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finance · 1907 and the 1930s
A bank can be killed by nothing more than the belief that other depositors are about to kill it. The panics of 1907 and the 1930s taught the cure: change the belief.
Facts drawn from archival and scholarly records, including Federal Reserve historical essays; model results are labeled as modeled.
In October 1907, a failed attempt to corner a copper-mining stock touched off runs on the New York trust companies connected to the schemers, and the panic jumped from institution to institution on rumor alone. There was no central bank and no deposit insurance. The panic was contained when private actors, led by J. P. Morgan, pooled reserves, backstopped teetering institutions, and made the backing conspicuous, and the episode's lesson led directly to the creation of the Federal Reserve a few years later.
The Great Depression brought the run dynamic back at national scale, as waves of bank failures in the early 1930s destroyed savings and deepened the collapse; Ben Bernanke's later research argued the failures themselves prolonged the Depression by wrecking the credit system. Congress answered with the Banking Act of 1933, which created the Federal Deposit Insurance Corporation. Temporary federal coverage of 2,500 dollars per accountholder took effect on January 1, 1934, and permanent coverage of 5,000 dollars followed that July [VERIFIED]. The runs on insured deposits largely stopped.