How Did the Great Depression Change Business Cash Management?

Almost a century has passed since the start of the Great Depression, and the lessons learned throughout this crisis are still important today. This period was characterized by a significant and lasting decline in nearly every aspect of the economy – making it the worst contraction the United States has experienced in its relatively brief history.

The Great Depression marked a turning point in regulation, business decisions, and the lives of the American people. It is well known that this period of turmoil shaped an entire generation and re-shaped the regulatory landscape. However, one often overlooked outcome was a shift in the way businesses view and manage their cash reserves.

Cash Management Prior To The Great Depression: Debt Favored Over Cash

The period between World War I and the Great Depression was aptly dubbed the “Roaring 20s.” The adoption of electricity skyrocketed, and mass-production methods like the assembly line ushered in a boom in industrial production. Tangentially related sectors also soared and there was a general sense of optimism about the future prospects of companies.

During this time, job opportunities drove citizens to move from farms to cities, and the balance shifted so that more people were living in metro areas than rural ones for the first time in American history. Unemployment remained low and business thrived thanks to an abundance of labor and laissez-faire economic policies. In fact, real GDP rose by almost 40% during this period.

Almost all businesses during the 20s had a relationship with at least one bank. They relied on financial institutions for payment services like clearing checks, safeguarding cash, and transmitting payments as well as borrowing from those banks. The pervasive optimism during the Roaring 20s led companies – particularly small businesses – to also rely heavily on credit from banks to adapt to seasonal changes, respond to unanticipated needs, and provide working capital. This debt often came at the expense of hard cash in reserve.

A heavy reliance on debt meant that businesses appeared to grow rapidly during this time. Some companies had the assets and revenue to back up these appearances, but lax reporting requirements allowed other businesses to benefit from the appearance of growth without actually having the performance to support the valuations.

Stocks boomed due in part to rampant speculation – which often occurred on credit – and the Dow Jones Industrial Average increased six-fold. Unfortunately, the prosperity of the 20s came to a disastrous end.

Cash Management During the Great Depression: Bank Runs, Dwindling Reserves

The Great Depression dawned on “Black Monday,” October 28, 1929, when the Dow lost 13% of its value. Stocks continued to drop the following day, and the index lost another 12%. This drop persisted and the Dow lost about half its value by mid-November.

Panic Shifted to Banks, Creating Runs

The shock of a collapsing stock market rang through nearly every sector of the economy – including the banking industry. Commercial banks had assumed millions of dollars in stock-market loans prior to the crash, and these debts strained their ability to meet withdrawal requests.

Nationwide panic resulted in runs on banks and ultimately the collapse of one-fifth of all U.S. banks. The result of these bank failures was devastating, with over $7 billion in depositor assets wiped out.

The Fed Could Not Stem The Banking Panic

At this time, there was no government agency tasked with protecting deposits, and the Federal Reserve was in its infancy. Further, leadership at the central bank was divided along ideological lines.

Some wanted to step in and support struggling banks. Others supported the idea of providing financial assistance to banks during periods of expansion and withholding it during tough times. Another, less popular viewpoint suggested that weak banks needed to fail to make room for stronger banks in the future.

Looking back on the Fed’s actions during this time, the central bank writes, “differences of opinion contributed to the Federal Reserve’s most serious sin of omission: failure to stem the decline in the supply of money.” In fact, the money supply fell by nearly 30% from the fall of 1930 through the winter of 1933. Consequently, deflation occurred of roughly the same percentage.

Bank failures, deflation, and a crippled stock market presented a uniquely challenging set of circumstances for businesses. Over 86,000 companies were unable to weather the storm and shut their doors completely.

Cash Management Post Great Depression: Safety for Cash, Renewed Focus on Emergency Reserves

The Great Depression taught American businesses two important lessons about their cash. First, disaster can strike even in the most promising of times, and businesses must be prepared to combat economic catastrophe. Second, the safety of banks should not be taken for granted.

The first lesson is relatively simple to understand but can be extremely difficult to implement. It requires companies to set aside some of their cash during prosperous times to prepare for the next downturn. This need is easy to ignore when business is booming and the economy is solid, but companies who heed the lessons of the past are often rewarded when the economic tide shifts.

Fortunately, the second lesson is simple to implement – and the solution came all the way back in 1933. In that year, Congress created the Federal Deposit Insurance Corporation [FDIC] to safeguard deposits held by member banks. Coverage extends to several types of common accounts used to store business cash reserves including savings, money market deposit accounts, and Certificates of Deposit [CDs].

Today, FDIC insurance remains the most robust protection available for business cash and no depositor has lost a penny of insured funds in the agency’s long history. Modern innovations in cash management also allow businesses to access extended coverage above and beyond the traditional $250,000 limit. These solutions make it simple for companies to gain the ultimate protection for their vital cash reserves as they prepare for the next economic downturn.

Manage Business Cash Effectively With ADM

Much has changed since the Great Depression, including the tools available to help businesses make the most of their cash. At American Deposit Management, we help companies secure access to extended deposit protection through our patent-pending technology.

Our modern cash solutions provide access to the ultimate safety for cash reserves along with nationally competitive interest rates and liquidity options to match a variety of needs. We provide all this with one account and one consolidated monthly statement.

To learn more about cash management with ADM, contact us today.

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