The day savings
were guaranteed
On 1 January 1934, the United States opened a new kind of window: federal deposit insurance. For the first time, an American saver knew their money would be returned even if the bank closed.
Four thousand banks closed in a single year
Between 1930 and 1933, thousands of American banks suspended payments: 1,350 in 1930, 2,293 in 1931, 1,453 in 1932, then about 4,000 in 1933. Each closure swallowed its depositors' savings, which pushed everyone else to withdraw theirs before it was too late. Queues outside the teller's window became the image of the era. On 6 March 1933, Franklin Roosevelt proclaimed a four-day national bank holiday.
The president was not in favor of a federal deposit guarantee, however. He and his Treasury secretary thought it too costly and feared it would subsidize badly run banks. Public opinion and Congress decided otherwise. The Banking Act, signed on 16 June 1933, created the Federal Deposit Insurance Corporation (FDIC), and coverage took effect on 1 January 1934: $2,500 per depositor, raised to $5,000 on 1 July 1934.
The result is striking: only nine banks failed in 1934, against more than 9,000 over the previous four years. The guarantee had almost nothing to pay out, because its mere existence was enough to deter panic. The aim was confidence, not compensation.
A promise that feeds on its own credibility
The mechanism is a useful paradox. A bank lends long with deposits that can be claimed at any moment: it cannot repay everyone, at the same instant, what it owes each. As long as everyone knows this, everyone has an interest in withdrawing first. By guaranteeing small deposits, the state removes the saver's reason to run to the window, and it is this avoided run that spares the bank from failure.
This protection has a price, one Roosevelt had sensed: an insured depositor no longer watches their bank, and the bank can take more risk with guaranteed money. Hence a question that runs through the whole twentieth century and remains open: how far to cover, and who pays the premium for confidence? The cap, a mere figure on paper, is a permanent trade-off between the peace of mind of savers and the discipline of banks.
The best insurance is the kind you almost never have to pay out.