ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. The Federal Reserve System was initially created to address these banking panics.

Detailed explanation-2: -The monetary contraction, as well as the financial chaos associated with the failure of large numbers of banks, caused the economy to collapse. Less money and increased borrowing costs reduced spending on goods and services, which caused firms to cut back on production, cut prices and lay off workers.

Detailed explanation-3: -The Panic of 1907 gave impetus to plans to impose more government oversight and public responsibility to bail out financial markets, leading to the creation of the Federal Reserve System a few years later.

Detailed explanation-4: -The creation of the Federal Reserve failed to prevent the bank runs of the Great Depression because the total value of reserves that banks were required to maintain was less than the total deposits. The measures of depositor insurance policy and capital requirement stopped the bank runs.

Detailed explanation-5: -The Panic of 1907 was a financial crisis set off by a series of bad banking decisions and a frenzy of withdrawals caused by public distrust of the banking system. J.P. Morgan and other wealthy Wall Street bankers lent their own funds to save the country from a severe financial crisis.