Weakness of Banking System Flashcards
Link
-A major problem…
A major problem that led to the financial crash of 1929 was the weak banking system in the USA.
Knowledge (1)#
-The US banking system…
The US banking system was made up of thousands of small, state-based banks, many of which would not be able to cope with a large financial crash.
Knowledge (2)
-In hundreds of small communities…
In hundreds of small communities, local people put their money into the banks for safekeeping and earned a small amount of interest in return.
Knowledge (3)
-Banks then used…
Banks then used their customers’ money to make investments that made more money for the bank.
Knowledge (4)
-As the economic boom grew…
As the economic boom grew, banks invested savers’ money in the stock market in the hope of making a larger profit due to the low interest rates, which deterred people putting money in savings accounts.
Knowledge (5)
-The banking system allowed…
The banking system allowed the banks to regulate themselves without the Government interfering.
Knowledge (6)
-There were 30,000 banks…
There were 30,000 banks in the 1920s, none of which had any checks to ensure they were reliable operators and would not be careless with customers’ money.
Knowledge (6)
-But, when financial uncertainty…
But, when financial uncertainty loomed, people began to withdraw their savings.
Knowledge (7)
-The banks could not cope…
The banks could not cope with the demand as they had used customer’s money to invest in the stock market, lost it as shares fell and consequently ran out of money.
Analysis (1)
-This was important because the collapse of one bank…
This was important because the collapse of one bank often led to a ‘run’ on other banks, resulting in a banking collapse.
Analysis (2)
-By the end of 1932…
By the end of 1932, 20% of the banks that had been operating in 1929 had declared bankruptcy and had closed down.
Analysis (3)
-The normal banking system…
The normal banking system almost ceased to exist and without an efficient banking system, the economy could not function.
Analysis (4)
-Also, businesses rely on…
Also, businesses rely on having access to banks so they can borrow money to pay wages but because many banks ran out of money, it caused a chain reaction of businesses closing.
Analysis + (1) & Historiography
- However, some historians such as Robert Sobel…
- “President Hoover’s Inactivity”…
However, some historians such as Robert Sobel argue this was not the cause of the Wall Street crash. He advocates that it was “President Hoover’s inactivity” that led to the collapse as he should have put a policy in place to have banks checked regularly.
Analysis + (2)
-Hoover’s “laissez-faire” attitude meant…
Hoover’s “laissez-faire” attitude maent he failed to see the size of this particular financial crash.
