Concept
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The economic prosperity of the early 1920’s created a frenzy among investors for investment and credit. A lot of this was financed by margin, which meant that Americans were taking out loans to finance their investments in the stock market. This practice, however, was not as pervasive as the effects of the crash. Only 10% of the US population had invested in stocks at the time, but nearly 100% were affected. Why, then, was there such widespread devastation? The answer to this lies in how banks were operating during the investment frenzy of the golden era.
During this period, commercial banks were able to take clients’ savings-deposits and use the capital to invest in speculative opportunities. Even while managing loans on a large scale, there was no guarantee of security. Up to this point in US history, it was not common practice for the federal government to safeguard deposits, as they thought it would lead to a Socialist, dole-like relationship between the government and the people. This was the primary reason behind the high rate of ‘bank runs’ (i.e. the mass withdrawals of savings) and the subsequent bank failures.
Without security, individuals had no assurance that their savings were safe.
President Herbert Hoover, who served his term from 1929 until 1933, had taken a political stance that desired minimal federal government intervention. This meant that he did not want to nationalize key industries, nor offer state backing for banks. Instead, Hoover and his cabinet sought to implement agencies and support networks to promote collaboration between market participants. He thought this would create a healthier, longer-term answer to the financial downturn by enabling them to lift themselves out of the Depression.