Legal Commentary

A radio interview describing the creation of the FDIC has me thinking about runs on banks.  (NPR interview with author Timothy Egan here.)  In 1933, Roosevelt closed banks for a five-day "bank holiday" to slow panicked withdrawals. FDIC insurance was part of the response to bank closures and runs on banks. Apparently Roosevelt later said that, if there had been a widespread run, the insurance could not have covered all of the deposits.  The (unsurprising?) lesson may be that  public perception - even when unrealistic - is central to fixing our financial problems (or at least avoiding new ones).

Roosevelt and his aides seem to have recognized that investor confidence was key.  In his first "fireside chat," in 1933, Roosevelt said that "[a]fter all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that  is the confidence of the people."  And, as one of his advisors put it: "We knew how much of banking depended upon make-believe or, stated more conservatively, the vital part that public confidence had in assuring solvency."

One more tidbit on "runs on the bank": the phrase - and probably the accompanying fear - has been around since the late 1600s.  A 1697 text said that "Any jealousie or suspicion that they shall not have Money for such Bills on Demand, will occasion a general run."  And the phrase pops up again over the years.  My favorite is from Adam Smith, The Wealth of Nations: "When a run comes upon them, they sometimes endeavor to gain time by paying in sixpences."  A practical solution.  (More from the OED here.)