Banks suffered financial strain from "summary" of The Great Crash 1929 by John Kenneth Galbraith
The calamity that overtook banks in the late 1920s was not just a localized problem. It was a symptom of a broader malaise that had infected the entire financial system. Banks, those venerable institutions that were supposed to be the bedrock of the economy, found themselves teetering on the brink of collapse. The source of their woes lay in the speculative excesses of the era. As the stock market soared to dizzying heights, banks had eagerly joined the fray, extending credit to investors who were all too willing to leverage their gains. This strategy worked well enough as long as stock prices continued to rise. But when the inevitable correction came, banks were left holding the bag. Suddenly, the assets that had seemed so solid were revealed to be nothing more than paper profits. As investors rushed to liquidate their holdings, banks found themselves facing a liquidity crisis. They simply did not have enough cash on hand to meet the demands of their depositors. The situation was made worse by the fact that many banks had engaged in reckless lending practices. They had loaned out far more money than they could reasonably expect to recover. As defaults mounted, banks were forced to write off huge losses, further eroding their capital reserves. In a desperate bid to shore up their balance sheets, banks began calling in loans and foreclosing on properties. But this only served to exacerbate the problem, as it drove even more borrowers into default. The end result was a vicious cycle of contraction. As banks curtailed their lending activities, businesses found it increasingly difficult to obtain the credit they needed to operate. This, in turn, led to a wave of bankruptcies and layoffs, further weakening the economy. The situation was akin to a house of cards collapsing in on itself, with each institution that fell bringing down others in its wake. The financial strain that banks suffered was not just a temporary setback. It was a symptom of a deep-seated malaise that would take years to fully overcome.
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