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.
