Banks During The Great Depression Essay

In October of 1929, the stock market crashed, which caused many Americans to be highly agitated and extremely gullible to the rumors of bank failures. Spending money and investing began to decrease, which later then lead to a drop in production and employment. Banking panics or “bank runs” intensified the nation's economic woes or distress during The Great Depression. The effects of bank failures in business and the economy caused people to lose everything and the production rate of goods and services fell by half during the Great Depression.

During the 1930s, the first official bank run happened in Nashville, Tennessee which then kicked off similar incidents throughout the Southeast. Usually during a bank run, a large number of depositors

lose confidence in the security of the bank, leading them to withdraw all their money at once. Banks only hold a fraction of deposits in cash at any one time, and lend out the rest to borrowers or government securities. When a bank run happens, the bank must quickly settle/pay (a debt), and sell anything useful and desirable thing they have, to come up with the necessary cash, and the losses they suffer can threaten the bank's ability to pay all debts. The banking panic that happened in 1930 was followed by similar incidents in 1931 and 1932. Sometimes, bank runs were started simply by the rumors of a bank's ability to pay out funds. In December of 1930, the New York Times reported that a small merchant in the Bronx went to a branch of the Bank of the United States and asked to sell his stock in the institution. When they told the man, the stock was a good investment and advised him not to sell, he left the bank and began spreading rumors that the bank had refused to sell his stock. Within hours, a crowd had gathered outside the bank, and that afternoon between 2,500 and 3,500 depositors withdrew a total of $2 million in funds. Bank runs continued through the winter of 1932 and into 1933. Franklin D. Roosevelt had already won the victory in the presidential election over Herbert Hoover and immediately after taking office in early March, Roosevelt declared a national “bank holiday”. Roosevelt also called Congress to come up with a new emergency banking law to aid the financial problems during this time.
In the past, depositing money into a bank account was risky and a challenge.

If a bank made bad investments and was forced to close, people who did not withdraw their money fast enough, found themselves left with no money. When depositors heard a bank was unsound or not solid and began removing their funds, the news would spread to others which would make them remove their funds from that bank as well. By 1932, 5102 banks went out of business. Families lost their life savings overnight. This really affected the lives of many people during this time because it left the Americans very nervous that they would lose everything they have. Overall consumer spending, investment decreasing, a decline in production and employment all tie back together that all these problems were caused by the banks failing.These Americans didn't expect for all their money to just disappear from the banks because if they knew that it was going to happen, they would have just kept it under their mattress. Smaller banks were failing first, so people in the metropolitan area weren't concerned. Investors and businessman assumed that failing banks were either weak or badly managed, which proves that no one expected for all these banks to fail and all this money to be lost. As soon as Franklin Roosevelt become president, his first priority was to fix the failing financial institutions. Two days after Roosevelt took oath of office, Roosevelt declared a “bank holiday”. From March 6 to March 10th, banking

transactions were suspended across the nation except for making change. Banks were divided into four categories. Over half of the nation's banks were put into the first category which meant that they were fit to be reopened. The second category of banks were permitted to allow a percentage of its deposits to be withdrawn. The third category consisted of banks that were on the extreme edge of collapse. When the “bank holiday” ended, these banks were only permitted to accept deposits. Five percent of banks were in the final category which was unfit to continue business. Roosevelt addressed the nation through one of this signature “fireside chats”. While using honests words in soothing tones, he assured sixty million radio listeners that the banking crisis was over and the nation's banks were secure. By April, Americans confidently returned a billion dollars to the banking system.
While Herbert Hoover was president, he created The Reconstruction Finance Corporation (rfc) on February 2, 1932, which was to make emergency loans to banks and railroads in danger of backing out as the Great Depression got worse.

$1.5 billion was given out from the rfc in its first year and was credited with trying to help with the prevention of bank failures during the first half of 1932. Even though five thousand financial institutions, railroads, and life insurance companies received loans, but it became clear that the most rfc money was going to a few large firms. As the Great Depression was getting worse, the money situation was also getting worse because Hoovers congressional opponents argued for direct federal grants to states, a governing body, or individuals. The Emergency Relief Act of July 21, 1932, authorized the rfc to lend $300 million to states that used up their own relief funds. Roosevelt also signed the Emergency Banking Act on March 9, 1933, which granted the government necessary powers to reopen the banks and resolve the immediate banking crisis. The Emergency Banking Act granted the government to reopen banks and 90% of the total United State banks were

safe