the stock market crash weakened the nation's banks because of what?
I THINK it is because people had borrowed money to buy stocks and when the market crashed people couldn't repay their debts. There was also a 'run' on the banks from people who had put money in savings and the banks didn't have the money to disperse since the money had been loaned it out.
You're correct! The stock market crash of 1929 weakened the nation's banks for the reasons you mentioned. Here's a more detailed explanation:
1. Speculation and Borrowing: Prior to the crash, many people had invested heavily in the stock market, often using borrowed money. This practice, known as speculation, allowed individuals to buy more stocks than they could afford, hoping to reap significant profits. However, when the market crashed, the value of stocks plummeted, leaving many investors with substantial losses.
2. Debt Repayment Issues: With the sharp decline in stock prices, people who had borrowed money to buy stocks found themselves unable to repay their loans. This created a wave of defaults on stock market loans, causing significant problems for banks that had lent money to investors. As borrowers failed to repay their debts, banks experienced a decline in their asset values, leading to financial instability.
3. Bank Runs: In addition to the failure of borrowers to repay their stock market loans, there was also a phenomenon known as a "bank run." A bank run occurs when depositors lose confidence in a bank and rush to withdraw their funds. During the Great Depression, many people panicked and withdrew their savings from banks due to fears of losing their money. However, the banks did not have enough cash on hand to meet the increased withdrawal demands because they had invested a significant portion of the money deposited by customers into stocks and other investments. This led to a lack of liquidity and further weakened the banking system.
These combined factors contributed to the weakening of the nation's banks following the stock market crash. The resulting economic crisis ultimately led to widespread bank failures, a decrease in lending, and a significant reduction in economic activity, exacerbating the effects of the Great Depression.