Which of the following problems was a reason for bank panics prior to the establ

Question

Which of the following problems was a reason for bank panics prior to the establishment of the Federal Reserve bank: a. Currency was not uniform in value. b. Currency was not backed by the full faith and credit of the United States Government. c. Currency could become worthless if the issuing bank went bankrupt. d. Lack of regulation of the financial markets often led to bank runs. e. All of these were elements of the bank panics that occurred prior to the establishment of the Federal Reserve system.

Explanation / Answer

Banking panics had occurred every few years during the nineteenth and early twentieth centuries. Panics were marked by depositor runs, suspensions of payments to depositors, sharp spikes in interest rates, and sometimes serious economic recessions. Panics were widely attributed to the nation’s “inelastic” currency, the concentration of bank reserves in New York City and other major financial centers, and investment of those reserves in short-term loans to stock market speculators. 2 The Federal Reserve Act addressed these perceived shortcomings by creating a new national currency—Federal Reserve notes—and requiring members of the Federal Reserve System to hold reserve balances with their local Federal Reserve Banks.

Hence ,all the above mentioned reasons were responsible for bank panics prior to establishment of the Federal Reserve Bank.

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