weaknesses of banking systems

• It can be argued that the economic crisis was caused by the weaknesses of the US banking system. In the 1920s there were 30,000 independent or state-based banks and only 1 in 3 were under the regulation of the Federal Reserve Boards.
• This is important in leading to the economic crisis because no one was checking how much money banks were lending to customers or themselves investing in the stock market.
• In addition, people started losing confidence in the banking system as small independent banks regularly went bust, due to their risky investments & lending to people who could not repay loans – e.g. a bad harvest could make it impossible for farmers to pay back loans.
• This is important in leading to the economic crisis because people began on mass withdrawing all their saving and the banks could not cope with the demand as funds had been invested elsewhere resulting in a banking collapse known as the ‘run on banks.’
• However, this cannot be the most important factor as it was not until after the Wall Street Crash that banks collapsed 10 fold therefore this

  alone is not enough to cause the crisis.
• Additionally, this cannot be the most important factor as banking

  collapses had occurred previously, for example the 1907 ‘Knickerbocker Crisis’ and the results of these did not have such a major impact on the country e.g. 10,000 banks did not go out of business therefore again this alone is not enough to cause the crisis.
• Overall, some Historians argue that the weaknesses in the banking system was the most important reason for the economic crisis because their foolish practices created an unhealthy economy which was vulnerable to a crash and without an efficient banking system the economy could not function.
• However, most Historians argue that the Republican policies were more important because this only occurred because of the weaknesses of ‘laissez-faire’ in which the banks operated unregulated and they clearly had not learnt from previous banking crisis.