Final answer:
Banks use fractional reserve banking to make profits by lending out deposits but are protected from panics through reserve requirements, central bank support, and deposit insurance, though historically, events like the Panic of 1819 have shaken public confidence.
Step-by-step explanation:
Banks operate on a system known as fractional reserve banking. This means that they only hold a fraction of their depositor's funds in reserve for withdrawal, lending out the majority to earn interest. The reason banks do not keep most deposits on hand is because it would severely limit their ability to make loans and generate profit. Loans are a primary way that banks earn money through interest. By lending out depositors' funds, banks facilitate economic growth and help businesses and individuals finance various needs.
However, this practice does make banks vulnerable to panics or bank runs, where many customers withdraw their funds simultaneously due to fears that the bank will become insolvent. To mitigate this risk, banks are required to hold a certain level of reserves and can also rely on central bank support in times of need. Moreover, deposit insurance systems have been established to protect depositors and reduce the likelihood of panics.
The statement that the Panic of 1819 increased the American people's faith in the Second Bank of the United States is false. Economic turmoil typically undermines confidence in financial institutions.