• FIC Hansraj

Bank Run and Panics of 1930-1931

~ By Vanshika Gupta

A bank run happens when a large number of individuals start making bank withdrawals because they fear that the institution will possibly run out of money. It is usually triggered by panic rather than an actual economic condition.

A very famous bank run occurred in the USA during 1930-1931. Following the stock market crash of 1929, the US seemed primed for economic growth, until a series of crises between commercial banks in November 1930 turned what had been a conventional recession into the beginning of the Great Depression. The practice of counting checks in the collection process as part of the cash reserves of banks was one reason. In the reserves of two banks, the one on which the check was deposited and the one on which the check was drawn, these floating checks were counted. The cash was solely in one bank. At that time, bankers referred to the float funds as fictitious reserves. The quantity of these fictitious funds peaked just before the financial crisis which meant that the bank as a whole had fewer cash reserves available for emergencies.

Bank Run of 1930s | FIC Hansraj
Bank Run of 1930s

A portion of the cash was held in their vaults by the banks and the majority of their reserves as deposits in correspondent banks in specified cities. This reserve pyramid restricted the access of country banks to reserves. Since the customers were panicking and withdrawing funds at large, the banks needed cash for which they turned to their correspondents who also did not have funds in their hands.

These problems led to the collapse of the Conglomerate and Company, the largest financial holding company in the South. The parent company Tennessee faced difficulties when the leaders invested too heavily in securities. To cover the losses from declining stock prices, they diverted cash from the companies that they owned due to which the bank was forced to close its doors along with other Cladwell affiliations resulting in hundreds of commercial banks suspending their operations.

In December 1931, the Bank of the United States of New York collapsed. At the time, the bank had more than $200 million in deposits, making it the biggest single bank failure in the history of America.

The response of the Federal Reserve to this crisis differed across districts. The crisis began in the Sixth District, headquartered in Atlanta where the leaders claimed that their position as the last resort lender extended to a wider banking system wherein they provided discounted lending to member banks and also encouraged them to assist the non-members. On the other hand, the Federal Reserve of St. Louis limited discount lending and denied assistance to non-member institutions.

Bank run
Bank run

In June 1931, a new crisis erupted in Chicago which was particularly associated with real estate. The crisis triggered deflation as it persuaded bankers to accumulate reserves and the public to stockpile cash. Hoarding and accumulation of wealth also reduced the supply of money in the economy.

The deflation culminated with the National Bank Holiday of 1933 and the Roosevelt administration’s stimulus programs. These programs included the suspension of the gold standard and the reflation of prices, reform of financial control, the development of deposit insurance, and the recapitalization of commercial banks. Roosevelt’s policies helped to begin the process of regaining public confidence. When the banks reopened many depositors showed up ready to deposit their currency or gold, signaling the end of the nation’s banking crisis.