The joys of banking....
posted by fsimone on March 7th, 2008 at 9:49PM

Having once studied the Great Depression, I'll weigh in on this conversation a little. If memory serves, the monetary side of the Great Depression in the US came about due to the progressive failures of numerous banks in the United States and the failure on the part of the Federal Reserve to act quickly to inject liquidity into the system. (There is a very important non-monetary side to the story but that discussion is too lengthy to include here).   Basically, the banks were holding investments and as the market crashed they became worthless causing some of the banks to fail.   This caused a wave of panic among deposit holders who tried to pull money out of other banks.   Given the banks only hold a fraction of outstanding deposits in reserve, this panic in itself would cause the more stable banks to fail as well.   The cycle would continue.

A couple of important points to address are the following....first bank accounts today are in fact relatively safe given the fact that the Federal government, through the Canada Deposit Insurance Corporation, guarantees funds in regular bank accounts up to a certain amount ($1M if memory serves). This sort of institution did not exist during the Great Depression.   Banks also are required to meet very stringent regulations with respect to how they invest their capital.   Now would this system be completely fool-proof in the event of a castostrophic global financial meltdown?   Let's just hope that we never get there...

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