A History of Banking
Depression Bank Failures and Glass-Steagall
How thousands of US banks failed during the Great Depression, how the 1933 banking holiday and deposit insurance restored trust, and why Glass-Steagall separated commercial and investment banking.
During the Great Depression, around 9,000 US banks failed between 1930 and 1933.
Why
- Bank runs as depositors panicked.
- Falling asset values.
- The Fed failed to act as lender of last resort, as Milton Friedman and Anna Schwartz later argued.
The banking holiday
In March 1933, President Franklin Roosevelt closed all banks for a bank holiday, then reopened sound ones.
Deposit insurance
- The Banking Act of 1933 created the FDIC, insuring deposits.
- Bank runs largely stopped.
Glass-Steagall
- The same law, known as Glass-Steagall, separated commercial banking (deposits and loans) from investment banking (securities).
- It was largely repealed in 1999; some blame this for risks before 2008.
India
India’s DICGC insures deposits up to 5 lakh rupees per depositor per bank since 2020.
The reopened bank
After the 1933 bank holiday, a customer who had withdrawn her savings in fear deposited them again, trusting new insurance.
Thinking deposit insurance always existed
The US created the FDIC in 1933 after mass failures.
Key takeaways
- About 9,000 US banks failed in 1930-33.
- Roosevelt declared a bank holiday in March 1933.
- The FDIC insured deposits from 1933.
- Glass-Steagall separated commercial and investment banking.
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