WEST-E Social Studies Practice Test

Which of the following best describes a major weakness of the U.S. economy during the 1920s?

1. The stock market was excessively regulated

2. The banking system was significantly flawed

3. Industry was heavily diversified

4. Unemployment rates were low

The correct answer is: The banking system was significantly flawed

The choice identifying the banking system as significantly flawed accurately highlights a major weakness of the U.S. economy during the 1920s. During this time, the banking industry was not subject to comprehensive regulation, leading to risky lending practices and an overall lack of oversight. Many banks invested depositors’ funds in stocks and other speculative ventures, which contributed to the instability of the financial system. Furthermore, there was no insurance on deposits, so when banks failed—particularly during the stock market crash of 1929—many individuals lost their savings, creating a ripple effect of financial distress throughout the economy. This lack of a stable and secure banking system played a crucial role in the onset of the Great Depression that followed the decade. In contrast, the other options do not accurately characterize the economic vulnerabilities of the 1920s. For example, the stock market was known for its lack of regulation rather than being excessively regulated, and while some industries were diversified, significant portions of the economy were heavily reliant on speculative investments. Additionally, although unemployment rates were low initially during the decade, this did not reflect an underlying economic stability due to the aforementioned banking issues. Thus, identifying the banking system’s flaws encapsulates a core weakness of the era's economy.