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The Great Depression, the Greed and Ethics of Banking

The Great Depression, the Greed and Ethics of Banking
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Banks that are huge financial structures with complex operations and transactions today had existed since the origin of civilization but in a simpler manner in which temples and royal kingdoms accepted deposits of grains, crops, livestock and other valuables and redistributed them. Ancient banking also involved lending and interest charges that used clay tablets as receipts for these transfers.

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As trade flourished across the continents, metallic monetary system came into existence. Eventually, what began as a simple practice of exchanging resources to satisfy the needs for survival has grown multitudes and has become extremely complex structures and phenomena that some consider as robbing lives in the modern day. Banking structures have become breeding grounds for human greed that nullify human values in the pursuit of more and more personal wealth.

“The Code of Hammurabi in ancient Mesopotamia contains records of loans with interests”

An ancient balance sheet found in Mesopotamia

An ancient balance sheet found in Mesopotamia [Image: Wikipedia]

As the process of banking became more complex, the trustworthiness associated with banks had also started deteriorating among common masses. Post Great Depression in 1929, people felt jitters about keeping their money in the banks as it might disappear from their accounts anytime due to the risky investments of banks on speculative schemes.  In other words, banks use the money saved by the people to make speculative investments in stock markets. As banks become more focused in accumulating wealth, the world economy went reeling with financial crisis and downturns. One such instance was the Great depression in 1929.

The Great Depression

What caused the Great Depression is still debated but for sure the stock markets – a craze among the Americans back in the 1920s- played a big role even though it being the primary cause of the economic disaster is denied by many today.

The US saw incredible economic prosperity in the 1920s making more Americans invest in the stock market while the entire financial sector was let loose without anyone regulating it. This made the investors to play a few tricks like trading heavily a low-value stock to make it look attractive. An outsider who saw the stock which is of low value, in fact being traded heavily invests his hard earned money on it.

“The GDP of US went 30% down during the Great Depression”

This makes many to buy the stock raising its value. Now the large investors would sell those stocks earning big grand money.  The desire for more money of a few large investors soared along with stock values. As a result, in fact, the stock values well exceeded the true value of the company setting up the tone for an economic crunch.

Protest demanding jobs during the Great Depression

Protest demanding jobs during the Great Depression [Image: Mashable]

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Adding to the woes, banks did invest the money of their depositors, who were hard-working Americans, in stock markets only to nullify their accounts. The depositor’s could only watch losing $140 billion in a matter of weeks. Black Tuesday and Black Thursday saw sellers desperately looking for buyers of stocks but only to find none. The stocks that were valued at $87 billion in 1929 saw a deep slump in their values reaching only $18 billion in 1933.

Commercial banks that invested their depositor’s money made many lose their hard-earned fortunes resulting in extreme poverty. Unemployment was at its peak making people travel across the continent looking out for petty jobs. The Great Depression sent shock waves throughout the global economy.

The imprudent decisions of the big bankers to bet the money of common masses in the stock market and their greed for personal wealth accumulation led to the Great Depression.

The rise and fall of Glass-Steagall Act

Franklin D. Roosevelt, the then Democrat president of the US elected after Hoover, wanted to insulate the depositor’s money from being traded in stock markets and other risky investments. Hence, he passed Glass-Steagall Act in 1933 with the help of Congress demarcating the line between commercial banking and investment banking. The Act also prohibited the affiliation of commercial banks with any securities firms. But human greed perpetuated and endured long to wait for the right time to disintegrate the Glass-Steagall Act. The Act has been interpreted in many ways just opposite to what it was intended to do and has been gradually undone until it was finally repealed in 1999.

When Citicorp decided to merge with Travelers Group forming Citigroup to offer banking, insurance and investment services, the Glass-Steagall Act was replaced with what is called as glibba, Gramm-Leach-Bliley Act that removed the restriction in the affiliation of commercial and investment banks.    Many attribute the cause of financial crisis in 2008 to the repeal of Glass-Steagall Act.

Banking and The Greed

Making an investment is not a crime, but only to beef up the wealth of a few by exploiting the earnings of the poor and the middle class is an act of greed and stealth. The invalidation of Glass-Steagall Act didn’t usher in the economic disasters but a lack of sense of responsibility and ethics among the big bankers surely did. The ethics of banking is in uprooting greed and putting common welfare ahead of everything.

Related Video: The Great Depression Explained – Crash Course

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