In the 1930’s, after the Stock Market crashed, a series of bank failures catapulted the United States into the Great Depression, due to the bank’s inability to handle the crisis, people withdrawing their money, the way they banks operated, and the fact that banks lost a vast amount of their investments on the stock market. Certain Bank directors covered their personal losses from the stock market crash, by withdrawing money of the corporations, which left the rest of the population with over 140 billion dollars in losses.
The great depression was severe that in today’s world it is still used as an example of how deep the world economy can decline. That is why the government has implemented several regulations to avoid this from ever happening again. The considerably decreased in money supply due to a series of bank failures is what took not only the United States, but the entire world into the longest deepest economic depression. Counting checks, or fictitious reserves, is a bank’s process of keeping track of the amount of money another bank owes it, as if it already has the money, but in reality, the money stays in the first bank.
In other words if, money was deposited in a bank and withdrawn on a different bank, both banks considered the cash as cash on hand, but in reality only one bank had the actual money. Many banks lost their customer’s trust, causing them to withdraw their money all at once due to the inability of banks meeting the customers’ demands. The amount of fictitious reserves increased tremendously during the “1920s and peaked just before the financial crisis in 1930″(Banking Panics of 1930-31, Gary Richardson). This led to the start of bank runs.Bank runs were situations where many of the bank’s customers would withdraw their deposits simultaneously due to believing the banks were insolvent. Bank runs became widespread throughout the country, thus increasing the risk of failure.
The reason for this was that customers were panicking and since the banks only carried a small fraction of their assets in cash, they were unable to meet their customer’s demand. Banks had used a great part of their deposits to invest in the stock market, resulting in losing deposits of 140 billion dollars. “In the first 10 months of 1930, 744 banks failed”(Farming in the 1930s, Bill Ganzel) and on 1933, 4,000 banks closed their doors because of bank runs. The bank had a “first come , first served” policy, so when the bank would run out of money all the people that were still in line were left empty-handed. In November 1930, the first major banking crisis began with over 800 banks closing their doors by January 1931. The closures resulted in a massive withdrawal of deposits by millions of Americans estimating to nearly 6.8 billion dollarsMany bank reserves were unable to be mobilized due to the fact that banks didn’t have the money at hand that the customers were demanding, thus leading to an enormous panic among the citizens of the United States.
This was due because “banks kept a portion of their reserves as cash in their vaults and the bulk of their reserves as deposits in correspondent banks in designated cities”(“Banking Panics of 1930-31”), so during the bank runs, many banks had to turn to their correspondents to get money, but most of the time, their correspondents were lacking the money as well, causing the banks to fail and leave their customers without their money. Most of the time, correspondent banks didn’t have the money available “because it’s reserves consisted of checks in the mail, rather than cash in the vault” (“Banking Panics of 1930-31”). The correspondent banks would usually not have the reserves available or respond to the requests. This in turn led to a huge panic in the people. When hearing about the insolvency of banks, many customers panicked and ran to the banks to withdraw their money, which is equivalent to around 60 billion dollars today. During a panic with many bank failures, there was a disruption of the monetary system and a reduction in production.
“The first bank run started in Nashville, Tennessee in 1930″(“Banking Panics of 1930-31”), and this triggered a wave of bank runs in the southeast as customers rushed to withdraw their deposits.During the 1920s many of the companies that were growing and expanding their operations suffer an economic downfall during the Great Depression. For instance, “Caldwell and Company was a growing conglomerate and the largest financial holding company in the south”(“Banking Panics of 1930-31”) that suffered along with other banks and businesses. Caldwell was a company that provided banking, brokerage, and insurance to its clients through a chain controlled by a headquarters in Nashville, Tennessee. The headquarters got into trouble when its leaders invested too heavily in securities markets and lost a large sum when stock prices declined. In order to save themselves, the leaders drained cash from the corporations they controlled. “On November 7, Caldwell’s prime subsidiaries,, the Bank of Tennessee closed its doors”(“Banking Panics of 1930-31”), followed by many of their affiliates, in the next few weeks that followed which forced many banks to suspend operations. In communities, where these banks closed, depositors panicked and withdrew funds en masse from other banks.
About one third of these organizations reopened within a few months, but the majority were liquidated. This situation got worst because banks tried to accumulate assets and consumers tried to hoard all their cash. This stopped the money from circulating and impeding the creation of credit and new loans, this generated deflation. “Deflation forced banks, firms and debtors into bankruptcy”(“Banking Panics of 1930-31”), which by default affected the purchasing of goods, payment for service and a huge increase on unemployment. Farmers in particular went through a difficult time during the Great Depression. In october 1929, the United States economy collapsed, triggered by the by the stock market crash.
Factories got rid of their large numbers of employees or closed their doors altogether. The malaise spread across much of the industrialized world, and soon there was no money to buy the farmer’s products or anything else. Desperate bankers called in the loans, but farmers had no money to pay them and foreclosures and bankruptcy sales became daily events. In the 1920s, every small town had a bank or two struggling to take in deposits and loan out money to farmers and businesses. As the depression deepened in the early 30s, and as farmers had less and less money to spend in town, banks began to fail at alarming rates.
With the farming economy coming to a halt, farmers were left with no money to buy groceries or to make farm payments.Today there are many laws set for the banks in order to avoid future bank failures. For instance in 1933, The federal Deposit Insurance Corporation, known as FDIC was created in order to provide a deposit insurance and to restore the trust of the population, especially to those directly affected by the crisis. Banks are also required to maintain a greater percentage of their assets on cash, in order to avoid future bank runs.
Unfortunately for many, this was all created after the fact, because even though many say that bank failure was the cause of the Great Depression and others argue that the economic collapse was what caused the banks to failed, the truth of the matter is that many americans lost their life time savings.The Stock market occurred on September 1929, and in the the fall of 1930 instead, what was to be the recovery and restoration of the stock market, was inevitably prolong by the bank failures, which sunk the United State and the rest of the world in the longest and most severe economic depression ever experienced.