The FDIC was created by the Banking Act of 1933 (frequently referred to as the Glass-Steagall Act). The FDIC is an independent government agency that “preserves and promotes public confidence in the U.S. financial system by insuring depositors for at least $250,000 per insured bank; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails” [1]. FDIC is funded by insurance premiums paid by banks [2].
Before the creation of FDIC, banks failures were very common, especially during periodic financial crises (e.g., 1836, 1855, 1875, 1895). When banks failed, depositors regularly lost their savings, bringing personal hardship and even disaster. Between 1930 and 1933, for example, Americans lost $1.3 billion from 9,000 bank failures (about $23 billion in today’s dollars) [3]. Moreover, the threat of failure frequently caused “bank runs,” a phenomenon where large numbers of people attempt to withdraw their money from the banks; ironically, these desperate actions made banking failures more likely. Furthermore, widespread bank failure made economic crises worse. The plunge into the Great Depression was led by the collapse of around one-third of all banks in the United States [4].
In contrast to this pre-New Deal history, “Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure” [5]. Furthermore, yearly bank failures have been kept to a minimum, exceeding 200 only six times since 1934 (during the Savings & Loan crisis and subsequent recession of 1986-1991). During the postwar ‘Golden Age’ of economic growth and stability, 1943-1974, bank failures never hit double-figures in any year [6]. The success of the FDIC rests on preventing bank runs and peremptorily closing troubled banks before they infect others in the system.
The chairmen of the FDIC during the New Deal era were Walter J. Cummings (1933-1934) and Leo T. Crowley (1934-1945).
FDIC is one of the longest-lasting and greatest accomplishments of the New Deal. Its policies have changed little over the years. Notably, the upper limit on the amount insured per account has risen and regulators have come to favor bank mergers over the bankruptcy of major banking houses. With all the deregulation of finance since 1975, bankers have never challenged the functions of the FDIC. The financial collapse of 2008-09 was centered on investment banks, which were not regulated by the FDIC.
Sources
(1) Federal Deposit Insurance Corporation, at https://www.fdic.gov/about/affaq.html, accessed March 19, 2015. (2) Ibid. at https://www.fdic.gov/about/learn/symbol/, accessed March 19, 2015. (3) Ibid. at https://www.fdic.gov/exhibit/p1.html#/10 and https://www.fdic.gov/exhibit/p1.html#/14, accessed April 5, 2015. (4), Charles Kindleberger, The World in Depression, 1929-39, Berkeley, CA: University of California Press, 1973. (5) See note 2. (6) To see a yearly list of bank failures since 1934, go to https://www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30&Header=1, and in the top area choose “United States (50 States and DC),” “Between 2015 and 1934,” “Summary by Year,” and click “Produce Report.”
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