Banking Problems Flashcards
When you put money in the bank, what does the bank do with most of it?
Loan it out to others
Why does the bank loan out most of the money people deposit?
When people pay back the loans they have to pay interest, which lets the bank make money
What is interest
An extra amount of money people pay for the privilege of borrowing money
In the late 1920’s, what 4 things caused many people to not be able to pay back all the money they borrowed?
- People borrowed too much money
- Banks gave loans to some people who were bad credit risks
- People started to lose jobs because of overproduction
- Some people lost a lot of money in the stock market crash
How did the stock market crash cause many banks to lose a lot of money?
Many banks had invested money deposited in the bank into the stock market, so when it crashed the banks lost that money
What 2 things caused the first banks to fail?
- money lost in the stock market crash
2. people not paying back loans
When the first banks failed, what did that cause?
People in other banks to panic and pull their money out of the bank because they feared their bank might be next to fail
Why did people panic and pull their money out of the banks when banks started failing?
Back then, if you had money in the bank when it failed, you lost all your money
How did a bank failure vicious circle develop?
every bank that failed made more people panic and pull their money out of the bank, the more people who pulled their money of the banks, the more banks failed, which caused more panic, and the cycle just kept repeating
What finally stopped the bank panics?
President Roosevelt closed all banks for a “bank holiday” while the government inspected banks and only would let banks reopen when they could show they were in good shape, restoring people’s confidence in banks
How did the banking problems contribute to the vicious circle?
People had to cut spending because they had lost their money when their bank failed
When people lost money because their bank failed, how did that contribute to the vicious circle?
People had to cut back on spending because they had less money
