Bank Failures in the 1920's

By Allison Larsen

How did Bank Failures lead to the Great Depression?

The banks' failures were heavily influenced by the stock market crash of 1929. Because banks had lent money to stock investors as well as invested other depositor's money in the stock market, when the stocks lost their money, so did the banks. After that, banks were less likely to give loans to new customers; then less credit was available and people couldn't spend as much as they had before. If a bank's debts outweighed its available money, it closed and the people who had used that business lost all of their money. Nervous Americans also started making 'runs' on the banks and withdrawing their money. Many people went bankrupt because they were unable to reach the bank before everyone else. Between 1930 and 1931about 3,000 banks closed (more than 10% of the nation's total). In first ten years following the Great Depression, about 9,000 banks closed in total.

How could this have been prevented?

To an extent, because the stock speculators have received loans from banks, when the stock market crashed they wouldn't have been able to repay their loans. That would cause the banks to be wary about who they give loans to, less credit would be available, people would buy less, etc. The cycle would continue just as it had.
Banks make money off of using the money people have deposited in their bank to give loans to other customers and collect interest. However, if these banks hadn't been greedy and invested so much of their money into the stock market trying to raise more money than they could just collecting interest off customer's loans, banks would have lost much less money when the stock market crashed, and fewer banks would have failed overall. This would have greatly lessened the effects of the Great Depression.

Could this happen again today?

No. Today banks are insured by the FDIC, Federal Deposit Insurance Corporation, it was created by Franklin D. Roosevelt in the Banking Act of 1933. This means that every depositor is insured for $250,000; however, stocks, bonds, life insurance policies, mutual funds, amenities, and securities are not covered. It could be considered one of the most successful government systems because it doesn't operate on taxpayer's dollars and has insured all of the bank account holders in the United States since 1933.