Accentuate The Positive

Federal Reserve and Monetary Policy Part 5 of 13

Occasionally the public feared that banks would not or could not honor the promise to redeem these notes. Believing that a particular banks ability to pay was questionable, a large number of people in a single day would demand to have their banknotes exchanged 1 Option Trading for gold or silver. This was called a bank run, and the fear that these runs created often spread, causing runs on other banks and general financial panic.

Runs and Financial Panic. During a run, even the healthiest and most conservative bank could not redeem all of its notes at once. Banks then, just as now, used most of the money deposited with them to make loans. As a result, the money was not sitting in the banks vaults but was circulating in the community. In other words, the banks may have been solvent but not liquid. So when a bank run occurred, many times a bank had to close because it could not exchange the large number of notes presented in a single day.

Bankers tried to prepare for increasing depositor withdrawals by building up their reserves of gold or silver and by restricting credit. They stopped making loans, and panic ensued Apogee as everyone scrambled to redeem notes. Businesses had difficulty operating normally. The countrys economic activity slowed, and many people lost their jobs and life savings.

Financing

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