History Resources

Banking Basics

Introduction

Many elementary school students are unaware of how banks make money and what causes them to fail. This lesson will provide students with a basic understanding of those two issues, linking them to the Great Depression and Franklin Delano Roosevelt's Banking Holiday in 1933.

 

Essential Question

  • How do banks make money?
  • What causes banks to fail?
  • How did Franklin Delano Roosevelt try to stem the failure of banks in 1933?

 

Background

During the late 1920s and early 1930s, many banks became insolvent because they were unable to meet the demands for withdrawals that occurred when there was a "run" on banks. Runs on a bank occurred when depositors became worried that banks would fail and that they would lose their money. This happened during the Depression when it was reported that a bank would not get its money back on loans made to farmers, or if a bank had lost money in the stock market. Customers would flock to a bank and demand their savings back. Since banks make money by investing, lending money, and other such means, they did not have the deposits available. When it could meet the demands of its clients, a bank would fail. There people who lost all of their money in a failing bank, since savings were not yet insured by the FDIC. One famous example is Frederick Douglass, who, during Reconstruction, deposited $10,000 into the Freedman's Bank, which later failed. The $10,000, which he had deposited to assure other customers that the bank was safe, was lost in that bank failure.

 

Objectives

  • Students will be able to participate in a simulation of how banks use depositors' money to make a profit and how they can become insolvent.
  • Students will be able to read and analyze a primary source article about bank failures.
  • Students will be able to demonstrate understanding of the intended effects of the 1933 Bank Holiday.

Materials

Motivation

  1. Students will respond to the question: Are banks a safe place to put your money? Why/why not?
  2. After students respond in writing, ask several to share their answers and conduct a brief whole class discussion.

Lesson Activities

Students will participate in a simulation of how banks operate and what causes a run on a bank as follows:

  • What causes a run on a bank?

Simulation

  1. This activity is designed for a class of thirty students, but can be easily adapted. Put three chairs at the front of the room to be used as banks. The bankers will sit there.
  2. Put all student names into a hat. First, draw the three names of the students who will be bankers at their own banks. Instruct them to write down the name of their bank on a sheet of paper and to sit at the front in the three aforementioned chairs.
  3. Draw the names of the rest of the students. The first seven students will be Depositors Group A, the second seven will be Depositors Group B, the third Depositors Group C, and the final six will be Depositors Group D.
  4. Give each of the Depositors $200 in fake money in one hundred dollar bills.
  5. Announce to the class that each Depositor has just earned or saved $200 and will now deposit it into the bank of their choice.
  6. Allow students to get out of their seats and give their money to the banker of their choice. Alternately, the teacher can assign which groups give money to which banks.
  7. After students return to their seats, the teacher should announce that Bank 1 is investing $500 in the stock market because the banker thinks that he/she will make ten percent on the money in a month, so that $500 will become $525. The teacher should then take $500 from Banker 1 and put it into an envelope labeled "STOCK MARKET."
  8. The teacher will then announce that Bank 2 is giving five students $300 each to purchase a Ford Model B, a V-8 car that was very popular in the early 1930s. They sell for anywhere between $450 and $700. The teacher will take $1,500 from Banker 2, put it into an envelope labeled "CAR LOANS," and give five students a toy car. Announce that because the loans were at 20% interest, Banker 2 can expect to make $300 when the loans are repaid.
  9. Ask students, "Who would like to buy a house?" Select one student from the volunteers. Tell that student that her house will cost $7,000. She already has $6,000, but must borrow the other $1,000 from Banker 3. She will have thirty years to pay it back, but must pay 20% interest on the loan each month. The teacher should then take $1,000 from Bank 3, put it in an envelope labeled "MORTGAGE" and give the student buying the house a small house replica (for example, a Monopoly house).
  10. The teacher should ask the Banks to count their money and then tell the class how much they have in their hands.
  11. Ask the Depositors how banks make money. Students should be able to respond that they make money by lending money and putting it into the stock market. Some students will also mention bank fees.
  12. Pass out excerpts of a Time article from 1930 linked above. Students should read the excerpt they have and pretend as though it is a current article.
  13. The teacher should tell the class that he heard in the market that Bank 1 lost a lot of money in the Stock Market Crash and might fail or go out of business as a result. Ask Depositors who used Bank 1 what they are going to do? Have them raise their hands to discuss their options. Allow those students who want to withdraw their $200 from the bank. Widen the discussion to ask the Depositors who used Banks 2 and 3 how they feel and what they think they will do. Allow students to withdraw money if they wish until a bank fails.
  14. After the simulation, post pictures of runs on banks from the Great Depression linked above.
  15. Make a list on the board of how banks make money and what can cause them to fail. The teacher should guide the discussion, but use only student-generated answers on the board.
  16. Ask students how they think bank failures can be stopped. Add those ideas to the list.

Assessment

Read Roosevelt's Bank Holiday speech "On the Bank Crisis" (linked above) to the class as they read along with the written version. In pairs, students should answer the questions on the Banking Worksheet.

Extension

Students will find and summarize a current newspaper or magazine article on failed banks and summarize the article for discussion in class.