Ben S. Bernanke (1983) argued that the Great Depression’s length and severity was aggravated by the increased costs of credit intermediation, which is an economist’s way of saying that the banking system stopped working as it’s supposed to — efficiently matching savers and borrowers.
In severely abnormal times, Bernanke argued, this process of intermediation is disrupted, as savers shun the banking system and bankers hoard what little funds are entrusted to them. Though we saw some of these abnormal behaviors during the late 1980s and early 1990s, the recent events were nothing when compared with the 1930s.
From 1929 to 1933, almost 10,000 banks failed; between failures and mergers, the number of banks was reduced by nearly half over those four years. At the same time, individual and business borrowers were going bust in unprecedented number. Of 22 major cities surveyed in 1934, default rates on residential properties ranged from a low of 21% in Richmond to 62% in Cleveland, with the majority clustering around the 40% level. A year earlier, 45% of all U.S. farmers were delinquent on mortgages. As of March 1934, 37 of the 310 cities with populations over 30,000 were in default, as were three states.
Among businesses, however, the picture was uneven. Aggregate corporate profits before taxes were negative in 1931 and 1932, the only years the business sector as a whole has been in the red since the national income accounts began in 1929. But these losses were borne mainly by small and mid-sized businesses; firms with assets over $50 million remained profitable throughout the period, while those with assets under $50,000 suffered losses equal to 33% of their capitalization in 1932 alone.