Running Head: How Banking Affected the Depression 1 How Banking Affected the Depression Name Institution Date
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
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- Fall '07
- Great Depression, Wall Street Crash of 1929, Bank run