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# Bank Failure Mechanisms

## Definition

The processes by which banks can become insolvent, including excessive note issuance, inadequate reserves, and over-extension of credit. These mechanisms often involve a cycle of drawing and redrawing bills to maintain liquidity.

## Source Chapter

Book II, Chapter 2

## Context

Smith analyses how banks can fail through various mechanisms, particularly focusing on the cycle of excessive credit extension followed by attempts to maintain liquidity through increasingly desperate measures.

## Economic Domain

Regulation

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