How did the Great Depression impact the banking system?

The Great Depression had a profound impact on the banking system in several ways. Firstly, the stock market crash of 1929 led to a significant decline in stock prices, causing many banks to suffer heavy losses as they had invested heavily in stocks. This resulted in a wave of bank failures and closures, leading to a loss of public confidence in the banking system.

Secondly, the economic downturn caused widespread unemployment and a decrease in consumer spending, which in turn led to a decrease in deposits in banks. As people lost their jobs and businesses failed, they were unable to repay their loans, resulting in a rise in loan defaults. This further weakened the financial position of banks, as they faced a high number of non-performing loans.

To make matters worse, the banking system at the time was not as regulated or protected as it is today. Many banks were operating with inadequate reserves, meaning they did not have enough cash on hand to meet the demands of depositors who wanted to withdraw their money. This lack of liquidity exacerbated the crisis, as banks were unable to meet the increasing number of withdrawal requests.

In response to the crisis, President Franklin D. Roosevelt implemented a series of reforms and policies known as the New Deal. One of the key measures was the establishment of the Federal Deposit Insurance Corporation (FDIC) in 1933. The FDIC provided deposit insurance, guaranteeing the safety of individual deposits in member banks. This helped restore public confidence in the banking system and prevent future bank runs.

Overall, the Great Depression had a devastating impact on the banking system, leading to widespread bank failures, loss of public confidence, and the need for significant reforms to prevent a similar crisis in the future.