The origins of federal deposit insurance (with Eugene N. White)

Abstract

Introduction The insurance of bank deposits has become a common feature of banking regulation in many countries, but until recently it was strictly an American phenomenon. Many countries adopted deposit insurance in imitation of the United States, where – with the exception of many economists – it is regarded as an institution necessary for the stability of the banking system and the protection of depositors. In the current debate about how to reform the U.S. banking system, most argue on economic or political grounds that deposit insurance must be retained in some form, despite the enormous costs it has imposed. Federal deposit insurance may thus be the only enduring legacy of the New Deal's banking legislation. The widespread support for deposit insurance in the United State represented a remarkable change of public opinion. Until the early 1930s, there was no general interest in deposit insurance. Even after the 1933 banking crisis, a bitter struggle was waged over deposit insurance legislation. As Carter Golembe (1960, pp. 181–82) pointed out over thirty years ago, “Deposit insurance was not a novel idea; it was not untried; protection of the small depositor, while important, was not its primary purpose; and finally it was the only important piece of legislation during the New Deal's famous ‘one hundred days’ which was neither requested nor supported by the new administration.” On the one hand, the answer to the question why the United States passed long-dormant deposit insurance legislation is simple.