Bank Runs and Panics, Part I

This chapter focuses on bank runs, and explains why they can have such damaging effects on the world economy, as well as be so rapid that (in effect) they aren’t seen coming. Professor Sachs explains the fundamentals of commercial banking and touches upon concepts like maturity transformations and site deposits of checking accountholders, among others. Bank runs happen when more depositors than expected decide to withdraw their funds from the bank which can cause a self-fulfilling panic, in which everyone takes their money out of the bank. This is a rational run. The Great Depression is given as an example.

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