1933:

The Banking of Panic of 1933 was the greatest crisis of the 20th century. However it was
preceded by one of the most prosperous eras the United States have seen. Between 1921 and
1929, US real gross national product (GNP) rose by 51%. Profits, stock prices and earnings
of companies grew substantially as a result. This increase in economic prosperity spread to
citizens who were then able to increase their deposits at banks. An increase in deposits meant
that banks were allowed to increase their assets by providing more loans. However, many
large corporations who were benefiting from this period of prosperity were making profits
large enough that they could meet their financial obligations without bank loans. This led to a
decline in business loans for banks. Banks responded by increasing their security holdings,
offering more loans to individuals and real estate lending.

In the spring of 1929, industrial production started to decline. “Black Thursday”, which
occurred on October 24th 1929, is when the stock market in the crashed. It is often considered
the beginning of the US Banking Panic ultimately the Great Recession. Between 1929 and
1933, real GNP fell 30%. Corporate profits and business failures rose while new securities
plummeted. Banking confidence fell, which led to many depositors trying to withdraw their
deposits. This is known as a bank run or bank panic. A banking panic erupted in 1930 and
two more in 1931.

The US Banking Panic began in Detroit in 1933. While the panic began in 1933, the events
leading up to the panic started in 1929 when the decline in the automobile industry led to the
loss of jobs. Individuals who lost their jobs began defaulting on their loans, causing many
banks to suffer losses. The panic in Detroit spread to other states and as confidence fell,
depositors in other states tried to obtain their cash.

In wake of the 1933 Banking Panic, the US Congress passed the Securities Act of 1933,
commonly known as the Glass-Steagall Act. Premises of the act include regulation that
required the separation of commercial banks and insurance banks by prohibiting commercial
banks to undertake investment bank activities such as buying and selling securities, the
establishment of a Federal Deposit Insurance Corporation (FDIC), that aimed to create a
safety net for consumer’s insurance whereby a percentage of their deposits are insured in the
event of a liquidity crisis, and imposing of restrictions to set limits on the value of bank loans
that were secured by stocks and bonds.