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In the United States during the latter part of 1800’s banking panics were typically observed to...

In the United States during the latter part of 1800’s banking panics were typically observed to happen at the beginning of a recession in the economy. Briefly explain why a banking panic was likely occur at the beginning of a recession. NOTE: In the 1800’s the U.S. did not have deposit insurance in place and did not have a central bank at that time.

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The banks take deposits from the public and after keeping some fraction as reserve they loan the rest amount to corporates or other entity. When there is a recession then there is less demand and hence corporates are facing difficulties in servicing the debts. People feel that they will not be able to get their deposited money from the banks and since there was no deposit insurance at that time hence it makes the fear more worse. So people starts running to bank to get the money they have deposited. Only fraction of deposit happens to be at bank hence the situation like bank run occurs.

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