🏦 Why banks were weak
A bank lends out most of the deposits it holds. Some loans were never repaid, because farmers and firms could not pay. Some banks had also put depositors' money into shares, which lost their value.
The USA in Depression, 1929-33 » From Crash to Depression: Banks, Farms and Factories
What you'll learn this session
Study time: 30 minutes
Edexcel spec: Paper 2 Section A, Investigation A3, Key topic 3
- How the Wall Street Crash led into the Great Depression
- Why banks failed, and why bank failures hurt ordinary savers
- How falling prices pushed farmers into debt and off their land
- Why factories closed, and how to answer a "How far does Source A support Source B?" question
🔒 Unlock Full Course Content
Sign up to access the complete lesson and track your progress!
Unlock This CourseFrom Crash to Depression
The Wall Street Crash of October 1929 wiped out huge sums of money. The Dow Jones index fell from about 381 in September 1929 to about 41 in July 1932, a loss of nearly 90 per cent. People who had shares, and many who had borrowed to buy them, lost their savings. Those who lost money cut back what they spent. Firms that sold less cut back their production.
In 1930 many people hoped it was a short slump. It was not. Between 1929 and 1933 the American economy shrank year after year. This long period of falling trade, collapsing businesses and mass unemployment is called the Great Depression. The Crash did not cause all of it on its own, but it destroyed confidence, and the damage then spread to banks, farms and factories.
Key terms:
- Great Depression: the severe fall in American trade, production and jobs that began after the Crash and lasted through the 1930s.
- Deposit: money that a customer pays into a bank for safe keeping.
- Bank failure: when a bank cannot pay its customers back and has to close.
- Bank run: a rush by customers to take their money out of a bank at the same time.
- Credit: money that banks lend to people and businesses.
Banks
💸 Why savers lost out
There was no insurance on savings. If your bank failed, the money you had saved could be lost for good.
Bank failures began to climb in late 1930. In December 1930 the Bank of United States in New York closed, which left about 400,000 depositors without their money. News like this frightened people in other towns. Customers queued outside their own banks to take out their savings. A bank run could ruin even a sound bank, because it did not keep all its deposits in cash.
The figures were huge. President Hoover told Congress in December 1932 that 4,665 banks had suspended payments since January 1930, holding $3,300,000,000 in deposits. Many families lost everything they had saved.
Bank failures also hit everyone else. Banks that survived became afraid to lend, and some demanded their loans back. Businesses and farmers could not borrow money to keep going. Hoover described this as a "strangulation of credit". Less lending meant fewer jobs and less spending, which made more firms and more banks fail.
Agriculture
Farmers were in trouble even before the Crash, because they grew more than they could sell. After 1929 things became much worse. As people lost jobs, they bought less food, and the prices farmers received fell by about half between 1929 and 1932. Farm incomes fell with them.
Many farmers had borrowed money for land and machinery. Now their crops earned too little to pay the interest. If a farmer could not repay a mortgage, the bank took the farm in a foreclosure. Thousands of families lost their farms. Banks that were struggling themselves had little patience with farmers who fell behind.
Some farmers fought back. In some places neighbours turned up at the auction of a foreclosed farm and bid just a few cents for the farm or its tools. Nobody dared bid higher, and the family got its property back. In 1932 members of the Farmers' Holiday Association in Iowa blocked roads to stop food reaching the towns, hoping to push prices up.
Industry
📉 Falling sales
With less money about, people stopped buying cars, radios and fridges. Firms already had unsold stock, so they made even less.
🏭 Closing factories
Industrial production fell by nearly half between 1929 and 1932. Some factories shut for good. Others cut hours and wages, or sacked workers.
Car making shows what happened. Cars had been a great success of the 1920s. In the early 1930s, with fewer buyers, car makers cut production sharply, and every cut meant jobs lost in steel, rubber, glass and the garages that sold cars. Workers who were sacked had less to spend, so the shops sold less, and so on. This downward spiral is why the Depression deepened year after year. How these job losses changed people's lives is the subject of the next lesson.
Worked example
A strong explanation links the three areas. Banks failed, so credit dried up. Farmers and firms that could not borrow had to close or sell up. Fewer people had jobs or savings, so they bought less. That hurt farmers and factories again, and more banks failed. Showing the circle earns more credit than listing three separate problems.
Common mistakes
- Saying all banks failed. Thousands did, but most survived. Use figures such as Hoover's 4,665.
- Writing about the causes of the Crash. That comes before this lesson.
- Describing unemployment and Hoovervilles in detail. This lesson is about banks, farms and factories.
Exam-style question
This is a Paper 2 Section A (b) question, worth 8 marks. You compare what two sources say. You do not need your own knowledge.
Source A
From a message to Congress by President Herbert Hoover, 6 December 1932.
'Bank failures rose in 1931 to 10 1/2 per cent of all the banks ... Since January 1, 1930, we have had 4,665 banks suspend, with $3,300,000,000 in deposits ... we have witnessed hoarding of currency to an enormous sum ... strangulation of credit which at times has almost stifled the Nation's business and agriculture.'
Source B
From the first inaugural address of President Franklin D. Roosevelt, 4 March 1933.
'Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen ... the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone.'
Study Sources A and B. How far does Source A support the evidence of Source B about the damage the Depression did to the American economy? Explain your answer. [8 marks]
Model answer
Source A supports Source B in showing that people's savings were badly hit. Source A says 4,665 banks suspended 'with $3,300,000,000 in deposits', and Source B says 'the savings of many years in thousands of families are gone'. Both also say agriculture suffered. Source A says credit was strangled until it 'almost stifled the Nation's business and agriculture', and Source B says 'farmers find no markets for their produce'.
However, the sources differ in what they stress. Source A is about banking and credit. It gives exact figures and does not mention factories. Source B is wider. It describes 'the withered leaves of industrial enterprise', which shows industry in decline, and says 'values have shrunken to fantastic levels', which is a general picture of falling prices. The sources also give different reasons for farmers' trouble. Source A blames a lack of credit, while Source B says there was no market for the crops.
Overall, Source A supports Source B quite strongly on lost savings and damage to agriculture, but only partly on the full picture. It deals with banks and credit alone, while Source B covers industry and falling values too.
What lifts this answer to the top level: it matches quotations from both sources on points of agreement and difference, and ends with a judgement on how far the sources support each other.
Exam tip
Quote from both sources in every paragraph, and end with one sentence that answers "how far". Do not judge which source is more reliable, because this question is about what they say.