The Great Depression In American Banking

In the year 1929, there was a crash in the stock market. After this, the U.S. has suffered depression that would have lasted  for years. Mentioned below are some of the major causes as well as effects of the Great Depression in American banking.

What Was The Great Depression?

From the year 1929-1939, the U.S. has experienced one the ruthless downturns in the country’s history. It started with the crash of the stock market in 1929 and the following decade was seen to be marked by high rate of unemployment as well as bank failures. Worker lost their jobs as well as their homes along with their possessions.

Many people who kept their jobs, hardly earned enough to meet up their needs. The currency valuation also saw a steady decline and simultaneously the agricultural market has gone through a downfall. Panic became widespread in the country and the lives of the people also got affected badly. By the year 1933, almost half of the banks in the U.S. has failed and nearly 15 million people lost their jobs.

What Were The Causes Of The Great Depression?

It was never only one factor that caused the Great Depression but rather a combination of domestic as well as worldwide conditions. Here are some top reasons that have been cited as the causes of the Great Depression.

Crash Of The Stock Market In The Year 1929

The stock market crash that took place in the year 1929 is one of the cause of the Great Depression. It was considered as one the main causes. Two months after the main stock market crash in the month of October, many stockholders has almost lost greater than $40 billion. However the stock market started to regain some of the losses. By the end of the year 1930, it did not turn up to be enough and America entered into what is known as the Great Depression.

Failures Of The Bank:

During the year 1930, many banks saw failure. Deposits in the banks were not insured. As a result of bank failures, people also lost the savings.

The banks that survived were unsure of the economic condition and were more concerned about their individual survival. They stopped being willing enough for creating new loans. This worsened the condition and lead to much less expenditures.

Purchase Reduction:

The stock market crash along with fears related to more economic distress, forced individuals from different classes to stop purchasing items. Thus there was a decrease in the production of the number of items and also workforce decrease. People lost their jobs.

Thus they were not able to continue making payments for the items they already bought through installment plans and so there occurred repossession of their items. Accumulation of huge inventory began. There was a rise over 25% in the rate of unemployment. This implied that even small spending to aid will alleviate the economic condition.

Effects Of The Great Depression:

Some of the main effects that took place in the years of the Great Depression are:

Rise In The Unemployment:

The wages for many workers were not as high right before the occurrence of the depression. The banks could not offer savings for the people as well as companies were falling apart. As a result the level of unemployment increased to high rates. The Great Depression began with the rise in the unemployment rate but still under 10%. As nadir was reached by the depression, it become worse significantly. It went past 20% in the year 1932 and by the year 1933 it was almost 25%.

Closing Of The Banks:

There was practically no existence of confidence as well as belief in the financial system of the U.S. after the crash of the stock market. This affected the banks to a great extent. Many people started to withdraw the money that they had from the banks. They either preferred to store it or purchase gold. Banks accounts were closed and banks were not having enough cash available to meet up all these withdrawals.

Such bank runs were done by the depositors with a hope of getting back their money before there occurred complete collapse of the banks in the most adverse scenarios. But this most adverse scenario turned up as real life scenario and more than 9000 banks failed. As a result there was a loss of billions of dollars that the bank depositors could not recoup.

Great turmoil was presented for the country as well as the world by the years of the Great Depression. After this struggle, lessons were learnt by government and also the Federal Reserve to avoid allowing a recession becoming a depression of the same vastness ever again.

The Emergence Of FDIC (Federal Deposit Insurance Corporation)

FDIC or the Federal Deposit Insurance Corporation is a US Government aided agency and was founded with the idea of protecting its consumers and to maintain the stability of the U.S. financial system. Their primary job is to create deposit insurance to help the customers evade losses shall a bank fail.

What Is FDIC?

The 32nd President of the United States, Franklin D Roosevelt was the main brain behind the New Deal Program to elevate the US out of the Great Depression and a part of this New Deal ordnance was to call the banks to reflect upon their dismal failures. The Banking Act of 1933 was signed and implemented into law by President Roosevelt himself to use that as a temporary countermeasure the losses incurred against bank deposits if they fail again.

This new law paved the way to the birth of a new organization, however temporary in nature which was named Federal Deposit Insurance Corporation (FDIC). The same was deemed permanent in 1935. Since its inception from January 1, 1934, not a single penny of any deposits has been lost for bank failures.

Till date, FDIC has increased the coverage amount to $250000, the most recent change being made in 2008 which can firmly solidify the organization’s importance in the US economy. This also states that an individual bank paying and belonging to FDIC always ensures that all of their customer’s money is protected up to $250000.

FDIC: 1980 Bank Crisis To Present

Many banks in the United States kept on flunking during the Post-World War II period because of the several adversaries like high-interest rates, recessions, inflations and deregulations which created a void in the banking and economic environment in the 1980s. A change in the monetary policy of the Federal Reserve adding with inflation hiked the interest rates. These high rates along with a fixed rated emphasis were the warning sign for the beginning of bank failures.

The 1980s witnessed the start of bank deregulations with DIDMCA being the significant addition to the law which eliminated ceilings for interest rates, loosening of restrictions on lending policy and the usury laws got overruled in many states. In 1981-1982, during the recession period, Gam-St. Germain Depository Institutions Act was passed by the Congress which acted as a catalyst for bank deregulations and procedures of dealing with bank failures.

All these resulted in a 50% hike in loan charge – offs and as many as 42 banks went bankrupt in 1982. 27 more commercial banks failed during the first 6 months of 1983 and almost 200 banks kept of flunking by 1988. FDIC was required to play its role of paying claims to the consumers of the loss-making banks for the 1st time in the post-war era which at the end highlighted how important was the creation of FDIC and the importance of the deposit insurance.

During this period several other significant events happened like Deposit insurance funds were discontinued in 1983, Congress refinanced FDIC by $10 billion yet FDIC lost money for 1st time in 1988 as 200 FDIC insured banks failed altogether. They overturned that loss and FDIC insurance premiums went from 8.3% to 12% per $100 deposits in 1990. 1991 saw the premiums go up to 19.5 cents per $100 of deposits, FDIC borrowing capacity increased and the least cost resolution was written and imposed by law and the system based on the rich based premium was formed.

By 93, Banks started paying risk-based premiums as the economy saw premiums reaching 23 cents per $100 from the previous 19.5. As of April 2006, deposit insurance for IRAs or Individual Retirement Accounts have been increased to $250000. 2008 saw the signing and implementation of the Emergency Economic Stabilization Act on the 3rd of October which raised the basic limit of government deposit insurance coverage to $250000 from $100000 per depositor although temporarily.

This legislation stated that the insurance limit of the basic deposits will go back to the original figure of $100000 on 31st December 2009. But another new legislation made the insurance limit to be made $250000 permanently in the month of July 2010.

FDIC maintains the Deposit Insurance Fund, by calculating insurance premiums on the basis of their degree of risk on the insurance fund. By calculating so, FDIC has collected a fund large enough now to safeguard consumers against any future bank losses.