By March 1933, the American banking system was in a freefall. A wave of bank runs, fueled by widespread panic, had forced thousands of banks to close their doors. Depositors, fearing they would lose everything, rushed to withdraw their cash, creating a self-fulfilling prophecy of collapse. The financial plumbing of the nation had seized up. In response, one of the first acts of Franklin D. Roosevelt's administration was to declare a nationwide "bank holiday," closing every bank in the country.

This drastic measure bought time. Congress quickly passed the Emergency Banking Act of 1933, a piece of legislation that gave the Treasury Department the power to inspect all banks before they could reopen. Healthy banks were allowed to resume business, while those on weaker footing were reorganized or closed permanently. This act was primarily a triage measure, designed to separate the solvent from the insolvent and restore a sliver of public confidence. It signaled that the government was stepping in to stop the bleeding.

With the immediate crisis contained, the focus shifted to building a more resilient system. The cornerstone of this effort was the Banking Act of 1933, more commonly known as the Glass-Steagall Act. This legislation aimed to tackle the root causes of the instability by fundamentally restructuring the financial industry. Its most significant provision was the separation of commercial banking from investment banking.

The second, and perhaps more psychologically powerful, component of Glass-Steagall was the creation of the Federal Deposit Insurance Corporation (FDIC). For the first time, the federal government guaranteed the safety of bank deposits up to a certain amount (initially $2,500). This was a revolutionary idea. Deposit insurance removed the primary incentive for a bank run. If a bank failed, depositors knew they would get their money back from the government, so there was no longer a need to panic and rush to the teller window at the first sign of trouble.

Restructuring the banks was only part of the solution. The government also needed more tools to actively fight the Great Depression's crushing deflation. The limitation was the gold standard, which required every dollar to be backed by a fixed amount of gold. This system severely restricted the government's ability to increase the money supply and stimulate the economy.

In a series of executive orders and legislative acts in 1933 and 1934, the Roosevelt administration effectively abandoned the gold standard for domestic transactions. Private ownership of gold bullion was outlawed, and the dollar was devalued relative to gold. This uncoupling was a pivotal moment. It transformed the U.S. dollar into a fiat currency, managed by the central bank, giving policymakers the flexibility to expand the money supply to combat economic contraction.

Finally, to inject much-needed liquidity directly into the financial system, the powers of the Reconstruction Finance Corporation (RFC) were greatly expanded. Originally created in the Hoover administration, the RFC became a major instrument of the New Deal. It began making large-scale loans not just to banks and railroads, but also to purchase bank preferred stock. This was a direct capital injection, shoring up bank balance sheets and giving them the stability needed to begin lending again.

These measures collectively stabilized a collapsing system. They restored public confidence through deposit insurance, reduced systemic risk by segmenting financial services, and provided the monetary flexibility and capital needed to begin the long road to recovery.

By addressing the banking crisis with such speed and structural depth, the government laid a new foundation for the American financial system that would endure for decades.