Chapter 20 – Money, Financial Institutions, and the Federal Reserve
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A series of bank failures and a cash shortage in 1907 led to the establishment of the
Federal Reserve System in 1913.
79. By the time of the Civil War, the efficient banking system of the United States was the
envy of the rest of the world.
80. The Federal Reserve System was designed to prevent a repeat of the 1907 banking
crisis.
81. Thanks in part to the Federal Reserve System, few banks failed during the Great
Depression.
82.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
Created during the Great Depression, the federal deposit insurance program resulted in a
large number of bank failures.
83. In the 1930s, during the Great Depression, the government started an insurance
program to protect the public from bank failures.
84. All federally chartered banks are members of the Federal Reserve.
85. The Federal Reserve is the “bankers’ bank.”
86. Bank crises tend to correlate with economic recessions.
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90. The wave of bank failures during the Great Depression prompted the government to
establish federal deposit insurance to protect the public from bank failures.
Feedback: Despite the presence of the Federal Reserve System to serve as a “lender of last
resort,” many banks failed during the early years of the Great Depression. Congress
responded by passing legislation to strengthen the U.S. banking system in 1933 and 1935.
One of the most important results of this legislation was the establishment of federal deposit
insurance.
91. During the Civil War, gold and silver coins were hoarded not because of their
currency value, but because they were worth more than currency.
Feedback: By the time of the Civil War, the banking system was a mess. Different banks
issued different kinds of currencies. During the Civil War, coins were hoarded because they
were worth more as gold and silver than as coins.
92. Commercial banks, savings and loan associations, and credit unions all represent
components of the American banking system.
93.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
Commercial banks offer services to depositors and borrowers.
94. Depositors represent a bank’s primary responsibility, while borrowing customers are
secondary.
95. Commercial banks operate as nonprofit institutions.
96. Commercial banks attempt to profit by using funds deposited by customers to make
interest-bearing loans to borrowers.
97. A savings account represents a demand deposit.
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108. A savings and loan association (S&L) is a financial institution that accepts both
savings and checking deposits and provides home mortgage loans.
109. Historically, savings and loans always paid lower interest rates on time deposits.
110. Savings and loan associations, also known as thrift institutions, were created to
promote consumer thrift and home ownership.
111. Many S&Ls failed when capital gains taxes increased in the late 70s and early 80s,
making it less attractive to invest in real estate and causing investors to walk away from
their property loans.
112.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
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Credit unions represent nonprofit, member-owned financial cooperatives that offer the full
variety of banking services to their members.
113. As nonprofit institutions, credit unions enjoy an exemption from federal income
taxes.
114. Credit unions are for-profit cooperatives.
115. Pension funds are monies put aside by corporations, non-profit organizations, or
unions to fund the financial needs of their employees, upon retirement.
116.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
Nonbanks accept deposits, but do not offer lending services, brokerage services, or
insurance services.
117. Some financial services organizations lend money directly to corporations.
118. Pension funds invest monies contributed by employers and/or employees for the
benefit of their members’ retirement.
119. Large pension funds represent a powerful force in U.S. financial markets.
120. Commercial and consumer finance companies specialize in making low interest loans
to individuals and businesses with strong credit ratings.
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129. Single handedly, the U.S. government’s lack of regulation caused the banking crisis
and collapse of banks that had been in business for several decades.
130. In the early 2000s, banks took the mortgages that they owned, created mortgage-
backed securities out of them, and sold them as safe investments.
131. Due to the fact that investors did not individually purchase MBSs (mortgage-backed
securities) in their investment accounts, they remained unaffected when the value of some
of these investments became worthless.
132. One thing is for certain, the average borrower’s risk-averse behavior did not contribute
to the problems that spiraled out of control and caused the recent banking crisis.
133.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
Fortunately, the Troubled Assets Relief Program (TARP) took care of the looming
bankruptcy problems of major financial services institutions, and taxpayers were not hit
with additional bailouts.
134. Persons with deposits less than $100,000 in banks, savings and loans, and credit
unions run the risk of losing their money in an economic downturn.
135. The FDIC exists to maintain the public’s confidence in the banking system.
136. When a commercial bank fails, depositors lose all of their money.
137. The FDIC traditionally protects depositors up to $250,000 per account.
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149. A debit card is better than a credit card because it allows the purchaser to float a short-
term loan, until the credit card company sends the bills at the end of the month.
150. A newer product is the payroll debit card. It is cheaper for employers to load your
paycheck on a debit card than to cut a check. This is convenient for customers who do not
qualify for a regular debit or credit card, because they can use it to pay bills, do online
purchasing and even get cash from an ATM machine.
151. High startup costs cause Internet banks to have higher operating costs than traditional
banks.
152. Internet banks offer customers better interest rates and lower fees because these
businesses avoid the costs of constructing and maintaining a bank building.
153.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
Although there are many features about online banking that customers do not care for,
they are seldom concerned with the security due to continued assurances by the banking
industry.
154. While credit cards increase the number of checks written, they lower the costs of
processing those checks.
155. In an electronic funds transfer (EFT) system, the information of a transaction is
communicated from one computer to another.
156. Electronic fund transfer (EFT) tools include debit cards, smart cards, direct deposit,
direct payments, and electronic check conversion.
157.