is necessary that the reopening of banks be extended over a period of time. This will permit the banks to make applications for necessary loans, to obtain currency needed to meet their requirements and to enable the government to make common sense checkups.
Let me make it clear to you that if your bank does not open the first day you are by no means justified in believing that it will not open. A bank that opens on one of the following days is in exactly the same status as the bank that opens tomorrow.
I know that many people are worrying about state banks not members of the Federal Reserve System. These banks can and will receive assistance from member banks and from the Reconstruction Finance Corporation. These state banks are following the same course as the
national banks, except that they get their licenses to resume business from the state authorities. These authorities have been asked by the Secretary of the Treasury to permit their good banks to open up on the same schedule as the national banks. I am confident that the state banking departments will be as careful as the national government and will follow the same broad policy.
It is possible that when the banks resume a very few people who have not recovered from their fear may try again to withdraw their money. Let me make it clear that the banks will take care of all needs. It is my belief that hoarding during the past week has become an exceedingly unfashionable pastime. It needs no prophet to tell you that when the people find that they can get their money -- and that they can get it when they want it for all legitimate purposes -- their fear will soon be laid. People will again be glad to have their money where it will be safely taken care of and where they can use it conveniently at any time. I can assure you that it is safer to keep your money in a reopened bank than under the mattress.
The success of our whole great national program depends, of course, upon the cooperation of the public. It depends on its intelligent support and use of a reliable system.
Remember that the essential part of the new legislation is that it makes it possible for banks more readily to convert their assets into cash than was the case before. More liberal plans have been made for banks to borrow on these assets at the Reserve Banks. And more liberal plans have also been made for issuing currency on the security of those good assets. This currency is issued only on adequate security -- and every good bank has an abundance of such security.
One more point before I close. There will be, of course, some banks unable to reopen without being reorganized. The new law allows the government to assist in making these reorganizations quickly and effectively. It even allows the government to sponsor at least a part of new capital which may be required.
I hope you can see from this basic recital of what your government is doing that there is nothing complex, or radical, in the process.
We had a bad banking situation. Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people's funds. They had used the money entrusted to them in speculations and unwise loans. This was, of course, not true in the vast majority of our banks, but it was true in enough of them to shock the people for a time into a sense of insecurity. It also put them into a frame of mind where they did not differentiate but seemed to assume that the acts of a comparative few had tainted them all. It was the government's job to straighten out this situation and do it as quickly as possible -- and the job is being performed.
I do not promise you that every bank will be reopened or that individual losses will not be suffered. But there will be no losses that possibly could be avoided, and there would have been more and greater losses had we continued to drift. I can even promise you salvation for some at least of the sorely pressed banks. We shall be engaged not merely in reopening sound banks but in the creation of sound banks through reorganization.
It has been wonderful to me to catch the note of confidence from all over the country. I can never be sufficiently grateful to the people for the loyal support they have given me in their acceptance of the judgment that has dictated our course, even though all our actions may not have seemed clear to them.
After all, there is an element in the reworking of our financial system more important than currency, more important than gold, and that is the confidence of the people. Confidence and courage are the essentials of success in carrying out our plan. You people must have faith; you must not be stampeded by rumors or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system; it is up to you to support and make it work.
It is your problem no less than it is mine. Together we cannot fail.
