The Development Of The Federal Reserve
To guard against this possibility, bankers prior to the establishment of the Federal Reserve would establish lines of credit with larger banks. In the event of a run, the smaller bank would draw on the line of credit. The larger banks, or central banks, to keep shady small-time operators out of business, evaluated the line of credit. Nobody would invest serious money to a small bank not protected against a run by a larger partner. However, the system was not perfect. In times of panic, large numbers of depositors would demand to withdraw their money. Only the largest Wall Street banks, with millions of dollars in reserve, could guard against this. Stories of bank runs- tales of people running to withdraw all their cash from their accounts- may seem dramatic, almost theatrical to people today. But to people living in an economically unstable society, like the early twentieth century, they were an expected occurrence. The banks were independent rivals, the amount of currency in......
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