The Effect Of The National Banking Acts
The National Banking Acts were passed to ensure that all banks issuing banknotes had backing of US government bonds
. This was to ensure that if the bank failed then the banknotes that they issued could be redeemed for their face value otherwise they would be worthless. Even the best forex trading institutions have faced similar incidents when the currency of a nation falters to nothing.But all of this was not enough because as a bank ran short of cash to meet withdraws the bank would draw down its deposits at other banks to get cash thereby making the other bank run short of cash also. Because the nations banknote currency supply was limited by the amount of government bonds outstanding, when the public demanded more cash, the banking system often ran short of cash and the economy experience problems called bank panics.
These scenarios preceding financial panics are similar. First the economy would enter a period of rapid expansion, creating heavy demand for bank credit. Then as interest rates increased, banks would issue more and more banknotes to satisfy their loans and demand. This would increase the money supply, further stimulate the economy, and lead to inflation as the forex trading tips the balance to the favor of the nation. At some point, some banks have over extended themselves by issuing too many banknotes relative to their reserve holdings. A slight downturn in economic activity would cause overextended banks to fail and then people would panic. Why? The public knew that banks had small amounts of preserves relative to the amount of bank notes outstanding. When the public demanded the conversion of their paper money into hard currency banks were forced to call in loans from their customers. Does this seem at all familiar? No. Because the Fed solves these problems by printing more money.
by: Rhab Hendrik