Was Cash King During The Great Depression?
When the stock market crashed on October 29, 1929, it was the start of what would be one of the most prolonged and most severe economic downturns in U.S. history.
The Great Depression lasted from 1929 until about 1939, leading to massive unemployment and bank closures worldwide.
Was cash king during the great depression? Yes, it was. Those who had access to cash were able to benefit from the plummeting asset prices around the world. But let’s take a deeper look...
What Is An Economic Depression?
An Economic Depression is declared after a prolonged downturn in economic activity. The textbook definition of an economic depression is an economic recession that lasts more than 3 years, or a 10%+ decline in GDP.
The Stock Market Crash of 1929
You might have heard the phrase "The Great Depression," often used to describe a period in U.S. history between 1929 and 1939 when there was widespread unemployment, poverty, and other economic problems.
The stock market crash of 1929 led to the start of the Great Depression, but it wasn't the only cause of that economic downturn.
On October 28, 1929, now famously known as Black Monday, the Dow Jones plunged nearly 13%. On the following day, now known as Black Tuesday, the market dropped almost 12%. By mid-November 1929, the Dow Jones had lost nearly 50% of its value.
Although President Hoover tried to reassure Americans that everything would be fine if everyone just held onto their stocks for a little longer—and even made speeches from his front porch about how buying more stock would be good for America—nothing helped stop the bleeding.
The 1930-1931 Bank Failure Spike
Image source: Some Interesting Facts About The Great Depression
Following the 1929 stock market crash, the U.S. appeared to be positioned for economic recovery. Still, widespread bank panics in 1930 quickly turned the rally into what is now known as the Great Depression.
There are a few reasons why banks failed during the Great Depression. First, banks could not make enough money to cover their deposits. The banks would lend out money from deposits made by customers with low-interest rates and then charge high-interest rates on loans that were given out.
This was known as fractional reserve lending, which also meant that there wasn't always enough money in bank vaults to cover all the money owed to customers at any given time.
So when the bank run started in 1930, everyone rushed to their bank to withdraw their cash. To quickly find out that the money they were owed wasn’t there.
Since there wasn't enough cash available when everyone needed their money back, many lost everything when banks closed down. And this happened across America from 1930 until the end of 1931.
Was Cash King During The Great Depression?
The monetary contraction and the financial chaos associated with the 9,000 failed banks caused the economy to collapse and enter a devastating depression.
Less money circulating in the economy increased borrowing costs and reduced spending on goods and services, which caused firms to cut back on production, prices, and lay off workers to preserve cash.
Those who still had access to their cash were able to benefit from the falling asset prices around the world.
But not everyone had access to their hard-earned cash. Around 9,000 banks failed in the United States during the great depression. Wiping out the savings of many Americans.
When economic panic hit in 1929, people rushed to sell assets for cash. And when businesses closed and banks failed, money became more scarce throughout the economy from 1930 to 1931-Increasing the overall demand for cash.
Those who still had access to their cash could survive the great depression better and even thrive by taking advantage of a stronger dollar to buy things cheaper than they were years before.
Will Cash Be King During Future Economic Depressions?
In times of economic uncertainty, cash is generally considered a safe position.
People tend to sell their assets in exchange for cash in order to get through financial storms. Businesses tend to reduce expenses and cut staff to preserve their cash.
Odds are if another economic depression does occur, cash will still be king. Recessions and depressions generally happen when there is a high demand for cash and safety. And people start panic selling assets in exchange for cash.
Final Thoughts: Was Cash King During The Great Depression?
Ultimately, cash was king during the Great Depression. Investors who held on to their money instead of putting it in risky stocks or bonds had the best chance of coming ahead.
The good news now is that if bank failures ever did occur in the United States again, your cash will be safe as long as your bank is federally insured (FDIC).
Congress created the FDIC to respond to the Great Depression's many bank failures in 1933. And to restore faith in the banks. The FDIC protects customers of insured banks (located in the United States) against losing their cash if an insured bank fails.
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As Always: Buy things that pay you to own them.
-Josh
Blog Post: #061
