But, at some stage, depositors, fearful of losing the race to others, rushed to their bank for the liquidity that even the solvent banks could not provide. When that occurred, not only did many banks fail, but the surviving banks husbanded the sought-after liquidity and simply ceased to fulfill their reason for being, to take risk by making loans.
The collapsed banking system and the associated Great Depression clearly shaped a bank regulatory structure that only began to change in recent years and still retains most of the safety net that was constructed seventy years ago. Congress responded to the Depression-traumatized banking system and devastated economy by creating a national deposit insurance system.