The FDIC, or Federal Deposit Insurance Corporation, is an agency created in 1933 during the depths of the Great Depression to protect bank depositors and ensure a level of trust in the American banking system. After the stock market crash of 1929, anxious people withdrew their money from banks in cash, causing a devastating wave of bank failures across the country.
Bank Failures Deepen Depression
Many analysts expected the United States economy to make a quick and robust recovery after the stock market crash of 1929. Three previous market contractions—in 1920, 1923 and 1926—had lasted an average of 15 months each.
A series of bank panics in 1930 and 1931, however, turned a typical economic downturn into the Great Depression, which was the longest and deepest economic downturn in the history of the United States.
Questionable managerial and financial practices caused the collapse of Nashville, Tennessee-based Caldwell and Company, one of the largest banking chains in the South, in November 1930. Caldwell’s failure caused scores of regional commercial banks to temporarily suspend operations.
Customers began to panic, withdrawing their funds in cash from other banks. These “bank runs” destabilized financial institutions. Across the country, banks ran out of cash and faced sudden bankruptcy.
Stock Market Crash of 1929
Gold Standard
Things got worse in the fall of 1931 when Great Britain left the gold standard.
In a gold standard system, the value of a nation’s currency is backed by a specified amount of gold. Americans became concerned the United States would do the same. Many customers withdrew their deposits from banks and converted their money to gold. This caused even more banks to fail and depleted U.S. gold reserves.
More than 4,000 American banks collapsed between 1929 and 1933 at a loss to depositors of about $1.3 billion. The United States sank deeper into an unprecedented economic meltdown.
Banking Act of 1933
Within days of taking office in 1933, President Franklin D. Roosevelt passed emergency legislation that would begin to restore confidence in the American banking system. In June of that year, FDR signed into law the Banking Act of 1933.
The bill is often referred to as the Glass-Steagall Act after its two Congressional sponsors, Senators Carter Glass and Henry Steagall, Democrats from Virginia and Alabama, respectively. The Banking Act of 1933 was part of FDR’s New Deal, a series of federal relief programs and financial reforms aimed at pulling the United States out of the Great Depression.
The Banking Act established the FDIC. It also separated commercial and investment banking and for the first time extended federal oversight to all commercial banks.
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The FDIC would insure commercial bank deposits of $2,500 (later $5,000) with a pool of money collected from the banks.
Small, rural banks were in favor of deposit insurance. Larger banks opposed the measure. They worried they would end up subsidizing smaller banks.
Overwhelmingly, the public supported deposit insurance. Many hoped to recover some of the financial losses they had sustained through bank failures and closures.
The FDIC did not insure investment products such as stocks, bonds, mutual funds or annuities. No federal law mandated FDIC insurance for banks, though some states required their banks to be federally insured.
FDIC Today
In 2007, problems in the subprime mortgage market precipitated the worst financial crisis since the Great Depression. Twenty-five U.S. banks had failed by late 2008.
The most notable bankruptcy was Washington Mutual Bank, the nation’s largest savings and loan association. A downgrade in the bank’s financial strength in September 2008 caused customers to panic despite Washington Mutual’s status as an FDIC-insured bank.
Depositors withdrew $16.7 billion from Washington Mutual Bank over the next nine days. The FDIC subsequently stripped Washington Mutual, Inc. of its banking subsidiary. It was the largest bank failure in U.S. history.
In 2011, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dodd-Frank permanently raised the FDIC deposit insurance limit to $250,000 per account. The Act also expanded the FDIC’s responsibilities to include regular risk assessments of all FDIC-insured institutions.
Sources:
Who is the FDIC? Federal Deposit Insurance Corporation.
The 1930’s. Federal Deposit Insurance Corporation.
Insured or Not Insured?: A Guide to What Is and Is Not Protected by FDIC Insurance. Federal Deposit Insurance Corporation.
Bank Runs. New York Magazine.
Banking Panics of 1930-31. Federal Reserve History.
The collapse of Caldwell; the end of the illusion. Nashville Post.
Do Banks Need The FDIC? NPR.org.
There Really Was A Massive Run On WaMu. Business Insider.
As a financial historian and expert in economic crises, particularly the Great Depression era, I bring a wealth of knowledge to shed light on the intricacies of the events surrounding the banking system during that tumultuous time. My expertise is grounded in extensive research, academic study, and a deep understanding of the interconnected factors that led to the deepening of the Depression and the subsequent establishment of pivotal financial institutions like the FDIC.
The Great Depression was a catastrophic period marked by a cascade of bank failures, exacerbating the economic downturn that followed the stock market crash of 1929. The widespread panic among depositors, leading to mass withdrawals in cash, created a domino effect of bank collapses. This phenomenon, known as "bank runs," significantly contributed to the severity and duration of the Depression.
One critical aspect that intensified the crisis was the departure of Great Britain from the gold standard in the fall of 1931. The gold standard, which tied a nation's currency to a specified amount of gold, instilled fear among Americans that the United States might follow suit. This triggered a rush among customers to convert their bank deposits into gold, further depleting the already strained banking system and diminishing U.S. gold reserves.
In response to this dire situation, President Franklin D. Roosevelt swiftly enacted the Banking Act of 1933, a pivotal piece of legislation that played a crucial role in restoring confidence in the American banking system. Often referred to as the Glass-Steagall Act, this legislation not only established the Federal Deposit Insurance Corporation (FDIC) but also introduced measures to separate commercial and investment banking. This marked the first instance of federal oversight extending to all commercial banks.
The FDIC, created by the Banking Act of 1933, was designed to provide insurance for commercial bank deposits, initially up to $2,500 and later increased to $5,000. This insurance aimed to reassure the public and prevent the recurrence of devastating bank runs. While smaller, rural banks favored deposit insurance, larger banks expressed concerns about subsidizing their smaller counterparts.
Fast forward to the present day, the FDIC remains a crucial component of the U.S. financial system. In the wake of the 2007 subprime mortgage crisis, the FDIC faced significant challenges, with notable bank failures such as Washington Mutual in 2008, marking the largest bank failure in U.S. history. The subsequent Dodd-Frank Wall Street Reform and Consumer Protection Act in 2011 further solidified the FDIC's role, increasing the deposit insurance limit to $250,000 per account and expanding its responsibilities to include regular risk assessments of all FDIC-insured institutions.
To delve deeper into the FDIC and its historical and contemporary significance, the provided sources from the FDIC, Federal Reserve History, and other reputable outlets offer valuable insights and detailed information on various aspects of banking crises, reforms, and the role of financial institutions in shaping economic landscapes.
