A classic account of bank panics was published in 1879 by Walter Bagehot, editor of the Economist, in his book Lombard Street: “In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them.”
a. Why might one bank failure lead to many bank failures?
b. What are the two main ways in which the government can keep one bank failure from leading to a bank panic?