Question

Thousands of banks failed during the first few years of the Great Depression for a few reasons. Some of the banks recklessly invested depositors’ money in the stock market, and when the stock market crashed, the banks were left without cash to operate. Others suffered from the panicking public, where depositors rushed to banks to withdraw all of their money. Since banks operate on a fractional reserve system, the banks could not give all deposited money back and had to close. Fractional banking is the system all banks follow, where only a fraction of deposited money is kept physically at a bank while the rest is made available for loans and investment.
Why did the author of this graph include information for 1920 and 1925?
What caused the large drop from 1933 to 1934?
Why might the failure rate have been so low in 1935, compared to 1920 and 1925?

Answer 1

To set a standard during normal times to compare depression years against

Bank holiday and regulations put in place, returning of consumer confidence.

Regulations in place kept banks safer, financially unsound banks were out of business by then.

Answer 2

The author included the information about 1920 and 1925 because that was the time the U.S economy expanded rapidly, The Roaring Twenties. Until 1925 there wasn’t legal requirement to separate the operations of commercial and investment banks, the investment banking was consisted of JP Morgan & Co, Kuhn, Loeb & Co, Brown Brothers and Kindder, Peabody & Co. Their funds could be used to fund the underwriting business of the investment baking side.

In 1929 everyone was putting their savings into stocks, not only the wealth part but the poor part too and because of that the stock market reached the peak in August 1929. But than the production declined causing unemployment and with that the stock prices were much higher than their actual value. The economy was struggling, the debt was rising and the banks had and excess of large loans that couldn’t be liquidated.

In the 1930s over 9,000 banks failed because people didn’t trusted them to put their saving. The Great Depression the official unemployment rate was 25% and the stock marked declined 75% since 1929. But in 1933 now with Rooselvet’s administration he took immediate action about the economic woes first announcing that all banks would close, Bank Holiday. The Congress would pass reform legislation and reopen the banks. In “first 100 days” Roosevelt’s administration stabilized the industrial and agricultural production and created jobs and also created the Federal Deposit Insurance Corporation (FDIC) to protect depositors’ accounts and the Securities and Exchange Commission (SEC) to regulate the stock market and prevent what happened in 1929.

The big change between the crises in the 20s and 30s were all about who was in charge, President Hebert Hoover didn’t take much lead about the crises but Roosevelt did.