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103
Explain the five perceived problems with the Dual banking system.
4) Susceptibility to panics & runs
4) Susceptibility to panics & runs
The problem lay in "Country" banks and the call-loan market:
Call-loans are loans that can be called for repayment at any time
"Country" banks are world banks that held a lot of money in city banks.
The problem was that city banks loaned out "Country" banks' money at higher interest rates but city banks borrowed this money on call. So if the "Country" bank experienced a run, it would call back the city banks' loans who would in turn call back loans it gave out. Basically, the situation could domino easily.
Call-loans are loans that can be called for repayment at any time
"Country" banks are world banks that held a lot of money in city banks.
The problem was that city banks loaned out "Country" banks' money at higher interest rates but city banks borrowed this money on call. So if the "Country" bank experienced a run, it would call back the city banks' loans who would in turn call back loans it gave out. Basically, the situation could domino easily.
Flashcard info:
Author: savhighsmith
Main topic: Economics
Topic: History of Economics
School / Univ.: UGA
City: Athens
Published: 12.10.2010