Financial Insolvency During The Great Depression

In the middle of The Great Depression, stocks dropped forty percent from the beginning of September to the end of October in 1929. Quite a few years later in 1932, the stocks were down ninety percent from the original highs of 1929. These statistics show that banks and the money-making world was in ruins. Investor confidence was at its lowest, making it hard for the financial world to rebuild after it’s big crash. In 1933 as the Act was being administered, banks started to reopen and the investors confidence grew. Going through and inspecting all banks throughout the span of two weeks established trust between the people of America and the Federal Banking System. Through one of Franklin Roosevelt’s famous “Fireside Chats” the President

With so many small banks, it is difficult for them to diversify their assets, which puts them at a risk of insolvency. Insolvency is the inability to pay debt that someone owes, leading to other problems among the small establishment such as liquidity problems. The banks have found it hard to keep enough cash in their possession to supply the depositors’ demands. After 1933 and President Roosevelt’s efforts with the Federal Reserve to vanquish this problem the rate of insolvency and liquidity were reduced tremendously. The Emergency Banking Act made sure that the banks had enough money and assets to safely reopen and continue to serve the men and women who had invested in the particular bank. The Federal Banking system inspected all banks throughout the banking holiday set by President Roosevelt. Out of all the banks inspected, fifty percent were cleared to reopen, as they had enough resources to function like before the Great Depression. Forty-five percent of the banks were put under regulations and were only cleared to pay out a certain percentage of deposits. These banks later received help in reorganizing the system by the Reconstruction Finance Corporation. The remaining five percent were immediately shut down due to the poor financial condition, and were never re-opened. The Emergency Banking Act helped stabilize the corrupted banking system by

In the beginning of the 1929 stock market crash, Congress was worried that commercial banking operations and payment systems were incurring losses from the unpredictable equity market. The main reason the bill was pushed was because Congress believed bank-credit should be restricted and aimed towards more productive uses, such as agriculture, industry, and commerce. Because of this concern, a main point to the Emergency Banking Act was to separate commercial and investment banking. This means that commercial banks, who took in deposits and distributed loans, were not allowed to deal in tradable financial assets, and investment banks were unable to have close connections to commercial banks. The act also gave tighter regulations to the national banks, requiring affiliates of state member banks to make three annual reports to the Federal Reserve Bank. This act put many regulations into place that stabilized the spending of all financial branches in the nation and helped rebuild the financial world in