The Federal Deposit Insurance Corporation (FDIC) was created in 1933 to protect bank deposits in the event of a bank failure by insuring deposits up to a specified amount (which has increased over the succeeding decades). Established in the wake of the BANKING crisis of the early 1930s, the FDIC played a major role in restoring the stability of the banking system and public confidence in banks.
The first years of the Great Depression brought thousands of bank failures, and the number of closings accelerated in the winter of 1932-33. Banks failed in such numbers because their assets—mortgages and other loans, for example—had lost value to the point where they could not be converted into enough cash to cover deposit withdrawals. When one bank failed and depositors lost their money, panicked depositors of other banks tried to recover their money. This led to “bank runs” that only aggravated the situation and brought still more failures.
After President Franklin D. Roosevelt was inaugurated in March 1933, he declared a bank holiday that closed all banks temporarily while his administration and Congress worked on the Emergency Banking Act of 1933. Congress passed the act on March 9, and the banks began reopening on March 13. The emergency measures helped to restore some public confidence in the nation’s banking system, but deposits remained vulnerable to runs and banks to possible failures.
Although Roosevelt wanted to defer further banking legislation, Congress initiated the push for federal insurance for bank deposits and passed the Banking Act of
1933 in June. Separating commercial and investment banking and strengthening the Federal Reserve System, the act also created federal deposit insurance. Over the initial objections of Roosevelt and his secretary of the treasury, the Federal Deposit Insurance Corporation was to begin operation on July 1, 1934; in the meantime, the Temporary Deposit Insurance Corporation (TDIC) was established to provide insurance protection for depositors. Deposit insurance guaranteed depositors their first $2,500, and all banks that were part of the Federal Reserve System were required to participate in TDIC by January 1, 1934. Non-Federal Reserve banks could join TDIC if they could prove the financial well-being of their institution. Overall, 90 percent of commercial banks and more than one-third of savings banks joined the TDIC.
FDIC was scheduled to succeed the TDIC in July
1934 under the Banking Act of 1933. Instead, at the urging of TDIC officials, Congress extended the TDIC through the summer of 1935. The Banking Act of 1935 then strengthened the FDIC system created in 1933, and the FDIC began operations in August 1935. The major changes since 1933 included an increase in the amount insured to $5,000 per account, while the insurance fund was raised by a levy on the total bank deposits in an institution (one-twelfth of 1 percent). To address the fear that insuring deposits might be too expensive, FDIC was also given more power to supervise and ensure the financial health of member banks, including making loans to troubled banks, purchasing their assets, and helping mergers between institutions by issuing guarantees. Nearly all of the banks that had been part of the TDIC joined the FDIC and by 1941, almost all American banks were FDIC members.
The FDIC was one of the most successful reforms of the New Deal. Between 1934 and 1941 there were only 370 bank failures, with the FDIC paying out almost $23 million to cover lost deposits. The failure rate in subsequent years was even lower (just 28 failures from 1942 through 1945, for example). By insuring the money Americans deposited in their banks, the FDIC helped to restore confidence in the banking system, worked to reverse the trend toward more bank failures, and contributed to the financial stability of banking institutions.
Further reading: Milton Friedman, and Anna Jacobsen Friedman, A Monetary History of the United States (Princeton, N. J.: Princeton University Press, 1963).
—Katherine Liapis Segrue
World History
