Bank Closures

in the Great Depression

Why Do Banks Close?

When you put your money into a bank, the bank loans it out, invests it into mutual funds, stocks, housing, anything they believe will be profitable (They will do a lot of research on their exploits before any money is involved). When for whatever reason the profits fail to materialize, they are in trouble. Someone's savings money is lost, and the bank is unable to continue because of a loss of trust between the people and the bank. People will not put their money in the bank, because the bank has lost it, and the bank will be unable to continue. They are forced to close because of bad investments.
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Economic boom leading to Great Depression 1920-1932

In the 1920's, an economic boom allowed the United States to prosper.
  • Core Goods (Oil, Coal)
  • More money compared to European Countries after WWI
  • Henry Ford's assembly line lowered prices
  • Fordney-McCumber Tariff Act placed tax on imports

With the economic boom, many took their money from under their mattresses and from banks and began investing in the Stock Market. Banks also began investing their clients' money in the Stock Market. The banks in the 1920's were not federally insured, so when they began loaning more money than they had coming in from loans, people began to panic and wanted to withdraw their money. But since the Banks used nonexistent money from loans to build homes, they didn't have any to give out. This and the collapse of the Stock Market in 1929 were just the tiny snowball that began major bank closures.
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The reason why there is such a drastic drop in the number of bank closures during this one year period is the fact that Franklin D. Roosevelt restored the public's trust in banks. Immediately after he was inaugurated on March 4, 1933, he closed all the banks in America by executive decree for a week, and also declared that only banks that had stabilized within the week will reopen and had passed federal review. On the last day of the "bank holiday", March 12, 1933, He promised to American public that because the banks were reviewed "it [was] safer to keep your money in a reopened bank than under the mattress" during his first fireside chat. And people immediately trusted banks again, to the point where they redeposited half the money that was originally stored in the banks within 2 weeks of their reopening. It was not the federal review procedure that restored the trust in the banking system, but Roosevelt's ability to communicate. In fact, the federal review procedure, for it to actually have been effective, would have taken months of review of the thousands of banks that did reopen. And there was no bureaucratic standard procedure for reviewing banks. So to say that the investigation of banks was credible was a bluff, but it was a bluff played by FDR, and therefore a well-played bluff. The FDIC was also opened in 1933, and would begin to insure bank accounts, adding to the trust in the banking system again.
The Century: America's Time - 1929-1936 Stormy Weather