Bank Panics of 1930 to 1931
The stock market crash of 1929 was made worse by a series of bank panics. Read this excerpt about what happens in a bank panic and how they connect to unemployment.
When a bank needed cash, because its customers were panicking and withdrawing funds en masse, the bank had to turn to its correspondent, which might be faced with requests from many banks simultaneously or might be beset by depositor runs itself. The correspondent bank also might not have the funds on hand because its reserves consisted of checks in the mail, rather than cash in its vault. If so, the correspondent would, in turn, have to request reserves from another correspondent bank…
The [bank panics caused] deflation because they convinced bankers to accumulate reserves and the public to hoard cash…Together, hoarding and accumulating reduced the supply of money…As the stock of money declined, the prices of goods necessarily followed.
Deflation harmed the economy in many ways. Deflation forced banks, firms, and debtors into bankruptcy; distorted economic decision-making; reduced consumption; and increased unemployment.
Gary Richardson. “Banking Panics of 1930-31.” The Federal Reserve History, 2013.
Question 1
How did many customers withdrawing money at one bank affect other banks?
Question 2
Why would banks want to increase their reserves, or, in other words, hold onto more money?
Question 3
What effect did growing bank reserves have on prices?
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