Why did bank runs increase in the late 1920s? New regulations increased taxes on bank savings. Consumers believed that banks owned failing companies. The government warned people that their money was at risk. People feared that the banks would close permanently.
Answers
The correct answer is option D “People feared that the banks would close permanently”.
Explanation:
In 1920, the banking sector experienced a great depression because more than 600 banks failed for performing their duties. These failures led to numerous state deposit insurance programs. In addition, the failed banks were mainly rural and small banks or people of metropolitan cities, who were less worried about this issue.
However, a bank run happens when a huge number of individuals withdraw their deposited cash from the bank as they suppose the bank may stop to operate in the future. In simple words, it happens when, in a proportional-reserve banking framework, numerous customers withdraw money from deposit accounts because they consider that their financial institutions might become insolvent.
This process can destabilize the banks until they run out of cash and eventually face sudden bankruptcy. This is the reason, why banks in 1920s increasingly faced bank run in different states.
The 1920s was the prelude of the era of great depression.
The world was reeling under economic downturn mainly due to declining industrialization.
Everybody thought that the bank would not be able to pay their money and would ultimately collapse.
Actually, a lot of banks closed as people withdrew all their deposits in them.
This created panic and spread like wildfire to give the banks a run.