FDIC History

In 2008, the history of the FDIC became a much more important subject to many people.  Most of the time we’re confident that the money in our bank accounts is safe, but when things become chaotic, we want to truly understand how safe our money is.   Understanding FDIC insurance can be improved by understanding the FDIC’s history.

Before the FDIC

Before the FDIC was created, the banking system was often beset by panics, or “runs on the bank.”  These could have a catastrophic effect on economic systems, despite no changes in the underlying fundamentals.  In attempts to mitigate the damage from these kinds of activities, plans began to be implemented at the State level to try to instill confidence.  In addition in 1913 the Federal Reserve System was founded, which was partially purposed to help in these efforts as well.

Panic of 1933

Unfortunately, these measures were not sufficient to prevent a panic in 1933.  The panic resulted in the closure of over 4004 banks, which would be quite a few even in modern times.  While the government did its best to make sure that most of the victims of these bank closures got some compensation, it was clear that the current system didn’t instill the necessary confidence.

Glass-Steagall Deposit Insurance Act

The Federal government at this point considered it necessary to provide the kind of insurance that would help prevent these bank runs in the future.  At the same point, they did not want to be on the hook for massive losses.  As such they came to a compromise where the protection would be limited to $2,500.  This led to the creation to the Federal Deposit Insurance Corporation, or FDIC.  Interestingly, many bankers were skeptical of the idea, and resistant to paying premiums to cover this insurance.

Further FDIC History

In 1935, the “Banking Act” established the FDIC as a permanent agency and increased the protection to $5,000.  Over the years the amount insured has continued to rise as a result of inflation and changing economic factors.  From 1966 to 1980 it was raised 4 times, reaching $100,000 in 1980, where it was not changed for over 25 years. 

Crisis of 2008

In 2008 the FDIC was once in the spotlight as a systemic weakness in the banking system led to many banks being taken over by the FDIC.  This once again highlights the importance of having an entity that can make people confident in the banking system, without them having to personally research the institution.  The stamp of “FDIC insured” helps people feel confident about the safety of their money.