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When a large number of people go to a bank with concerns with their money and withdraw that money. When you put your money into a bank you are giving the bank permission to loan out your money. This was a cause because due to the people becoming scared with losing their money if the bank had just help onto the money then their would have been no panic.

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What Is a Bank Run?

A bank run is when the customers of a bank or other financial institution withdraw their deposits at the same time over fears about the bank's solvency. As more people withdraw their funds, the probability of default increases, which, in turn, can cause more people to withdraw their deposits. In extreme cases, the bank's reserves may not be sufficient to cover the withdrawals.

Key Takeaways

How Bank Runs Work

Bank runs happen when a large number of people start making withdrawals from a bank because they fear the institution will run out of money. A bank run is typically the result of panic rather than true insolvency. However, a bank run triggered by fear can push a bank into bankruptcy.

Most institutions have a set limit on how much they store in their vaults daily. These limits are set based on need and security reasons. Many banks also keep specific amounts in reserve at the nation's central bank to minimize the risks related to bank runs and other issues. In fact, the Federal Reserve pays them interest to do so, a program which it calls Interest on Reserve Balances (IORB). This program gives banks an incentive to keep deposits in reserve.

Because banks typically keep only a small percentage of deposits as cash on hand, they must increase their cash position to meet the withdrawal demands of their customers. One method a bank uses to increase cash on hand is to sell assets-sometimes at significantly lower prices than if it did not have to sell quickly. Losses taken when selling assets at lower prices can cause customer concerns, which can trigger withdrawals.

Examples of Bank Runs

In modern history, bank runs are often associated with the Great Depression. In the wake of the 1929 stock market crash, American depositors panicked and began withdrawing their deposits. A succession of bank runs on thousands of banks occurred in the early 1930s, creating a domino effect on the economy.

More recent examples of significant bank runs include those on Silicon Valley Bank, Washington Mutual Bank (WaMu), and Wachovia Bank.

Silicon Valley Bank

The collapse of Silicon Valley Bank in March 2023 was a result of a bank run caused by venture capitalists. The bank reported that it needed $2.25 billion to shore up its balance sheet, and by the end of the following business day, customers had withdrawn about $42 billion. As a result, regulators closed the bank and took control of its assets.

Silicon Valley Bank had last reported $209 billion in assets as of the fourth quarter of 2022, making it the second-largest bank failure of all time.

Washington Mutual (WaMu)

Washington Mutual (WaMu), which had about $310 billion in assets at the time of its failure in 2008, was the largest bank failure in the U.S. Its collapse was caused by several factors, including a poor housing market and rapid expansion. The bank also suffered a run when customers withdrew $16.7 billion within two weeks.

JPMorgan Chase eventually bought Washington Mutual for $1.9 billion.

Wachovia Bank

Wachovia Bank was also shuttered after depositors withdrew more than $15 billion over a two-week period after Wachovia reported negative earnings results. Wachovia was eventually acquired by Wells Fargo for $15 billion.

Much of the withdrawals at Wachovia were concentrated among commercial accounts with balances above the limit insured by the Federal Deposit Insurance Corporation (FDIC), drawing those balances down to just below the FDIC limit.

Preventing Bank Runs

In response to the turmoil of the 1930s, governments took several steps to diminish the risk of future bank runs. Perhaps the biggest was establishing reserve requirements, which mandated that banks had to maintain a certain percentage of total deposits on hand as cash. This requirement has since been reduced to zero by the Federal Reserve because other monetary policy tools have been created.

Additionally, the U.S. Congress established the FDIC in 1933 to insure bank deposits in response to the many bank failures in the preceding years. Its mission is to maintain stability and public confidence in the U.S. financial system.

The FDIC provides insurance based on ownership category. There are several FDIC-recognized ownership categories, but generally, each depositor is insured for up to $250,000 in each different category.

In some cases, banks need to take a more proactive approach if faced with the threat of a bank run. For example, they may temporarily close to prevent people from withdrawing their money en masse. Franklin D. Roosevelt implemented another solution when he declared a bank holiday in 1933, calling for inspections to ensure banks' solvency so they could continue operating.

What Is a Silent Bank Run?

A silent bank run is when depositors withdraw funds electronically in large volumes without physically entering the bank. Silent bank runs are similar to other bank runs, except funds are withdrawn via ACH transfers, wire transfers, and other methods that do not require physical withdrawals of cash.

What Is Meant by a Run on the Bank?

This happens when people try to withdraw all of their funds for fear of a bank collapse. When this is done simultaneously by many depositors, the bank can run out of cash, causing it to become insolvent.

Why Is a Bank Run Bad?

Bank runs can bring down banks and cause a more systemic financial crisis. A bank usually only has a limited amount of cash on hand that is not the same as its overall deposits. So, if too many customers demand their money, the bank simply won't have enough to return to their depositors.

The Bottom Line

A bank run is when customers flock to banks, either physically or online, to withdraw their funds because they lose confidence in the bank. In extreme cases, they can cause the collapse of a bank, as a bank run did in 2023 when Silicon Valley Bank became insolvent.

To reduce your risk of losing money in a bank run, you can keep your deposit amounts under the FDIC-insured limit of $250,000 per depositor, per insured bank. If you need to deposit more funds, you can open an account at another bank and receive the same protection.

Correction-July 29, 2023: A previous version of this article incorrectly stated that FDIC coverage only amounted to $250,000 per depositor per institution. This was corrected to include ownership categories, which can raise the insured amount depending on the category.

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What Is a Bank Run? Definition, Examples, and How It Works

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A bank run is when many customers withdraw their deposits simultaneously over concerns about the bank's solvency. Learn what governments do to try to prevent bank runs.

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During WWI farmers needed to produce a lot of food in their "victory gardens" for solders. After the war ended there was too much product and not enough demand. This was a cause of the depression because with the abundance of food it lost its economical value.

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Farm Collector - Dedicated to the Preservation of Vintage Farm Equipment

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U.S. Farmers During the Great Depression - Farm Collector

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Let’s Talk Rusty Iron: U.S. farmers faced high farm mortgages and big debts even before the Great Depression began, and the stock market crash and dust storms only made it worse.

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During the roaring 20's it was an economic boom for the US with new technology. With so many new products and when the companies had to lower their prices for people to buy. This was a cause of the Great Depression because with low prices and products that weren't a necessity were not pumping money back into the economy.

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A look at the causes of the Great Depression, a global financial crisis that consumed most of the developed world throughout the 1930s.

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This tariff raises to keep out foreign merchandise. due to overproduction prices plumited and with the 40% tariff on importing goods this helped destroy the economy because there wasn't any money circulating the US.

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Smoot-Hawley Tariff Act, U.S. legislation (June 17, 1930) that raised import duties to protect American businesses and farmers, adding considerable strain to the international economic climate of the Great Depression. The act takes its name from its chief sponsors, Senator Reed Smoot of Utah, chairman of the Senate Finance Committee, and Representative Willis Hawley of Oregon, chairman of the House Ways and Means Committee. It was the last legislation under which the U.S. Congress set actual tariff rates.

The Smoot-Hawley Tariff Act raised the United States's already high tariff rates. In 1922 Congress had enacted the Fordney-McCumber Act, which was among the most punitive protectionist tariffs passed in the country's history, raising the average import tax to some 40 percent. The Fordney-McCumber tariff prompted retaliation from European governments but did little to dampen U.S. prosperity. Throughout the 1920s, however, as European farmers recovered from World War I and their American counterparts faced intense competition and declining prices because of overproduction, U.S. agricultural interests lobbied the federal government for protection against agricultural imports. In his 1928 campaign for the presidency, Republican candidate Herbert Hoover promised to increase tariffs on agricultural goods, but after he took office lobbyists from other economic sectors encouraged him to support a broader increase. Although an increase in tariffs was supported by most Republicans, an effort to raise import duties failed in 1929, largely because of opposition from centrist Republicans in the U.S. Senate. In response to the stock market crash of 1929, however, protectionism gained strength, and, though the tariff legislation subsequently passed only by a narrow margin (44-42) in the Senate, it passed easily in the House of Representatives. Despite a petition from more than 1,000 economists urging him to veto the legislation, Hoover signed the bill into law on June 17, 1930.

Smoot-Hawley contributed to the early loss of confidence on Wall Street and signaled U.S. isolationism. By raising the average tariff by some 20 percent, it also prompted retaliation from foreign governments, and many overseas banks began to fail. (Because the legislation set both specific and ad valorem tariff rates [i.e., rates based on the value of the product], determining the precise percentage increase in tariff levels is difficult and a subject of debate among economists.) Within two years some two dozen countries adopted similar "beggar-thy-neighbour" duties, making worse an already beleaguered world economy and reducing global trade. U.S. imports from and exports to Europe fell by some two-thirds between 1929 and 1932, while overall global trade declined by similar levels in the four years that the legislation was in effect.

In 1934 President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act, reducing tariff levels and promoting trade liberalization and cooperation with foreign governments. Some observers have argued that the tariff, by deepening the Great Depression, may have contributed to the rise of political extremism, enabling leaders such as Adolf Hitler to increase their political strength and gain power.

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Smoot-Hawley Tariff Act | History, Effects, & Facts | Britannica

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Smoot-Hawley Tariff Act, U.S. legislation passed on June 17, 1930, that raised import duties to protect American businesses and farmers, adding considerable strain to the international climate of the Great Depression. Learn about the development and effects of the Smoot-Hawley Tariff Act in this article.

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This is a situation where there is high risk and possibly high reward. Buying a lot of low cost shares means when the investment brings in money you get a big return when you sell it off. This contributed to the depression when a bunch of people started to flood the stock market with money and then all pulled it out at the same time.

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What is a 'Speculative Stock'

A speculative stock is a stock with a high degree of risk. A speculative stock may offer the possibility of substantial returns to compensate for its higher risk profile. Speculative stocks are favored by speculators and investors because of their high-reward, high-risk characteristics. Such stocks usually have a very low share price, and often trade on smaller exchanges like the OTC Markets in the U.S. or the TSX-Venture Exchange in Canada. A necessary condition for investing in speculative stocks is a high tolerance for risk. This means an investor in a speculative stock should be prepared for the possibility of losing the full amount invested if the stock price goes down to zero.

BREAKING DOWN 'Speculative Stock'

The low share price of speculative stocks and the possibility - albeit remote - of windfall profits are two of their most appealing characteristics. A share price of a few cents means that speculators can load up on thousands of shares. If the company is successful and the shares eventually trade at a significantly higher price, the potential profit can be much more than that offered by most other investments.

Speculative stocks tend to be clustered in sectors such as mining, energy and biotechnology. While there is significant risk involved in investing in early-stage companies in these sectors, the possibility that a small company may find a giant mineral deposit or oil field, or discover a cure for a disease, offers enough incentive for speculators to take a punt on it.

Although most speculative stocks tend to be early-stage companies, a blue-chip can occasionally become a speculative stock if it falls upon hard times and has rapidly deteriorating prospects for the future. Such a stock is known as a "fallen angel" and may offer an attractive risk-reward payoff if it can manage to turn its business around.

Speculative stocks outperform in very strong bull markets, when investors have abundant risk tolerance. They underperform in bear markets, because investors' risk aversion causes them to gravitate towards larger-cap stocks that are more stable.

Typical valuations metrics like the price/earnings and price/sales ratios cannot be used for most speculative stocks, since they are generally unprofitable and may have minimal sales. For such stocks, alternative techniques like discounted cash flow (DCF) valuation or peer valuation may need to be used.

Speculative stocks often account for a small portion of diversified portfolios held by experienced investors, since such stocks may improve the return prospects for the overall portfolio without adding too much risk. Experienced investors who dabble in speculative stocks typically look for companies that have experienced management, strong balance sheets, and excellent long-term business prospects.

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A speculative stock is a stock with a high degree of risk. A speculative stock may offer the possibility of substantial returns to compensate for its higher risk profile. Speculative stocks are favored by speculators and investors because of their high-reward, high-risk characteristics.

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people would take out loans to buy things during the great depression which put everyone in debt. with the people already in debt from the roaring 20's with buying all new technology coming out the economy couldnt keep up. this caused the great depression when the stock market crashed the bank had to recall the money they loaned out but the people couldnt pay it back.

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BUYING ON MARGIN AND OTHER CAUSES OF THE GREAT DEPRESSION!! - THE EDUCATIONAL FORUM OF MR. MICHELOT

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The purpose of this forum is to allow any user of it easy access to many of the educational sites, resources and tools that the internet and technology can provide.

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On black Tuesday, investors on wall street took out 16 million shares which caused our economy to plummet. Because of low wages and struggling farmers the bank could not liquidate lone's or give the people back their money. This caused the Great Depression because if the investors didn't get scared they were going to lose their money and pick it up from the bank then there would have still been money in the economy and the Depression could have been avoided.

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Table of Contents

1. What Caused the 1929 Stock Market Crash?

2. Black Tuesday

3. Effects of the 1929 Stock Market Crash: The Great Depression

The Stock Market Crash of 1929 occurred on October 29, 1929, when Wall Street investors traded some 16 million shares on the New York Stock Exchange in a single day. Billions of dollars were lost, wiping out thousands of investors. In the aftermath of that event, sometimes called "Black Tuesday," America and the rest of the industrialized world spiraled downward into the Great Depression, the deepest and longest-lasting economic downturn in the history of the Western industrialized world up to that time.

What Caused the 1929 Stock Market Crash?

Stock Market Crash of 1929

During the 1920s, the U.S. stock market underwent rapid expansion, reaching its peak in August 1929 after a period of wild speculation in the Roaring Twenties. By then, production had already declined and unemployment had risen, leaving stocks in great excess of their real value.

Among the other causes of the stock market crash of 1929 were low wages, the proliferation of debt, a struggling agricultural sector and an excess of large bank loans that could not be liquidated.

Did you know? The New York Stock Exchange was founded in 1817, although its origins date back to 1792 when a group of stockbrokers and merchants signed an agreement under a buttonwood tree on Wall Street.

Black Tuesday

Stock prices began to decline in September and early October 1929, and on October 18 a big drop in stock prices began. Panic soon set in, and on October 24, Black Thursday, a record 12,894,650 shares were traded. Investment companies and leading bankers attempted to stabilize the market by buying up great blocks of stock, producing a moderate rally on Friday.

On Monday, however, the storm broke anew, and the market went into free fall. Black Monday was followed by Black Tuesday-October 29, 1929-during which stock prices collapsed completely and 16,410,030 shares were traded on the New York Stock Exchange in a single day. Billions of dollars were lost, wiping out thousands of investors, and stock tickers ran hours behind because the machinery could not handle the tremendous volume of trading.

Effects of the 1929 Stock Market Crash: The Great Depression

After October 29, 1929, stock prices had nowhere to go but up, so there was considerable recovery during succeeding weeks. Overall, however, prices continued to drop as the United States slumped into the Great Depression, and by 1932 stocks were worth only about 20 percent of their value in the summer of 1929.

The stock market crash of 1929 was not the sole cause of the Great Depression, but it did act to accelerate the global economic collapse which it was also a symptom. Stock prices continued to drop through 1932 when the Dow Jones Industrial Average-a widely-used benchmark for blue-chip stocks in the United States-closed at 41.22, its lowest value of the 20th century, 89 percent below its peak.

By 1933, nearly half of America's banks had failed, and unemployment was approaching 15 million people or 30 percent of the U.S. workforce. The Dow Jones Industrial Average would not return to its pre-1929 heights until November of 1954, about 25 years later.

African Americans were particularly hard hit, as they were the " last hired, first fired." Women during the Great Depression fared slightly better, as traditionally female jobs of the era like teaching and nursing were more insulated than those dependent on fluctuating markets.

Life for the average family during the Great Depression was difficult. Storms and a severe drought in the Southern Plains ruined crops, causing the area to be nicknamed the Dust Bowl. "Okies," as fleeing residents were called, moved to big cities looking for work.

Did you know? The Great Depression helped bring an end to Prohibition. Politicians believed legalizing the consumption of alcohol could help create jobs and stimulate the economy.

The relief and reform measures in the New Deal programs enacted by the administration of President Franklin D. Roosevelt helped lessen the worst effects of the Great Depression; however, the U.S. economy would not fully turn around until after 1939, when World War II revitalized American industry.

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Stock Market Crash: 1929 & Black Tuesday | HISTORY

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The Stock Market Crash of 1929 ushered in the Great Depression, as some 16 million shares were traded on Black Tuesday, Oct. 29, 1929, wiping out many investors.