The Devastating Consequences The impact of these bank runs extended far beyond the immediate loss of savings for individuals. In the 1920s, easy credit and laissez-faire oversight allowed banks to engage in risky investments.
Loss of Confidence and the Banking System Collapse
Business failures led to a collapse in commercial paper values, which banks had heavily invested in. Factories shuttered, farms lost, and a cycle of deflation took hold, where falling prices discouraged investment and spending.
The Psychological Trigger While economic indicators often provided rational grounds for concern, the speed and severity of the runs were fueled by psychological contagion. Gold reserve requirements constrained the ability of central authorities to inject cash into the system.
Loss of Confidence and the Banking System's Fragility
The table below illustrates the peak years of bank failures and the staggering rate of closures. Widespread unemployment reduced the ability of borrowers to repay loans, further straining bank reserves.
More About Bank run during the great depression
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