This affected all sectors, some more some less. This time was mainly characterized by a one-third decrease of output, money stock, and prices and therefore was the most serious economic downturn in the United States history. The mentioned regulations and banking codes differed from state to state and consequently the banking system in the United States was divided into geographical sections (Federal Reserve Board, 1929). This reaction could lead to a banking panic due to random withdrawals. Examiners and supervisors of non-member state banks were the state banking commission. Friedman and Schwartz differentiate between four nationwide banking crises. National banks were subject to regulations stating that the Federal Reserve System (FED) and the Comptroller of the Currency (OCC) had to conduct their supervision and evaluation. According to this, the years from 1929 until 1933 were a time full of unrest in the country, characterized by impecuniousness, deflation, slight profits, and desperateness in terms of economic wealth and growth. [Table 1]. Therefore, the paper starts with a brief explanation of the American banking system, its importance and the general structure, in order to prove sound previous knowledge to better understand the following theories. Friedman and Schwartz (1963) labelled the deterioration of the United States The Great Contraction of 1929-1933 and blamed four successive banking crisis for the serious impact on the worlds economy. Click here to learn about options for StrengthsFinder training and using StrengthsFinder for team building. Some banks could not assign themselves to a particular type of business since they operated in the saving, commercial, fiduciary and even investment banking. Due to the fact that general consumption and income decreased, tax revenues fell. Regulations for national and state banks were different when it comes to banks loans, bank capital, investments and reserves. This even decreased consumption and investments further. The American Banking System and Its Importance Farmers, for instance were more affected than house owners or the business sector since low prices for their offerings got farmers into troubles so that they were not able to repay their debt anymore. Even Grossman (1994) stated that the structure of the banking system as well as the structure of single banks had a great impact on the vulnerability of banks. This view is predicated on the propostion that the beginning of the Great Depression was a normal recession due to the current government policy in conjunction with a decline of the money supply.

It contains the assumption that depositors react when they do not receive the whole information about the value of banks asset portfolios and at the same time receives unfortunate news about the macro economy. The drop in aggregate demand started with the collapse of the investment boom just before the Great Depression. Banking panics emerge due to information asymmetry. It is the best possible way for depositors to value banks assets. For this reason, the study is subdivided into three major parts. Despite of the higher fixed rate in case of liquidating depositors usually opt for long-term investments since they entail higher returns. Banks in the United States were mainly small, independent, had single offices and were at the very most private owned unit banks. The first one lasted from the end of 1930 until March 1931. This might have been due to its intense agricultural environment. First of all, it is tested whether investments of banks influence banking failure rates at all. [] Often its officers are the main source of local business counsel and advice, contributing notably to the development of the communitys enterprise (National Industrial Conference Board, 1932, p. 7), Banks are deemed as the financial analogue of enterprises with local ownerships and independent managements, and consequently thousands of independent privately owned unit banks existed in the United States. In the meanwhile several researchers, historians, politicians, and other experts tried to comprehensively explain the causes of the Great Depression, but nevertheless it is still one of the largest unresolved mysteries for historians. In the second part of the study it is investigated whether banks in the United States were more likely to run illiquid or insolvent during the Great Depression. Shortly after the start of the recession in the beginning of August 1929, the Wall Street Crash of 1929 happened. The banking crisis induced banking failures due to the fact that banks suffered from illiquidity and therefore a decline in money supply arose. This theory implies that optimal bank contracts, namely deposits at par value, lead to costly banking panics. The Great Depression was affected by extremely large economic as well as social pressure since Gross National Product dropped almost 30 precents, from $190.9 billion to $141.5 billion and unemployment increased by 20 precents in the time period from 1928 to 1933 (Kendrick, 1961). There are several methods that help to study resources and liabilities of banks. However, state banks had the choice to become a member if they wanted and although it was not obligatory for state banks, one third of commercial banks were subscribed (Comptroller of The Currency, 2015). The most outstanding paragraph was the one referring to the unlike standards of national and state banks. He took both possible aspects, monetary factors as well as the continuing decline in expenditures, into consideration. So far there is no universal explanation provided. Also the banks market structure plays an important role in the asymmetric information theory since the United States has a unit- banking system in which banks act like institutions. - It only takes five minutes From 1929 until 1933 the financial crisis had an immense effect on the United States economy. However, most shoring was that a significant number of over 9000 banks failed in the United States from August 1929 until the Banking Holiday in 1933 (Friedman & Schwartz, 1963).

During the financial crisis, starting in August 1929, several depository institutions had to close their doors; in other words only 14,000 out of almost 24,000 were still operating in the banking industry after March 1933. For a better understanding reasons for banking failures are stated in the context with the whole financial crisis between 1929 and 1933. Therefore, a comprehensive definition, its emergence in connection with the Basel Accords, and different measurement methods are provided. They were called multiple-function banks. Keynes recommended a fiscal policy in order to overcome the financial crisis. 2. 3. In contrast to banking systems of other nations it entailed less large banks with a developed branch systems and more precise national system structures (White, 1983). A trace of anxiety concerning the banking insecurity and a general feeling of suspiciousness emerged. A fear of being the last depositor withdrawing its money will arise when depositors expect other depositors to withdraw their money. This implied that the ratio, banks relative to the population, had to be quite high. Liabilities in the form of fixes price demand deposits and assets in illiquid form did not only increase the vulnerability of banks but also supported banking panics and following illiquidity problems. However, in addition to investment cuts the Great Crash also caused a decline of general consumption due to the fact that consumer became more uncertain about consumption. Table 1 shows that there was a significant number of banks, under national as well as state character, in contrast to the population. For a better understanding a panic is defined as an excessive or unreasoning feeling of alarm or fear leading to extravagant or foolish behaviour, such as that which may suddenly spread through a crowd of people (New Shorter Oxford Dictionary, 2002). In this paper banking panics are seen as an exogenous shock caused by bank runs.

This part is conducted on the state level. Although the United States banking system was characterized by unit banks there are some exceptions, as some of the banks had branches. The continuing downturn of the United States did not come to an end until the Banking Holiday in 1933. 5. Conclusion, Table 1 - Banks And Population, by Geographical Divisions, June 30, 1929, Table 2 - Composition of Commercial Banks Balance Sheets 1924-1929, Table 3 - Subsections of Commercial Banks Assets, Table 4 - States With Highest And Lowest Banking Failure Rates 1929-1933, Table 6 - Total Assets And Liabilities of The United States 1929, Table 7 - Current Assets And Liabilities of The United States 1929, Table 8 - Percentage Decline of Assets on The State Level, Figure 1 - Regression Analysis of Study Part 1, Figure 2 - Percentage Decline of Assets on The State Level. 4. 7. If depositors assume that there is a bank that may become insolvent, but cannot identify the under-performing bank, depositors could trigger a system wide banking panic to suspend unwanted banks. Keynes (2000) came up with a theory for normal economies that states that there is a circular flow of money. Afterwards, however, an increasing number of researchers did not only consider failures of fiscal policies, but started considering the failures of monetary policies as well.

For a banking panic several banks need to be involved. In some cases suspended banks were reorganized and reopened to resume operations although they suspended before.

Theories indicate that the Great Depression is caused by a mixture of low asset price, declining consumption, under invesments, and the absence of self-correcting financial markets. In order to gain deeper insights of banking events, to appraise the American banking system when it comes to judgments and get a broad understanding of the banking situation before and during the Great Depression, it is fundamental to provide a brief overview of the American banking systems general form as it existed in 1929, not considering the changes and the formation of the Federal Reserve System in its past but only the real nature. A lack of confidence in the American banking system is the main trigger leading to banking panics, which caused the Great Depression according to Friedman and Schwartz (1963). Overnight, hundreds of thousands of customers began to withdraw their deposits. In order to come to a conclusion, the value at risk is compared to equity and working capital. In order to talk about banking panics the demand for redemption must be to a certain extent, so that banks either cannot disburse cash anymore or have to act collectively to avoid suspension of convertibility by issuing clearing-house loan certificates (Calomiris & Gorton, 1991). There are several historians providing theories of the financial crisis but with different approaches. Group banking has the small but subtle difference that there is not a single or group of individuals owning or controlling diverse banks but a holding company. Even the stock market crashed. Friedman and Schwartz (1963) are outstanding advocates including both aspects, fiscal and monetary policies, when finding the main triggers for the banking crisis during the Great Depression. Economists can debate whether bank failures caused the Great Depression, or the Great Depression caused bank failures, but this much is undisputed: By 1933, 11,000 of the nations 25,000 banks had disappeared. Insurance Companies but also for example, mutual saving banks were able to conduct almost normal operations whereas commercial banks had immense problems in surviving. Due to the fact that the banking failures were of great importance during the financial crisis, provided theories mainly focus on the causes of the banking failures. Friedman and Schwartz (1963) are outstanding advocates including both aspects, fiscal and monetary policies, when finding the main triggers for the banking crisis during the Great Depression. Last but not least the study examines whether there is a proportional connection between banking failure rates and the value of risk, depending on the amount the banks invested in the different asset type. As a consequence, the unequal distribution of state and national banks has been occurred. First and foremost I want to thank my supervisor, Professor Mrdjan Mladjan, who has supported me throughout my Bachelor Thesis. facts about banks and bank failures during the Great Depression. In this model banks are the main operator insuring depositors against risk since depositors are not sure about their future consumption and long-term investments are quite expensive to liquidate. They occur when a huge amount of debt holders suddenly demand cash for their debt claims. Enormous government investments and pump priming would have been the solution according to him. If depositors preferences of consumption change and deposits have to be liquidated, a first come first serve rule comes into effect. Both, macroeconomic as well as microeconomic theories will be considered in order to explain how banking failures arose.

The underlying conception of an independent unit bank is that of a banking institution having its origin and ownership in the local community and deriving its business chiefly from the communitys industrial and commercial activities and from the farming population within its vicinity or trade area, as determined by available transportation facilities. - Every paper finds readers. For several years, historians as Keynes (2000) and Temin (1976) only focused on factors like under consumption, unbalanced budgets, and bad institutional structures. The heavily increasing ratio, debt services as a fraction of national income (Clark, 1933), did not only cause problems for lenders but also for borrowers. The United States banking system was known and presumed as a consolidated one, since the stability of the credit structure was always guaranteed. Prior to the fall of 2008, FDIC insured bank accounts up to $100,000. Divided in geographical division one can read off that the ratio was clearly highest for the Western division. In contrast to the classical model of macroeconomic his focus is on the analysis of aggregate demand. His knowledge and continuous assistance made it possible for me to write this paper. In the third chapter a comprehensive overview of the financial crises during the Great Depression is given, all significant aspects that could have influenced or even triggered the financial crises are explained and defined, and different views of researchers are provided. Dataset Other historians like Wicker (1980, 1996), Calomiris and Mason (2000, 2003), Temin (1989), White (1984), Richardson (2006,2007) and Bernanke (1994) investigated, similar to Friedman and Schwartz (1963), theories under both aspects. Consequently, an outbreak of the depression was more likely (Peicuti, 2014). - Completely free - with ISBN There have been other historical periods facing banking crises, but most of them only lasted for a short period of time. Calomiris and Gorton (1991) say that bank runs are the perfect response of depositors. Although there was a short period of recovery after the peak of the Great Depression, the aggregate gross national product could not fully recover again until 1938 (Graham, Hazarika, & Narasimhan, 2011). 6. In his eyes an exogenous decrease in consumption rather than in investments was the main cause of the Great Depression. Due to the fact that the economy has to face financial crises again and again it is time to figure out models that might forecast financial crisis. These restrictions should mainly protect the interests of banks customers. Amongst others, Temin (1976) raised the question what could have caused the Great Depression and subsequent banking failures. National banks were bound to be a member of the FED, whereby state banks underlay the state law. He did not only give me the general idea, but also provided me material. In contrast to several researchers, for Friedman and Schwartz (1963) the Wall Street Crash of 1929 was not seen as a cause of the following depression, but rather as an inducement since it encouraged the population to liquidate their deposits. If depositors of only one bank demand to redeem debt for cash and the bank will result in illiquidity it will be called a bank run. There also was a significant difference in the quantity of state banks and nation banks present in the United States. Banking failure rates, value of risk of different asset types and the amount invested in a particular asset relative to total assets are set into correlation by means of a regression model. In this section an overview of current literature is provided, starting with a brief representation of the United States banking system, its importance and general structure, and continuing with a detailed elaboration of the financial crisis with special regard to literature on the field of banking failures. The following chapter will provide brief insights into theories merely based on the fiscal policy problem and will then continue with a comprehensive representation of theories, including monetary factors as well. The general structure of the United States banking system played an immense role in most of the theories explaining the reasons for the financial crisis and its subsequent banking failures of the Great Depression. Since there are different definitions for banking failures across the literature and the terms of banks suspensions and banking failures are often used interchangeable a short definition of both will be provided.