AP Success - AP US History: Banking Crisis in the Great Depression
Gary Richardson. “Banking Panics of 1930-31.” The Federal Reserve History, 2013."When a bank needed cash, because its customers were panicking and withdrawing funds en masse, the bank had to turn to its correspondent, which might be faced with requests from many banks simultaneously or might be beset by depositor runs itself. The correspondent bank also might not have the funds on hand because its reserves consisted of checks in the mail, rather than cash in its vault. If so, the correspondent would, in turn, have to request reserves from another correspondent bank… The [bank panics caused] deflation because they convinced bankers to accumulate reserves and the public to hoard cash…Together, hoarding and accumulating reduced the supply of money…As the stock of money declined, the prices of goods necessarily followed. Deflation harmed the economy in many ways. Deflation forced banks, firms, and debtors into bankruptcy; distorted economic decision-making; reduced consumption; and increased unemployment."
Question 1
According to Gary Richardson, what immediate action did banks take when faced with mass withdrawals during the panics of 1930-31?
Banks immediately liquidated their assets to provide cash.
Banks turned to their correspondent banks for reserves.
Banks closed indefinitely to prevent further withdrawals.
Banks requested government bailouts to cover the withdrawals.
Question 2
What was a direct consequence of banks accumulating reserves and the public hoarding cash during the bank panics?
The supply of money in circulation was reduced.
The stock market experienced a rapid recovery.
Consumer confidence in the banking system improved.
The Federal Reserve increased the money supply.
Question 3
The source describes a deflationary period during the bank panics of 1930-31. What is deflation?
An increase in the value of the stock market.
A decrease in the overall level of economic activity.
A decrease in the general price level of goods and services.
An increase in the general price level of goods and services.
Question 4
How did deflation negatively impact the economy during the Great Depression, as described in the source?
It resulted in a surplus of goods and services.
It led to increased bankruptcy and unemployment.
It caused a significant increase in international trade.
It led to a rapid expansion of credit and lending.
Question 5
The source suggests that the banking panics and subsequent deflation had an effect on economic decision-making. Which of the following best reflects this impact?
Businesses increased their production to meet rising demand.
Banks expanded their lending to stimulate economic growth.
Economic actors were more likely to delay purchases and investments.
Consumers engaged in speculative investments to take advantage of low prices.
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