Depression-Era Bank Failures: The Great Contagion or the Great Shakeout?

Abstract

Contagion-induced bank runs are widely viewed as the cause of widespread bank failures during the Great Depression. Federal deposit insurance was created in 1934 to prevent future contagion-generated bank failures. Yet the cycle of bank failures appears quite similar to an industrial shakeout, a frequent occurrence in other industries, even though other industries are not subject to contagion-induced runs. If a large portion of bank failures during this period were caused by a shakeout rather than by contagion, the need for deposit insurance is less clear.