Explain why the FDIC was created. (1 point)
• to restrict monopolies in the economy
• to help prevent bank runs
• to carry out deregulation of the financial sector
• to allow growth of the money supply and faster economic growth
The FDIC, or the Federal Deposit Insurance Corporation, was created primarily to help prevent bank runs. A bank run occurs when a large number of depositors rush to withdraw their funds from a bank due to concerns about its financial stability. This sudden withdrawal of deposits can cause a bank to quickly run out of cash, leading to its collapse.
To address this issue and restore public confidence in the banking system, the FDIC was established in 1933 as a response to the Great Depression. The key purpose of the FDIC is to provide deposit insurance to individuals and businesses who hold their money in banks. This means that if a bank fails, the FDIC reimburses depositors for their losses, up to a certain amount (currently $250,000 per depositor, per insured bank).
By providing deposit insurance, the FDIC helps reassure depositors that their money is safe and protected, even if a bank fails. This assurance helps prevent panic-driven bank runs and promotes stability in the financial system. The FDIC also supervises and regulates banks to ensure their safety and soundness. Overall, its creation has been instrumental in maintaining public confidence in the banking system and preventing widespread instability during times of economic uncertainty.
While the FDIC plays a crucial role in maintaining financial stability, its purpose is not to restrict monopolies, carry out deregulation, or directly control the money supply. These functions are carried out by other government agencies, such as the Federal Trade Commission (FTC), the Consumer Financial Protection Bureau (CFPB), and the Federal Reserve System.