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Famous Bank Runs in History That Shook the Financial World

Famous Bank Runs in History
Retrospect can make things look a lot simpler; fear breeds panic, panic breeds chaos and if things are not controlled, ends up as eventual downfall. The principle is self-destruction cannot be better explained without the help of a bank run.
Arun Prabhu
Last Updated: Dec 09, 2017
So you finally get a job, work hard, get your first salary, work harder, climb the ladder up and start saving up a decent chunk of cash in 'this very trusted bank used by everybody'. One day, you hear that this bank is about to shut down because of financial reasons. You panic, rush to the bank and take out all the money you have, every last cent. Now, imagine all the customers of that bank rushing in to safeguard their money. This is called a bank run. Now, the thing about a bank run is that whichever bank it is, if they even try to joke about losing money, theirs will not be ones of a good sense of humor. People will take any means necessary to protect their well-earned money, and when they find out it's in danger, they jump in to 'give it a hand'. Within hours or a few days, the bank gets cleaned out. The problem is, if the bank is indeed starting to sink, it will want to use whatever money it has left to stop that from happening. But they can't do that, because people are emptying their accounts. Thus, the bank rumored to fall, falls for real. This is a serious problem indeed, because the event can cause a chain of other financially draining activities that lead to an economic depression. If man is meant to learn from his mistakes, here are the largest bank runs from which we can learn most.
The Biggest Bank Runs In History
The Panic of 1907
As if a single bank run wasn't bad enough, this plot includes farmers, foreign investors, Theodore Roosevelt, J.P. Morgan (by now more like a superhero) and a citywide earthquake, smack in the middle of a recession. It all started with the blunder of Otto Heinze, brother of F. Augustus Heinze, a giant in the copper industry. Otto intended to corner United Copper, a copper industry in America. His attempt to squeeze borrowed stocks misfired horribly, ending with the ruin of both the Heinze brothers and the bankruptcy of Otto's brokerage house, Gross and Kleeberg along with the Knickerbocker Trust Company. Seeing this, the people, already bearing the brunt of the recession and the economic problems due to an earthquake in San Francisco, ran off to get their money back. Soon rumors of other banks and trusts being in financial trouble took off, prompting the frenzy of everyone. J.P. Morgan, with the help of other big names in banking, took hold of the reigns and eventually brought peace and calm over America. The end result was the birth of a National Reserve Bank, designed to handle similar crisis in the future. Unfortunately, it also ended with the defamation of J.P. Morgan and his subsequent demise after the Pujo Committee, which was investigating Morgans assets.
The 1929 Wall Street Crash
This fiasco is agreed on as the largest financial disaster in all of American history. It was so bad, it started off the 12-year Great Depression. Ironically (to the normal perspective), the crash happened within the period of extraordinary financial gains that all Americans were enjoying, known as the Roaring Twenties.

Concept of Marginal Purchase
Many had concluded before the crash that this state of prosperity was meant to be permanent. In fact, it was this state of happiness that led almost everyone to blindly believe in the stock market, so much so that they would buy stocks on a margin all the time.

● Buying stocks on margin means the person buying the stocks can't afford them, so turns to a brokerage for assistance.
● At the time, if you bought a stock on margin, you would pay for about 10% to 20%, while the broker paid for 80% to 90%.
● Of course, if the price of the stock fell beyond a certain limit, the broker would issue a 'Margin Call' to the buyer who would have to pay the money immediately.

Warning Bells
March 25, 1929 is when there occurred a slight dip in the market. It wasn't actually much to panic over, but people started getting margin calls from these brokers all of a sudden. This, in turn, prompted people who witnessed it to hurry up and sell off their stocks in fear of having to cough up large amounts of money to the broker (80% to 90% of total stock price that the broker paid for). One by one, people started selling off, prompting others to do the same. This didn't lead to much, except several warnings by market bigwigs about an impending major crash.

Black Thursday
The "Black Thursday", October 24, 1929, is when the prediction came true. Stock prices fell so low, a large number of people got margin calls, which made a larger number to sell their stocks. The damage was, at the time, handled by a banker's group, who stockpiled their money into the stock market and managed to convince the public to stop selling, stopping any further damages by the end of the afternoon. About 12.9 million shares were sold on 'Black Thursday'. The problem was said to be in control, until it happened again.

Black Monday
"Black Monday", October 28, 1929, the stock market dipped again, people started selling stocks again, but this time there was little or no financial backing to the market. The problem here was the inability of control over the situation, especially by the major banks. They kept quiet throughout the debacle, which made people think that even the banks were selling.

Black Tuesday
The almost-apocalyptic day that followed, "Black Tuesday", is the worst day in American financial history, with over 16.4 million shares sold. The stock market was shut down the next day for 4 days, after which it was opened for a few hours, which still recorded a drop. The fall continued for almost two years. Dow Jones, which closed at 381.17 on September 3, 1989, recorded 41.22 on July 8, 1932. Even though the causes of the crashes are still not perfectly clear, what remains to be learned is the destruction the crash encumbered the coming generations with; reports of mass suicides (including people jumping off the upper floors of Wall Street), countless lives were doomed to unemployment, people started distrusting banks at a whole new level.
The Argentinian Debacle
This is a modern-age bank run that almost destroyed the entire economy of Argentina. The timeline starts with worsening economic and political conditions. Fernando De La Rua became the Argentinian president on December 10, 1999, with Ricardo Lopez Murphy joining him as the new economy minister, after the resigning of Mr. Machinea in March 2001. The discovery of rampant corruption as the sole cause of increasing debts in the Government treasury prompted them to take quick decisions. They eventually decided to revalue their currency exchange with 1 Peso equaling $1. Now, the majority of goods exported by Argentina were to Brazil and the European Union, both of whom decided that the new prices for importing were too much. This led to a perpetual halt on Argentinian exports. It led to mass unemployment and lowered wages. The consequent inflation of consumer goods made citizens to start withdrawing money by the truck loads. Add to this, the decline of investments received by banks and you have yourselves a bank run. The Argentinian Government ordered an indefinite closure of all banks in the country. This further fueled citizens frustration, who then started converting their pesos to dollars and pursue foreign investments. To plug the money leak, the Government stopped banking and foreign exchange transactions. The cherry on the icing came when the Government banned citizens from withdrawing more than $500 of their own money, but it was too late. Almost 10% of their total money had already been leaked out. The entire affair reached the crescendo when protesters were shot outside the Buenos Aires branch of HSBC.
Other Notable Bank Failures
The Bankruptcy of Lehmann Brothers
The biggest case of leveraging gone wrong in US history is credited to the Lehmann Brothers. a subprime mortgage crisis, forcing the Lehmann Brothers to file for bankruptcy. As a result, Dow Jones dropped (-4.4%) on September 15th, 2008 and again (-7%) on September 29th, 2008.
Northern Rock
Following a liquidity crisis in 2007, the Northern Trust's stock fell by 32%. Although this was not a classic bank run, the effects were similar and it all ended up with the bank being declared as a national bank.

A bank run can be the most lethal thing to happen to any financial organization, be it private or Government. What remains to be understood is the reactions between the common investors and the trust that a bank can shell out. In the words of J.P. Morgan during the Pujo Committee: "A man's character comes before money or anything else. Money cannot buy it. A man I do not trust could not get money from me on all the bonds in Christendom."