Bank Runs Great Depression: Lessons Learned from History

The Great Depression was a pivotal moment in history that taught us valuable lessons about the importance of banking stability and regulation.

In 1933, over 9,000 banks failed in the United States, resulting in the loss of billions of dollars in deposits.

The bank run on March 6, 1933, was a pivotal moment in American history, with people withdrawing their money from banks in a frantic attempt to save their savings.

This widespread panic was triggered by the collapse of the banking system, which had been weakened by years of reckless lending and speculation.

A bank run is a situation where a large number of people withdraw their money from a bank at the same time, often due to fear that the bank will run out of money or go bankrupt. This can happen when there's a perception that a bank is in trouble, even if it's not actually insolvent.

In fact, bank runs are often the result of panic rather than true insolvency, according to Cornell University. The mere hint of a bank closing can send depositors scrambling to withdraw their money.

Here are some key facts about bank runs:

The consequences of a bank run can be severe, as seen during the Great Depression. Over 1,400 banks collapsed in 1932, taking with them $725 million in deposits.

A bank run is a situation where many people try to withdraw their money from a bank at the same time, often due to fear of the bank collapsing. This can happen even if the bank is not actually insolvent.

A bank run can be triggered by public fear, which can create a cycle of panic withdrawals. If customers perceive a rising risk beyond their individual comfort, they may withdraw their money, making it harder for the bank to maintain liquidity.

Banks typically keep only a small percentage of deposits as cash on hand, which means they may not have enough money to meet withdrawal demands. To increase cash on hand, a bank may sell assets, sometimes at lower prices than usual, which can cause customer concerns.

During the 1920s, many banks engaged in unsound banking practices, such as lending money for poor investments or extending large credit to speculators. This led to a high number of bank failures, with over 1,400 banks collapsing in 1932, taking $725 million in deposits with them.

In some cases, a bank may limit withdrawals per customer or suspend all withdrawals altogether to deal with the panic. In extreme cases, a bank may even shut down temporarily, as seen in the US on March 6, 1933, when President Franklin D. Roosevelt declared a national bank holiday to prevent further bank runs.

Banks extended too much credit during the 1920s, fueling a credit boom that led to the 1929 crash and the Great Depression.

New businesses borrowed to support non-stop expansion in output, keeping borrowing and spending even as business inventories soared 300 percent between 1928 and 1929 alone.

Banks funded speculation itself, providing money for individual investors to buy stocks on margin, with some farmers borrowing up to 90 percent of the money needed to invest.

Farm incomes plunged in the years leading up to 1929, and others found their wages stagnant, relying solely on their stock market wealth for prosperity.

The banks ignored warning signs, downplaying the fact that Americans were overstretched, and continued to subsidize new businesses.

A bank run is a situation where a large number of customers withdraw their money from a bank at the same time, often due to a loss of confidence in the bank's stability.

This can be especially problematic for banks that have a high proportion of demand deposits, which can be withdrawn on short notice.

To mitigate this risk, banks can offer term deposits, which are essentially savings accounts with a fixed term.

These term deposits are non-callable, meaning customers can only withdraw their money after the agreed-upon period, not on demand.

This makes it easier for banks to manage their liabilities and avoid a bank run, even if customers withdraw other deposits.

By locking up a portion of their liabilities, banks can ensure they have enough funds to meet withdrawal requests and maintain stability.

A bank run occurs when people try to withdraw all of their funds for fear of a bank collapse, causing the bank to run out of cash and become insolvent.

The critical quality for any bank is trust, and if customer trust is suddenly diminished or lost, it can create panic, whether rational or not.

Bank runs can arise from public fear pushing a bank into insufficient liquidity rather than actual insolvency, and managing daily reserves is a critical function of any bank.

A bank may limit the withdrawals per customer or suspend all withdrawals altogether as a way of dealing with the panic, but this can perpetuate a cycle that triggers even more withdrawals.

Banks typically hold onto only a small percentage of all the money depositors entrust to them, and lend out the rest in search of a profit; this can lead to a shortage of cash reserves if customers start showing up in droves and demanding their deposits back.

A silent run is essentially a modern twist on the classic bank run, where depositors withdraw their funds electronically in large volumes. This can happen through ACH transfers, wire transfers, and other digital methods that don't require physically entering the bank.

Silent runs are similar to traditional bank runs, except they occur without the usual scenes of long lines and anxious depositors. This can make them harder to detect and respond to.

These electronic withdrawals can happen quickly, catching banks off guard and potentially leading to a liquidity crisis.

Banks typically hold onto only a small percentage of all the money depositors entrust to them, and lend out the rest in search of a profit.

This is because banks count on the ability to borrow from other financial institutions, or from the Federal Reserve, to cover any unexpected shortfall in reserves.

Most institutions have a set limit on how much they store in their vaults daily, which is set based on need and security reasons.

This limit is often not enough to cover all of their deposits, which can lead to a bank run if depositors suddenly demand their money back.

During the Great Depression, large numbers of American banks hadn't joined the Federal Reserve system and so weren't able to tap its reserves to avoid collapse.

Ironically, once banks started to try to correct their missteps by keeping more reserves, they stopped lending money, making the problem worse.

A bank run happens when people try to withdraw all their funds for fear of a bank collapse, causing the bank to become insolvent.

This can be triggered by a perfect storm of unlucky factors, just like the one that led to the start of the Great Depression in 1929.

The Great Depression was the worst economic downturn in U.S. history, and it's essential to understand the causes to prevent similar events.

People's fear of a bank collapse can be fueled by rumors or a lack of trust in the banking system, making it difficult for banks to operate normally.

A bank run can happen suddenly, catching banks off guard and leaving them struggling to meet withdrawal demands.

Bank runs have occurred throughout history, but one of the most notable examples is the Great Depression. In the wake of the 1929 stock market crash, American depositors panicked and began withdrawing their deposits.

A succession of bank runs on thousands of banks occurred in the early 1930s, creating a domino effect on the economy. This was a devastating period for the US economy.

More recent examples of significant bank runs include those on Silicon Valley Bank, Washington Mutual Bank (WaMu), and Wachovia Bank. These bank runs were caused by a combination of factors.

Washington Mutual (WaMu), which had about $310 billion in assets at the time of its failure in 2008, was the largest bank failure in the U.S. It suffered a run when customers withdrew $16.7 billion within two weeks.

JPMorgan Chase eventually bought Washington Mutual for $1.9 billion. This was a significant acquisition, given the bank's large size.

Wachovia Bank was also shuttered after depositors withdrew more than $15 billion over a two-week period following negative earnings results. Much of the withdrawals at Wachovia were concentrated among commercial accounts with balances above the limit insured by the Federal Deposit Insurance Corporation (FDIC).

Governments took several steps to diminish the risk of future bank runs in response to the turmoil of the 1930s. The establishment of reserve requirements was a key measure, mandating that banks maintain a certain percentage of total deposits on hand as cash.

The Federal Reserve has since reduced reserve requirements to zero due to the creation of other monetary policy tools. The U.S. Congress established the FDIC in 1933 to insure bank deposits in response to the many bank failures in the preceding years.

The FDIC provides insurance based on ownership category, with each depositor insured for up to $250,000 in each different category. The FDIC may also extend its coverage in certain cases, such as when Silicon Valley Bank failed in 2023.

Banks need to take a proactive approach if faced with the threat of a bank run, and may temporarily close to prevent people from withdrawing their money en masse. Franklin D. Roosevelt implemented another solution by declaring a bank holiday in 1933, calling for inspections to ensure banks' solvency.

The FDIC initially guaranteed deposits to a maximum of $5,000 when it was first established. The FDIC is funded by quarterly fees assessed on banks, which are used to reimburse depositors in the event of a bank failure.

The Great Depression was a time of widespread economic hardship, and one of the key events that contributed to its severity was the phenomenon of bank runs. A bank run occurs when a large number of depositors lose confidence in the security of their bank and withdraw their funds at once.

Banks typically hold only a fraction of deposits in cash, so during a bank run, they must quickly sell their assets at often rock-bottom prices to come up with the necessary cash, which can lead to significant losses. In the fall of 1930, a bank run in Nashville, Tennessee, kicked off a wave of similar incidents throughout the Southeast.

This wave of bank runs was followed by similar incidents in the spring and fall of 1931 and the fall of 1932, causing widespread economic disruption. A single rumor, like the one spread by a small merchant in the Bronx who was refused a sale of Bank of the United States stock, could spark a bank run, as seen in December 1930 when a crowd gathered outside the bank and withdrew $2 million in funds.

The Great Depression was a time of economic crisis that lasted for over a decade, from 1929 to the late 1930s. Banks played a significant role in the crisis, ignoring warnings from the Federal Reserve to slow down lending.

Banks didn't maintain adequate reserves, which made them vulnerable to collapse. They held only a small percentage of deposits in cash, and the rest was lent out to borrowers or invested in other assets. This left them unable to cover unexpected shortfalls when depositors demanded their money back.

The first wave of bank runs began in the fall of 1930, triggered by a bank run in Nashville, Tennessee. This was followed by similar incidents throughout the Southeast, as depositors lost confidence in the security of their banks.

Bank runs were a major problem during the Great Depression, as they led to a rapid depletion of a bank's cash reserves. Banks had to quickly liquidate loans and sell assets at rock-bottom prices to come up with the necessary cash, which often put them at risk of insolvency.

The stock market crash in 1929 was a major contributor to the bank runs, as investors withdrew their funds from banks to cover their massive stock market losses. This created a vicious cycle, as banks struggled to meet the demand for cash and businesses were unable to access capital.

The bank crisis came to a head in the winter of 1932 and into 1933, with a series of bank runs continuing across the country. This was when President Franklin D. Roosevelt declared a national bank holiday, closing all banks until they could be inspected for solvency.

Roosevelt's actions helped to begin the process of restoring public confidence in the banking system. He gave a series of radio speeches, known as fireside chats, in which he assured Americans that the government would not allow another wave of bank failures.

The Pecora investigation was a series of sensational hearings held in 1933 and 1934 that exposed widespread theft and fraud on Wall Street.

Congress punished bankers for their old violations of the public trust, introducing the term "bankster" to the cultural vocabulary.

The Senate Banking and Currency Committee, led by Ferdinand Pecora, revealed that the brokerage house of Lee, Higginson, and Company had defrauded the public of $100 million.

Charles E. Mitchell, head of National City Bank, paid no income tax and had issued $25 million in worthless Peruvian bonds.

Andrew Mellon, former secretary of the treasury, and J. P. Morgan, a prominent banker, had also managed to avoid taxes.

Twenty of Morgan's partners paid no taxes in 1931 and 1932.

The public was introduced to Wall Street tactics like selling short, pooling agreements, influence peddling, insider trading, and the wash sale.

These practices artificially inflated the worth of stocks or gave traders a financial advantage over others.

National City Bank took bad loans, repackaged them as bonds, and sold them to unwary investors, actions that were technically legal but viewed as unethical and immoral.

The public reputation of bankers and financial businesspeople fell to a new low.