The cycle of runs created a contagion that spread from state to state, destabilizing the entire financial network. When businesses began to fail due to collapsing demand, the banks that had lent them money were left with worthless assets.
How the FDIC and Lender of Last Resort Stopped the Next Bank Run
Unlike today’s diversified institutions, most banks of the era were small, local unit banks with limited geographic diversification. Furthermore, the absence of a federal safety net, such as the Federal Reserve acting as a lender of last resort and the FDIC insurance established in 1934, meant that panics were inherently more destructive.
Regulatory Neglect and Structural Weaknesses. Monetary Policy Errors and the Deflationary Spiral The Federal Reserve, established to provide stability, made several critical errors that deepened the crisis.
How the FDIC and Lender of Last Resort Stopped the Cycle of Bank Runs
During the Great Depression, however, the word "bank" in "bank run" was tragically literal. Crucially, a significant portion of bank funds were tied up in the stock market and loans to businesses that now faced collapse.
More About Why did the banks fail in the great depression
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