The United States has experienced its share of stock market panics, which have resulted in bank runs and bank failures in its brief history. Despite the fact that the present pandemic and the Great Recession of 2009 are still vivid in our thoughts, it is prudent to begin at the beginning.
The Panic of 1819
Bank failures in the United States date back to just over 40 years after the signing of the Declaration of Independence. After the Napoleonic Wars ended in 1819, global market fluctuations threw the United States into its first of many financial crises. For generations, England and France had been at odds, and the United States profited by selling agricultural supplies to both belligerent countries. When they stopped fighting, demand for American goods plummeted.
To make matters worse, uncontrolled speculation in public lands, driven by governments’ loose issue of paper currency, sent the economy into a tailspin that lasted until 1821. The Second Bank of the United States (SBUS) the successor to the First Bank of the United States was severely hit by the crisis and began decreasing the amount of credit it provided to state-chartered banks as a result. State-chartered banks began to fail as a result of the lack of funds. Customers lost their deposits when a bank failed because the FDIC had not yet been established. This resulted in bank runs, which resulted in more bank collapses.
Despite the government’s best efforts, many farmers have lost everything. This crisis resulted in the demise of several state-chartered banks, paving the path for Andrew Jackson to shut down the SBUS in 1933.
The Panic of 1837
The 1837 financial crisis ushered in a period of economic stagnation that lasted until the mid-1840s. Speculative lending practices in western states, a sudden drop in cotton prices, and a land price bubble are all regarded to have contributed to the panic. Andrew Jackson’s financial policies are also thought to have played a role in the crisis.
During this time, 343 of the 850 banks in the United States closed completely. Furthermore, 62 banks failed partially, and many state banks were stressed to the point where the state banking sector never fully recovered. Many Americans lost their life savings because the FDIC failed to protect them.
The Panic of 1873
The Panic of 1873, like previous and future crises, was exacerbated by excessive speculation, but this time in railroads. At the time, Germany and the United States were both demonetizing silver, which could have contributed to the United States’ excessive inflation and high interest rates. After the Civil War, the United States had undoubtedly overexpanded, and severe fires in Chicago (1871) and Boston (1872) had already drained bank reserves, putting the country on the verge of implosion.
Jay Cooke & Company began offering railway bonds for sale in September of 1873. JCC went bankrupt after making large investments in railroads. They declared bankruptcy on September 18, 1873. This was the start of a spate of bank failures that eventually led to the first Great Depression in the United States. After the 1929 events, the period was termed the “Long Depression.” For the first time in history, the New York Stock Exchange halted trade during this crisis. And, once again, many Americans lost everything because there was no FDIC.
The Panic of 1907
Two speculators, F. Augustus Heinze and Charles W. Morse, sought to corner the United Copper stock in 1907, but were unsuccessful and suffered significant losses. Following this tragedy, Americans began withdrawing their funds from banks linked to these two men. These bank runs prompted the New York Clearing House to declare Heinze member banks insolvent, including the Mercantile National Bank, a few days later. The bank runs were exacerbated when F. Augustus Heinz, the president of Heinz Bank, was forced to retire. The New York Clearing House, on the other hand, came to their rescue and granted these banks loans to ensure that they could pay their depositors’ withdrawals, effectively stopping the bank runs.
While the Heinz bank runs were effectively halted, the virus extended to trust companies. Knickerbocker Trust, which had been linked to Morse, experienced another bank run in October. Knickerbocker Trust was temporarily saved thanks to a loan from the National Bank of Commerce, but this did not last. Knickerbocker Trust’s run intensified later in the month, resulting in their failure. Knickerbocker’s failure sparked a run on New York-based banking institutions. The trust corporations that operated in New York at the time are strikingly similar to today’s shadow banks.
The New York Clearing House Committee met and constituted a group to ease the issue of clearing-house loan certificates to prevent these bank runs. These certificates were the forerunners of the Federal Reserve’s discount window loan scheme, which is still in use today. In fact, the Federal Reserve Bank’s intellectual foundation was built on the repercussions of the crisis and the methods taken to ameliorate them.
The Great Depression: Stock Market Crash of 1929
The stock market disaster on ‘Black Tuesday,’ October 29, 1929, marked the formal commencement of the Great Depression. The ‘roaring twenties’ saw a lot of crazy speculation, which contributed to the crash. Prior to the panic, unemployment had been rising, but stock prices had continued to rise. Furthermore, many businesses were dishonest with their investors about their financials in the run-up to the catastrophe.
Due to the crisis, bank runs occurred in the United States later in 1930, resulting in a major wave of bank collapses. The first of these bank runs occurred in Nashville, Tennessee, sparking a wave of similar events across the Southeast. In 1931 and 1932, there were more bank runs in the United States’ financial system.
In 1933, President Franklin D. Roosevelt declared a banking holiday, ordering all banks to halt operations until they were proven to be solvent. The bank runs were finally coming to a close, but the suffering was far from over. During the 1930s, about 9,000 banks failed as a result of these runs and the financial impact of the stock market crisis.
On June 16, 1933, the Federal Deposit Insurance Corporation was established in response to this disastrous incident. Up to a certain limit, the FDIC insured that depositors in member institutions would not lose their money if the bank failed. Bank runs haven’t been a big threat to the US banking system since the FDIC was established. The FDIC presently boasts that “no depositor has lost a dime of FDIC-insured funds since 1933.”
Savings and Loan Crisis of the 1980’s and 1990’s
The Savings and Loan Crisis started in the 1980s and lasted into the early 1990s. This was another crisis brought on by speculation and rules that were out of step with market reality.
The United States had just recovered from the 1970s stagflation, which had resulted in historically high interest rates. S&L was put at a disadvantage by these high rates, as well as rules that limited their capacity to compete. After a high profit in 1980, S&Ls were losing as much as $4 billion per year by 1982. By 1989, over 1,000 S&Ls had failed, and the trend continued into the early 1990s. The FDIC, on the other hand, made sure that Americans didn’t lose their insured cash due to bank failure this time.
How many banks were closed during the 2008 Great Recession?
Many banks in the United States failed as a result of the financial crisis of 20072008. Between 2008 and 2012, the Federal Deposit Insurance Corporation (FDIC) shuttered 465 bankrupt banks. Only ten banks collapsed in the five years leading up to 2008.
A bank failure occurs when a federal or state banking regulatory agency closes a bank. When a bank’s capital levels are too low or it can’t satisfy obligations the next day, the FDIC is named Receiver for its assets. After a bank’s assets are placed in receivership, the FDIC serves two purposes: first, it insures depositors for assets that are not sold to another bank, up to the deposit insurance maximum. Second, as the failing bank’s receiver, it is responsible for selling and collecting the bankrupt bank’s assets as well as satisfying its debts, including claims for deposits in excess of the insured limit. As a result of the Emergency Economic Stabilization Act of 2008, which increased the ceiling from $100,000 to $250,000 per depositor, per insured bank, the FDIC now insures up to $250,000 per depositor, per insured bank.
On September 26, 2008, federal authorities placed Washington Mutual Bank into receivership, making it the greatest bank collapse in US history. Regulators also facilitated the sale of the majority of WaMu’s assets to JPMorgan Chase, which expected to write down the value of the company’s loans by at least $31 billion.
Since 2008, how many banks have closed?
Since a high of 157 bank failures in 2010, the rate of bank failures in the United States has fallen dramatically. 445 banks have failed since the start of 2008, the year the global crisis erupted.
What was the proportion of banks that closed during the Great Depression?
Between 1930 and 1933, more than 9,000 banks failed in the United States, accounting for around 30% of the total number of banks in operation at the end of 1929. This figure certainly indicates the largest number of bank closures in the country’s history. The data reflect at least four distinct periods in which the number of bank failures increased and decreased dramatically: November 1930 to January 1931, April to August 1931, September and October 1931, and February and March 1933. These four occurrences were identified as banking panics by Milton Friedman and Anna Schwartz, with just one of them having causal macroeconomic significance. Only two out of every five bank suspensions happened during banking panics if the 3,400 banks that were not licensed by the Secretary of the Treasury to reopen in March 1933 are omitted. It’s important to remember that 60% of bank closures between 1930 and 1932 were not caused by panic, and that the difficulty of understanding why so many banks collapsed during the Great Depression extends beyond merely describing what happened during panics. One of the causes of non-panic failures during the Great Depression, for example, could have been due in part to the over-expansion of small, rural banks in the 1920s, as well as the impoverished status of American agriculture after World War I. These elements could have played a role during banking panics as well, but they would not have been limited to panics.
Unlike previous banking panics throughout the national banking era, the Great Depression banking panics occurred during the same cyclical downturn from 1929 to 1933, with each panic compounding the impacts of the previous panic.
How many banks were shut down in 1929?
People were growing increasingly concerned about the security of their money in the aftermath of the stock market crash of October 1929. Consumers were spending less and less money as wealthy people withdrew their financial assets from the economy. Bankruptcies were growing more widespread, and people’s trust in financial institutions like banks was eroding quickly. In 1929, 650 banks failed; by the following year, the number had risen to over 1,300.
During the Great Recession, what happened to banks?
The financial crisis of 2008 had a short-term impact on the banking sector, causing banks to lose money due to mortgage defaults, interbank lending to halt, and consumer and commercial credit to dry up. In the long run, the financial crisis influenced banking by spawning new regulation acts such as Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States.
Are banks in jeopardy in 2021?
Banks have recorded phenomenal earnings in 2021 as the US economy continues to revive. However, the findings conceal a more serious concern for banks: a “revenue recession.”
In 1930, what caused the banks to fail?
Deflation increased the real cost of debt, leaving many businesses and households unable to repay their debts. Thousands of banks failed as a result of an increase in bankruptcies and defaults. Between 1930 and 1933, almost 1,000 banks in the United States shuttered their doors.
In a slump, may banks seize your money?
The good news is that as long as your bank is federally insured, your money is safe (FDIC). The Federal Deposit Insurance Corporation (FDIC) is an independent organization established by Congress in 1933 in response to the numerous bank failures that occurred during the Great Depression.