How did people's fears contribute to the bank closings?

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Ashley Kannan eNotes educator| Certified Educator

The run on the banks helped to cause greater calamity and closings.  When investors went to the banks and demanded their money back, the banks lost their primary source of income and investment capital.  Many demanded their money because of the economic collapse that was being witnessed around them.  In asking for their money back from the banks, they were actually increasing the economic chaos, because when the banks ended up closing, a greater economic challenge was being faced by the nation.  Few in America could have envisioned such a reality and fewer still could remember a time when economic crisis held America so tightly in its grip.

pohnpei397 eNotes educator| Certified Educator

The reason for this is that banks do not keep all of the money that they take in as deposits.  They don't just put it in the vault and keep it there.  Instead, they loan it out and make money that way.  They keep some money on hand, but not enough to give all their depositors all their money at once.

So, if all the depositors want their money back at once, the bank is in big trouble because it doesn't have that kind of money available.

When people got scared that their banks would fail, they ran to the banks to get their money out.  When all the people came at once, the banks went broke.

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