What did bank customers do following the stock market crash? What impact did this have on many banks?

Following the stock market crash of 1929, which signaled the beginning of the Great Depression, many bank customers panicked and rushed to withdraw their deposits in cash. This phenomenon is known as a bank run. Bank runs occurred because customers feared that their banks would become insolvent and they would lose all their savings. Since banks typically lend out most of the money deposited with them and only keep a small fraction in reserve, they rely on the premise that not all customers will withdraw their money at the same time. However, during the crisis, when too many customers attempted to withdraw their funds simultaneously, banks did not have enough cash on hand to meet the demand.

The impact that these bank runs had on many banks was devastating. Unable to provide the money that customers demanded, many banks became insolvent and were forced to close. This further fueled panic and caused more bank runs in a vicious cycle. As banks closed, people lost their savings, and the economy suffered because the availability of credit was greatly reduced. When banks failed, it undermined public confidence in the banking system, and the economic crisis deepened as consumer spending and investment plummeted. Moreover, as banks closed, people's life savings were wiped out, leading to severe personal financial crises for many individuals.

The stock market crash and the subsequent banking crisis helped catalyze what would become the Great Depression, a severe worldwide economic depression during the 1930s. Understanding the banking system is important to grasp why bank runs are so significant. Banks operate on a fractional reserve system, meaning they only keep a fraction of their depositors' money in reserve as cash to satisfy withdrawal requests. The rest of the funds are used to provide loans and invest, which is how banks earn profit.

The failure of banks not only affects individuals who lose their savings but also impacts the overall economy. When banks fail, they can no longer provide loans, which are essential for business operations, expansions, and consumer financing. The reduction in available credit can lead to a decrease in investment, business growth, and consumer spending—all of which are key drivers of economic activity.

In response to the failures of the banking system during the Great Depression, governments and financial authorities worldwide took steps to mitigate such risks in the future. Measures were implemented to improve the resilience of banks, such as the creation of deposit insurance programs (like the Federal Deposit Insurance Corporation, or FDIC, in the United States) that guarantee a portion of depositors' money in the event of bank failure. There were also reforms to improve financial regulatory oversight to ensure that banks maintain adequate reserves and follow prudent lending practices.