3 pages bankimg and great depression.docx - Running Head...

Running Head: How Banking Affected the Depression 1
How Banking Affected the Depression
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How Banking Affected the Depression 2
How Banking Affected the Depression
The two theories relate to how banks caused the great depression relates to banking
panics and failure of the gold standard which caused the monetary contraction in the economy.
Prior to the 1930s, Duignan (2015) notes that the banking industry operated without clear
safeguards on the deposits. It, therefore, meant that whenever a bank failed, the customers lost
their deposits. The structural weaknesses in the economy of rural American led to higher levels
of farm indebtedness and made the banks vulnerable to collapse. The period leading up to 1920
had seen a rapid rise in land prices, and the many farms were over-mortgaged to banks.
However, Romer & Romer (2013) notes that the land prices experienced a bubble in 1919,
partially due to low crop prices, and many customers were missing their repayment obligations,
hence exposing the banks.
In the urban areas, the banks were also exposed, partially due to structural weaknesses
that had overexposed them to the stock market. Romer & Romer (2013) notes that some of the
banks had heavily invested in the stock market and had made risky loans. The substantial
investments made this way meant that the banks had low cash reserves to lend. In 1931, the stock
market crashed, and this led to massive losses to the investors. Some of the heavy losers were