Why Did Thousands of American Banks Close After the Stock Market Crash?

did-thousands-american-banks-close-after-stock-market-crash Credit: Getty Images/Archive Photos/Getty Images

According to History.com, when the U.S. stock market crashed in October 1929, many American banks began closing because consumers pulled all of their money out of the banks, including investments and cash accounts, and began to default on loans. Because the banks had to liquidate loans and sell assets to pay consumers withdrawing their funds, the banks began to fail due to lack of funds.

History.com notes that banks rarely keep the full amount of deposits and securities it holds in cash on the premises. When consumers began to panic, worried about the security of their funds in banks after the stock market crash, the banks had to take a financial loss to pay all of their customers immediately. Without an influx of cash, the banks closed.

Public Broadcasting Service notes that the American banking system was largely non-existent by 1933. The remaining banks couldn't give out loans to businesses. Consumers didn't know what checks to accept because many were worthless, and banks had huge amounts of assets in uncollectable loans and low value stock certificates. President Franklin D. Roosevelt attempted to help surviving banks by closing them for three days in 1933 for a "bank holiday" before allowing them to reopen with cautionary limits on withdrawals. As confidence began to return to the banking system, the government set up the Federal Deposit Insurance Corporation to prevent future bank runs. The FDIC insures consumers' bank deposits so that if the bank closes, the government reimburses the consumer for any money lost.