The Banking Act of 1933, also known as the Glass-Steagall Act, created the FDIC. FDIC is an independent agency of the government that “preserves, promotes public trust in the U.S. Financial System by insuring depositors up to $250,000 per insured banks; by identifying and monitoring the risks to the deposit insurance fund; and by limiting economic and financial system effects when a thrift institution or bank fails.” FDIC is funded from insurance premiums paid banks.
Bank failures were common before the FDIC was created. They were especially frequent during financial crises like 1836, 1855 and 1875. Depositors lost their savings regularly when banks collapsed, which caused personal hardship and even financial disaster. For example, between 1930 and 1933, Americans suffered $1.3 billion losses from 9,000 bank collapses, which is roughly $23 billion today. The threat of failure often caused “bank runs”, a phenomenon in which large numbers of people try to withdraw money from banks. Ironically, this made bank failures more likely. Economic crises were made worse by widespread bank failure. The collapse of about one-third of the banks in the United States led to the Great Depression.
Contrary to the pre-New Deal history, no depositor has ever lost even a cent of FDIC insured funds since January 1, 1934. Moreover, bank failures per year have been kept at a minimum. They have exceeded 200 only six times since 1934, during the Savings & Loan crisis, and subsequent recession, 1986-1991. Bank failures did not reach double figures during the postwar Golden Age’ of stability and economic growth, 1943-1974. FDIC’s success rests on the prevention of bank runs and the prompt closing of troubled banks, before they spread to other members.
Walter J. Cummings (1933-1934), and Leo T. Crowley (34-1945) were the chairmen of FDIC during New Deal era.
FDIC is the New Deal’s greatest and longest-lasting achievement. The policies of FDIC have not changed much over the years. Notably, the maximum amount that can be insured per account has increased and regulators favor bank mergers over bankruptcy of large banking houses. Despite all the financial deregulation since 1975, bankers never challenged the FDIC’s functions. The financial crisis of 2008-09 was centred on investment banks which were not regulated under the FDIC.