Currency Wars_ The Making of the Next Global Crisis - James Rickards [36]
The panic soon spread to England, and by July 1931 massive gold outflows had begun. Leading English banks had made leveraged investments in illiquid assets funded with short-term liabilities, exactly the type of investing that destroyed Lehman Brothers in 2008. As those liabilities came due, foreign creditors converted their sterling claims into gold that soon left England headed for the United States or France or some other gold power not yet feeling the full impact of the crisis. With the outflow of gold becoming acute and the pressures of the bank run threatening to destroy major banks in the City of London, England went off the gold standard on September 21, 1931. Almost immediately sterling fell sharply against the dollar and continued dropping, falling 30 percent in a matter of months. Many other countries, including Japan, the Scandinavian nations and members of the British Commonwealth, also left the gold standard and received the short-run benefits of devaluation. These benefits worked to the disadvantage of the French franc and the currencies of the other gold bloc nations, including Belgium, Luxembourg, the Netherlands and Italy, which remained on the gold exchange standard.
The European bank panic abated after England went off the gold standard; however, the focus turned next to the United States. While the U.S. economy had been contracting since 1929, the devaluation of sterling and other currencies against the U.S. dollar in 1931 put the burden of global deflation and depression more squarely on the United States. Indeed, 1932 was the worst year of the Great Depression in the United States. Unemployment reached 20 percent and investment, production and price levels had all plunged by double-digit amounts measured from the start of the contraction.
In November 1932, Franklin D. Roosevelt was elected president to replace Herbert Hoover, whose entire term had been consumed by a stock bubble, a crash and then the Great Depression itself. However, Roosevelt would not be sworn in as president until March 1933, and in the four months between election and inauguration the situation deteriorated precipitously, with widespread U.S. bank failures and bank runs. Millions of Americans withdrew cash from the banks and stuffed it in drawers or mattresses, while others lost their entire life savings because they did not act in time. By Roosevelt’s inauguration, Americans had lost faith in so many institutions that what little hope remained seemed embodied in Roosevelt himself.
On March 6, 1933, two days after his inauguration, Roosevelt used emergency powers to announce a bank holiday that would close all banks in the United States. The initial order ran until March 9 but was later extended for an indefinite period. FDR let it be known that the banks would be examined during the holiday and only sound banks would be allowed to resume business. The holiday ended on March 13, at which time some banks reopened while others remained shut. The entire episode was more about confidence building than sound banking practice, since the government had not in fact examined the books of every bank in the country during the eight days they were closed.
The passage of the Emergency Banking Act on March 9, 1933, was of far greater significance than the bank inspections in terms of rebuilding confidence in the banks. The act allowed the Fed to make