Throughout Milton Friedman’s (and Anna Schwartz) seminal book A Monetary History he tries to make the case that suspension of convertibility would have alleviated much of the suffering of the Great Depression. It had in the past worked in that sort of capacity, choking off the suffering of systemic runs just enough so that emotion could die down and cooler heads prevail. He was particularly harsh for when suspension was, in fact, used – afterward.

The term suspension of payments, widely applied to those earlier episodes, is a misnomer. Only one class of payments was suspended, the conversion of deposits into currency, and this class was suspended in order to permit the maintenance of other classes of payments. The term suspension of payments is apt solely for the 1933 episode, which did indeed involve the suspension of all payments and all the usual activities by the banking system. Deposits of every kind in banks became unavailable to depositors. Suspension occurred after, rather than before, liquidity pressures had produced a wave of bank failures without precedent. And far from preventing further bank failures, it brought additional bank failures in its train. More than 5,000 banks still in operation when the holiday was declared did not reopen their doors when it ended, and of these, over 2,000 never did thereafter. The “cure” came close to being worse than the disease.

It was this loss of banking capacity that through even the new monetary system of the New Deal, stripped of gold money, would regret for the rest of the decade and beyond. Though there seemed to be recovery at the time, as the bond market showed then, as it does now, it wasn’t actually one.

This is a problem that has plagued banking for as long as there have been banks. Emotion is a part of money, but economists felt it necessary to deprive people of property rights so that they might be in better position to save “good” banks from suffering the same fate as “bad” banks. That is what bank holidays and suspension of convertibility meant; to allow less pressing circumstances by which to sort out which bank actually belonged to which category. The systemic cost of getting it wrong is enormous.

But as Friedman himself describes above, placing the balance into the hands of government officials is itself no guarantee, either. It is that fact which has become the central focus of our own time, where economists were handed all the power they sought and we ended up with the same circumstances anyway. The only difference between the 1930’s and the 2010’s is the size of the crashes which preceded their depressions. And unlike the previous one, this one actually happened in the very place which was supposed to prevent just these circumstances. There just is no way to describe in words the cosmic irony.

Clearly, what counted as money during the Great Crash after 1929 is nothing like what counts as money today. There were then as now Federal Reserve Notes but only in denominations to as low as $5; the smaller cash bills were US Treasury silver certificates, a legacy of William Jennings Bryan agitation that actually lasted into the 1960’s. The primary difference of those compared to what we find today is convertibility. Cash and currency at that time was properly understood as a derivative claim on money, but not just money as gold but money as personal property. There is a huge difference.

A bank that holds property is bound by the terms of constructive bailment; the same kind of arrangement as when you hand the keys for your automobile to a valet. Your car does not cease to belong to you, it is only transferred into the temporary custody of the valet company who has responsibilities for its safe keeping. Should the valet business declare bankruptcy while you attend whatever activity that brought you into this arrangement, they cannot sell your car to satisfy their creditors – by all property rights it remains your vehicle no matter what.