When the stock market crashed in 1929, the Federal Reserve Board was unable to prevent it from triggering the Great Depression. During the twenties, many banks had invested their savings deposits in the stock market. They had also loaned money to speculators who were buying stock on credit. When the market crashed, these individuals could not cover their loans. As a result, the banks lost the money, which they had loaned for stock speculation. Although the Federal Reserve Board had recognized in the late twenties that speculation was out of control and had tried to adjust interest rates accordingly, it could not protect individual banks from their unsound loan policies.
Once banks began to fail, Americans began to lose confidence in the nation’s entire banking system. Thousands of Americans rushed to withdraw their savings from the banks, before they closed. This action placed even more pressure on the nation’s banks. As a result, during the first three years of the Great Depression, five thousand banks failed and nine million Americans lost their savings accounts. The Federal Reserve’s failure to prevent widespread collapse of the nation’s banking system in the late 1920s and early 1930s led to a severe contraction (reduction) in the nation’s supply of money in circulation.