Fdic Established

The bank holocaust of the early 1930s—9,106 bank failures in four years, 1,947 of them national banks—culminating in President Franklin D. Roosevelt's executive order declaring a nationwide bank moratorium in March 1933, at last produced the needed drastic reforms. In 1933 Congress passed the Glass-Steagall Act, which forbade Federal Reserve member banks to pay interest on demand deposits, and founded the Federal Deposit Insurance Corporation (FDIC). In an effort to protect bank deposits from rapid swings in the market, the Glass-Steagall Banking Act of 1933 forced banks to decide between deposit safeholding and investment. Executives of security firms, for example, were prohibited from sitting as trustees of commercial banks.

The FDIC raised its initial capital by selling two kinds of stock. Class A stock (paying dividends) came from assessing every insured bank 0.5 percent of its total deposits—half paid in full, half subject to call. All member banks of the Federal Reserve System had to be insured. Federal Reserve Banks had to buy Class B stock (paying no dividends) with 0.5 percent of their surplus—half payable immediately, half subject to call. In addition, any bank desiring to be insured paid .083 percent of its average deposits annually. The FDIC first insured each depositor in a bank up to $2,500; in mid-1934 Congress put the figure at $5,000; on 21 September 1950, the maximum became $10,000; on 16 October 1966, the limit went to $15,000; on 23 December 1969, to $20,000; and on 27 November 1974, to $40,000. At the end of 1971 the FDIC was insuring 98.6 percent of all commercial banks and fully protecting 99 percent of all depositors. However, it was protecting only about 64 percent of all deposits, with savings deposits protected at a high percentage but business deposits at only about 55 percent. By the mid-1970s the FDIC was examining more than 50 percent of the banks in the nation, which accounted for about 20 percent of banking assets. It did not usually examine member banks of the Federal Reserve System, which were the larger banks. There was a degree of rivalry between the large and small banks, and the FDIC was viewed as the friend of the smaller banks.

Whereas in the 1920s banks failed at an average rate of about six hundred a year, during the first nine years of the FDIC (1934–1942) there were 487 bank closings because of financial difficulties, mostly of insured banks; 387 of these received disbursements from the FDIC. During the years from 1943 to 1972, the average number of closings dropped to five per year. From 1934 to 1971 the corporation made disbursements in 496 cases involving 1.8 million accounts, representing $1.215 billion in total deposits. The FDIC in 1973 had $5.4 billion in assets. Through this protection, people were spared that traumatic experience of past generations, a "run on the bank" and the loss of a large part of their savings. For example, in 1974 the $5 billion Franklin National Bank of New York, twentieth in size in the nation, failed. It was the largest failure in American banking history. The FDIC, the Federal Reserve, and the comptroller of the currency arranged the sale of most of the bank's holdings, and no depositor lost a cent.