Why were banks one of the first institutions to feel the effects of the stock market crash?

Banks were among the first institutions to feel the effects of the stock market crash of 1929 due to several reasons:

1. Investments and Speculation: Many banks had invested heavily in the stock market and speculated on stocks. As the stock prices plummeted during the crash, the value of their investments declined significantly, leading to substantial losses.
2. Deposits and Panic: The crash caused widespread panic among investors and the general public. Concerned about their financial stability, people rushed to withdraw their money from banks in fear of losing their savings. This mass withdrawal of deposits led to bank runs, putting immense strain on the banks' liquidity.
3. Bank Failures: With the sudden and massive withdrawal of funds, some banks faced liquidity crises and insolvency. As more depositors tried to withdraw their savings, several banks were unable to meet the demand for cash and were forced to close their doors permanently.
4. Overextension and Risk: Some banks were highly overextended and had lent large amounts of money for speculative purposes or margin trading in the stock market. When the market crashed, many borrowers were unable to repay their loans, causing further financial distress for the banks.

These factors combined to create a banking crisis that amplified the impact of the stock market crash, contributing to the onset of the Great Depression. The failure of numerous banks exacerbated the economic downturn, leading to a contraction of credit, reduced consumer spending, and widespread financial hardship across the country.