The Origins of Federal Deposit Insurance

Deposit insurance cannot be explained as an emergency measure conceived in haste to resolve an ongoing crisis. The legislation had been debated for years, the banking crisis of 1933 had been over for months prior to the implementation of the new insurance plan, and prior losses of banks and depositors were unaffected by the plan. Finally, there was an alternative long-run solution to the instability of the American banking system-nationwide branch banking-and it had been gaining ground politically in the 192Os, partly in response to widespread failures of agricultural unit banks and the failures of state deposit insurance schemes.
The purpose of our paper is to explain how and why federal deposit insurance-special-interest legislation that had failed in Congress for nearly fifty year-was adopted with near unanimity in 1933. We consider the forces in favor of, and against, federal deposit insurance from the nineteenth century to 1933. We argue that, even though the traditional supporters of federal deposit insurance had suffered repeated defeats and their power was at the nadir in 1933, the nature of the political struggle over deposit insurance changed in the 1930s from a battle waged in Congress among special interests to one that engaged the general public. The banking collapse focused the attention of the public on the otherwise esoteric political issue of banking reform and offered the supporters of deposit insurance the opportunity to wage a campaign to convince the public that federal deposit insurance was the best solution to banking instability.

Charles W. Calomiris and Eugene N. White

NBER

1994

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