Federal Deposit Insurance: A Banking System Built on Sand MAY
20, 2010 by WARREN C. GIBSON Federal deposit insurance grew out
of a turbulent time in American history: the Great Depression.
During two waves of bank failures in the 1930s an astonishing
9,000 banks closed and millions of depositors lost some or all
of their savings. The Federal Deposit Insurance Corporation
(FDIC) began operations in 1934, insuring deposit accounts up to
$5,000 per person (roughly $80,000 in today’s money). The bank
failure rate then dropped dramatically and never again rose
anywhere close to the level of the 1930s. And such bank failures
that have occurred have cost insured depositors nothing; many
uninsured depositors were made whole as well. Bank runs are a
distant memory, revived occasionally by reruns of It’s a
Wonderful Life. Yet it may be premature to pronounce deposit
insurance a success. It can take a long time for an
unsustainable program to unravel: Witness Social Security and
Medicare. Seventy-five years after the st