Federal Deposit Insurance Corporation (FDIC)
Encyclopedia of the Great Depression, 2004
They became, unwittingly, the most powerful image of the Great Depression, standing nervously in long
lines, clutching their deposit books, hoping against hope to get inside before the bank closed its doors,
leaving them penniless. Today, their visages survive only in the memories of America's "greatest
generation" or in the imaginations of television viewers watching another holiday season broadcast of
Frank Capra's 1946 film It's a Wonderful Life. The long lines of nervous bank depositors disappeared,
thanks to the Federal Deposit Insurance Corporation (FDIC), arguably the New Deal's most enduring and
least controversial legacy. Knowing that the FDIC, an agency of the federal government, would guarantee
all individual bank deposits up to a certain maximum, anxious depositors no longer needed to demand
cash at teller windows, and bankers no longer had to engage in fire sale liquidations of assets to satisfy
them. In doing so, the Federal Deposit Insurance Corporation ended the gravest threat ever to financial
instability in the United States.
During the 1920s and early 1930s, the American banking system underwent a financial meltdown because
of undercapitalization, real estate speculation, the agricultural depression, problems on Wall Street, and
overcompetition in some markets. Between 1918 and 1933, more than thirty thousand financial
institutions—banks, savings banks, savings and loan associations, credit unions, and insurance
companies—declared insolvency. The problem became so severe in the spring of 1933 that recently
inaugurated President Franklin D. Roosevelt had to declare a national bank holiday, closing every bank in
the United States and scrambling for short-term and long-term solutions to the problem.
During the end stage of the Herbert Hoover administration, when the banking crisis was reaching
catastrophic proportions, Congressman Henry Steagall, a Democrat from Alabama, proposed the
establishment of a federal agency to insure individual bank accounts. Such an agency, Steagall argued,
would help preserve bank capital and prevent another crisis. If individual depositors knew that the
government guaranteed their deposits, they would be less likely to make a so-called run on the bank to
empty their accounts. Bankers would then be saved from the need to generate cash by calling in loans
and selling stocks, bonds, and real estate, often at highly deflated prices, which badly eroded their capital
reserves and permanently weakened them. Most private bankers, however, bitterly opposed the measure,
and President Hoover was not inclined to undertake such a vast expansion of federal authority.
By March 1933, however, with Hoover out of the White House, the opposition of private bankers melted
away. The nation was caught in an unprecedented financial crisis, and the private sector possessed
neither the resources nor the will to address it. Congressman Steagall attached his proposal for a federal
agency to guarantee bank deposits to what later became known as the Banking Act of 1933. At first,
President Franklin D. Roosevelt opposed the notion of federal deposit insurance, not so much because of
any personal philosophical disagreements but because Senator Carter Glass of Virginia, the influential
chairman of the Senate Appropriations Committee, worried that federal deposit insurance would
concentrate too much power in Washington, D.C. As the legislation was written and debated, however,
Glass's opposition waned, and so did the president's.
The measure went through Congress with little opposition, and on June 16, 1933, President Franklin D.
Roosevelt signed it into law. The legislation established the Federal Deposit Insurance Corporation
(FDIC), which insured individual bank accounts up to $5,000. All national banks had to sign up for FDIC
insurance, and all state banks wanting to enroll also had to agree to become part of the Federal Reserve
System, requirements that automatically brought more stability to financial markets. The insurance
program went into effect on January 1, 1934, financed with $150 million in federal appropriations and
premium payments by member banks.
In a matter of weeks, the value of the FDIC became obvious. Americans treated non-FDIC banks like
financial pariahs. Bankers had no choice, if they had any hope of surviving and profiting, but to join the
FDIC. By the end of 1935, more than 14,400 banks had enrolled for FDIC insurance, and bankers
displayed the FDIC sign at every teller's window. Those signs became American icons, proof that every
bank displaying one was safe; if it was not, the federal government would make good on the deposit.
During 1934, only thirty-two banks failed in the United States, the fewest in a generation. Since then, the
American banking system, from the perspective of depositors, has become the safest in the world, thanks
largely to the FDIC.
See Also: BANKING PANICS (1930–1933) ; GLASS-STEGALL ACT OF 1933 .
BIBLIOGRAPHY
Burns, Helen M. The American Banking Community and New Deal Banking Reforms: 1933–1935. 1974.
Kennedy, Susan E. The Banking Crisis of 1933. 1973.
Olson, James S. Herbert Hoover and the Reconstruction Finance Corporation, 1931–1933. 1977.
Olson, James S. Saving Capitalism: The Reconstruction Finance Corporation and the New Deal,
1933–1940. 1988.
JAMES S. OLSON
Full Text: COPYRIGHT 2004 Macmillan Reference USA, COPYRIGHT 2006 Gale.
Source Citation
OLSON, JAMES S. "Federal Deposit Insurance Corporation (FDIC)." Encyclopedia of
the Great Depression. Ed. Robert S. McElvaine. Vol. 1. New York: Macmillan
Reference USA, 2004. 339-340. U.S. History In Context. Web. 5 Mar. 2013.
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