How did bank failure contribute to the Great Depression?

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Banks play a very important role in modern industrial capitalism; they facilitate and encourage economic activity. It is not surprising that the unprecedented rash of bank failures in the late 1920s and early 1930s contributed significantly to the Great Depression. In the twelve months after the Wall Street crash in 1929, 744 banks went out of business—ten times the number of the previous year. In 1933 alone, a staggering 4,000 banks failed in the United States, with savers and investors losing somewhere in the region of $140 billion.

In those days, deposits weren't insured, so if a bank failed and you had money in that bank, you lost every penny. In turn, this meant that people had less money to spend, leading to a dramatic collapse in demand. The consequences for businesses across the length and breadth of the United States were catastrophic. As there was much less money to spend, businesses were unable to sell their products, and many of them went bust. Inevitably, this meant that millions of workers were laid off, putting a further downward pressure on the already dangerously low level of demand in the economy.

Although bank failures may not have caused the Great Depression, they certainly made it a whole lot worse.

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