7 Tough Lessons For The Next Generation

Lesson #5. Extreme Government Maneuvers Can Backfire

In a time of economic crisis, Americans will again look to their government as a savior. That’s also not healthy. When the government steps in with emergency economic rescues or maneuvers, it often leads to unforeseen and uncontrollable circumstances.

Main lobby of Hibernia Bank & Trust, New Orleans, circa 1933.
Main lobby of Hibernia Bank & Trust, New Orleans, circa 1933.

The best illustration that comes to mind took place many years ago, in February 1933.

A major insurance company failure almost sank the Hibernia Bank & Trust Company, then the third largest in New Orleans.

Hibernia’s president got $4 million in government loans for the busted insurance company to reduce its debt to the bank.

But when word of the loan leaked out, depositors figured the bank was probably in trouble, too. So they immediately lined up to withdraw their funds. By the close of business on Friday, February 3, it was clear that the bank could not survive another day of withdrawals.

That night, Louisiana’s legendary senator, Huey Long, summoned the governor and leading bankers to hammer out an emergency $20 million loan to Hibernia from the state and from the Fed. They agreed. But due to slow transportation, there was no way to physically move that much money to New Orleans before Monday morning. Meanwhile, the bank didn’t have enough cash left to survive its customary Saturday banking hours.

Fearing that any admission of a crisis would only make it worse, Long pleaded with the governor to proclaim Saturday some kind of public holiday — to give the banks an excuse to stay closed.

The governor rousted a local librarian out of bed to find something — anything — to commemorate. But nothing of historical significance had ever happened on February 4th. The best the librarian could come up with was that the United States had severed diplomatic relations with pre-World War I Germany on February 3, 1917.

So even though it was a day late, the governor declared February 4th a holiday. The banks stayed closed without comment. And puzzled Louisianans duly celebrated the 16th anniversary of the diplomatic break with Germany. On Sunday, the bank announced the $20 million loan — plus an additional $4 million from other local banks, and by Monday morning, the crisis seemed to have passed.

But a month later, Franklin Roosevelt was inaugurated, and he immediately declared a banking holiday nationwide.

Reno in early 1930s; welcome sign for tourists and divorcing couples.
Reno in early 1930s; welcome sign for tourists and divorcing couples.

The bank holiday had all kinds of unexpected ramifications:

In Reno, Nevada — already a national center for quickie divorces — unhappy couples were made even more unhappy when the court turned away anyone unable to pay cash for filing fees.

A streetcar in Salt Lake City accepted a pair of men’s trousers in lieu of a cash fare. A Lewiston, Montana newspaper sold subscriptions for 10 bushels of wheat.

In Oklahoma City, a hotel offered to allow guests to settle their bills with “anything we can use in the coffee shop.” The first customer presented a pig.

But it was the governor of California who came up with the most novel scheme to conserve cash: He halted payments to the executioners normally hired as independent contractors by the state prison system. When asked about the sudden suspension of previously scheduled executions, he simply declared: “A bank holiday is no time to hang a man.”

The moral of this story: When the government takes unusual measures, expect unusual results.

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