WEST-E Social Studies Test 2025 – 400 Free Practice Questions to Pass the Exam

The choice identifying numerous independent banks with inadequate assets highlights a significant issue that contributed to the instability of the banking system in the 1920s. During this period, the United States had a multitude of small, independent banks that often lacked sufficient capital reserves and diversified investment portfolios. This situation made them vulnerable to economic fluctuations and crises, as they were less equipped to absorb losses or manage risks effectively.

As the economy expanded and certain industries boomed, these banks tended to invest heavily in speculative ventures, including real estate and stocks, without maintaining adequate liquidity. When economic downturns occurred or when there was a sudden demand for withdrawals from depositors, many of these banks found themselves unable to meet their obligations. Consequently, this led to bank failures, which destabilized not only individual institutions but also the banking system as a whole, contributing to the financial panic that preceded the Great Depression.

The other options do not capture the specific vulnerabilities that stemmed from the structure and practices of the banking sector during that time. Centralized banking institutions, vigorous regulations, and professional management—while they have their own implications—do not directly correlate with the immediate issues that small, undercapitalized banks faced during the 1920s.