Depression-era bank failures: the great contagion or the great shakeout?

Economic Quarterly | January 1, 2005| | Copyright

Deposit insurance was created, at least in part, to prevent unfounded bank failures caused by contagion. The legislation that created the Federal Deposit Insurance Corporation (FDIC) was driven by the widespread bank failures of the Great Depression. In the years immediately before the 1934, when the FDIC began insuring bank deposits, over one-third of all extant banks failed. Many observers argue that these failures occurred because the banking industry is inherently fragile since it is subject to contagion-induced runs. Fragility arises because banks gather a large portion of ...

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