PREDECESSORS OF THE FEDERAL DEPOSIT INSURANCE LAW

Adoption of deposit insurance by the Congress in 1933 followed the prolonged banking crisis of the early 1930's, which had culminated in thousands of bank failures and finally in the banking holiday of 1933. However, the insurance of bank deposits was not a novel idea conceived at that time nor was it an untried experiment.

The history of deposit insurance in the United States goes back a century and a quarter to the efforts of State legislatures to establish stable banking systems. A period of mushroom growth in banking had followed the dissolution of the first Bank of the United States in 1811; and this, together with the policies of the second Bank of the United States at the end of that decade, had led to many bank failures in the early years of the 1820's. In the decades of the 1820's and 1830's banking codes were developed in many of the States. The primary aim of these codes was to provide conditions under which bank credit would not be subject to alternations of excessive expansion and contraction, with consequent periods of financial disturbance accompanied by numerous bank failures.

At that time the credit of commercial banks was extended both in the form of deposit accounts and in the form of circulating notes, or currency; and the latter formed a much larger part of the nation's circulating medium than do the circulating notes issued now by the Treasury and the Federal Reserve banks. In the 1820's, the total circulating medium was about equally divided between deposits and currency; and practically all of the currency, except for minor coins, consisted of circulating notes of commercial banks.

State systems of guaranty of bank obligations prior to creation of the national banking system. In the discussions accompanying the development of banking codes, there was more agitation for special legislative provisions to assure the safety of bank credit in the form of circulating notes than in the form of deposits. In many sections of the country, currency issued by banks was predominantly used in making payments, and tended to circulate for long periods of time before being returned to the issuing bank. The use of deposits was mainly concentrated in the large cities, and checks or drafts on deposits were usually presented to the issuing bank promptly. In consequence, some of the plans for insurance of bank obligations covered only circulating notes, while others covered both circulating notes and deposits. The earliest plans covered both notes and deposits.

Insurance funds covering both circulating notes and deposits, or the mutual guaranty of bank obligations, were established by New York in 1829, Vermont in 1831, Indiana in 1834, and Michigan in 1836. The New York plan was modified to cover circulating notes only in 1842, after the fund was found insufficient. Plans covering circulating notes only were adopted by Ohio in 1845 and Iowa in 1858.

These plans met with varying degrees of success. The Michigan plan applied only to a few banks and appears never to have been in actual operation. The New York and Vermont funds were partially successful, meeting nearly all claims against them and operating for about forty years, passing out of existence with the termination of the charters of all the participating banks. The plans in Indiana, Ohio, and Iowa applied to the offices of so-called State banks, the "branches" of which were in reality independent banks subject to examination and supervision by State boards of control. All three were highly successful. They were discontinued only when the "branches" converted into national banks following the prohibitive Federal tax in 1865 on circulating notes of State banks.

United States government guaranty of circulating banknotes. In 1863 the National Bank Act provided for guaranty by the Federal Government of circulating notes issued by national banks.1 Federal Government guaranty of circulating banknotes has continued to the present time. Guaranty of national banknotes continued until 1935, when they were retired, and the notes of Federal Reserve banks have been guaranteed since establishment of the Federal Reserve System.

At the time when establishment of a national banking system was under consideration, circulating notes were, as in the 1820's, about equal in amount to deposits. A large portion of the circulating notes in use in 1863, when the National Bank Act was adopted, had been issued by the Federal Government during the early years of the Civil War. The remaining circulating notes were issues of State banks. It was expected that most of these circulating notes would be replaced by notes of the new national banks.

Consequently, at the beginning of the national banking system it was expected that about one-half of the circulating medium would be covered by Federal government guaranty. This is about the same proportion of the circulating medium as was guaranteed or insured after establishment of the Federal Deposit Insurance Corporation in 1934. With the more rapid growth of currency than of deposits during World War II, the amount of deposits insured and currency guaranteed rose to about three-fifths of the circulating medium.

Each bank which issued circulating notes was required to purchase United States Government bonds and deposit them with the Comptroller of the Currency as security for the circulating notes, which were printed under the directions of the Comptroller.

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Due to circumstances which apparently were not foreseen at the time of passage of the National Bank Act, the proportion of bank obligations guaranteed by the Federal Government under the provisions of that Act declined substantially in the 1870's and 1880's. Circulating notes did not expand as rapidly as the needs of the nation for circulating medium. Increased use was made of deposits transferable by check because of their convenience in making payments in distant places and their advantages with respect to safekeeping. In consequence, the problem of assuring the safety and value of bank deposits became as important a monetary problem as that of assuring the safety and value of banknotes.

Proposals for guaranty of deposits in national banks, 1886-1912. By the middle of the 1880's deposits had become over four-fifths of the circulating medium. The problem of protecting bank deposits was sufficiently acute to bring about the introduction in the Congress of bills providing for the guaranty of deposits. Four bills for this purpose were introduced in the House of Representatives in 1886. Fourteen more were introduced in the Congress prior to 1900.

In the 60th Congress, following the panic of 1907, about thirty proposals for deposit guaranty legislation were made. Most of these related to deposits in national banks but in a few cases other banks were also eligible for participation. In 1908 the National Monetary Commission was established and during the next five years only a few bills for deposit guaranty were introduced in Congress. It is believed that numerous proposals of this sort were made to the National Monetary Commission but no record of them has been located.

State deposit guaranty systems, 1907-1917. Proposals for the guaranty of bank deposits were not confined to the Federal Congress. In the 1890's and the early years of the present century, many similar proposals were made in the legislatures of various States.

During the period 1907-1917 deposit guaranty funds were established in eight States: Oklahoma in 1907; Kansas, Nebraska, and Texas in 1909; Mississippi in 1914; South Dakota in 1915; and North Dakota and Washington in 1917. By 1933 these funds had become insolvent or inoperative as a result of the large number of bank failures in the 1920's and early 1930's, and of relatively high failure rates among the larger banks.

Proposals for Federal deposit insurance, 1913-1932. During the period when establishment of the Federal Reserve System was under consideration proposals for deposit guaranty were considered by the banking and currency committees of the Congress. The Federal Reserve Act, as reported by the Senate Committee on Banking and Currency and as passed by the Senate in 1913, contained a provision placing part of the earnings of the Federal Reserve banks in a depositors' guaranty

fund. This was eliminated by a joint conference committee with the House. However, during the next few years several bills for the guaranty of bank deposits were introduced.

In the early 1930's numerous proposals for deposit guaranty were made. More than twenty bills for this purpose were introduced in the 72nd Congress, which opened in 1931. Early in 1932, hearings on one of these were held by a subcommittee of the Banking and Currency Committee of the House of Representatives. Following the hearings, the bill was reported favorably by the Committee, and it passed the House of Representatives in May 1932. The Banking and Currency Committee of the Senate, to which the bill was referred after its passage by the House, took no action on it before the 72nd Congress adjourned on March 4, 1933.

In the first session of the 73rd Congress, which opened on March 9, 1933, several bills for deposit insurance were introduced. One of these proposals was incorporated in the Banking Act of 1933, as introduced in the House and Senate by the chairmen of their banking and currency committees.

DEPOSIT INSURANCE LEGISLATION, 1933-1950

Federal legislation regarding deposit insurance. Most of the important features of the deposit insurance law, as enacted in June 1933, may be found in one or more of the bills previously introduced in the Congress. Some of the basic provisions were contained in the very earliest of the bills introduced.

One feature of the deposit insurance law of 1933 was provision for two distinct and separate plans of deposit insurance. One of these was a temporary plan which limited the protection to $2,500 for each depositor. The other was a permanent plan which provided 50 percent coverage on all deposits in excess of $50,000, 75 percent coverage of deposits exceeding $10,000 but not $50,000, and full coverage of all deposits up to $10,000 per depositor.

Both of the plans of deposit insurance embodied in the Banking Act of 1933 were amended. Coverage under the temporary plan was raised in 1934 to $5,000. The permanent plan was revised in 1935, before going into effect, with coverage reduced to $5,000. In 1950, coverage under the permanent plan was raised to $10,000. Table 34 gives the insurance coverage and sources of funds in the plans for deposit insurance approved by the Senate in 1913 and the House of Representatives in 1932, the two plans adopted in 1933, and the subsequent amendments.

State deposit insurance legislation, 1934-1943. Subsequent to creation of the Federal Deposit Insurance Corporation three States

provided for establishment of deposit insurance funds for mutual savings banks. These were Massachusetts and New York in 1934, and Connecticut in 1943. The New York fund passed out of existence in 1943, when all the participating banks became insured by the Federal Deposit Insurance Corporation. The Massachusetts plan covers all mutual savings banks in the State; in Connecticut nine-tenths of the savings banks participate. In all three of these plans for mutual savings banks the insurance covered all deposits.

Table 34. DEPOSITS INSURED AND SOURCES OF FUNDS IN DEPOSIT INSURANCE PLANS ENACTED BY CONGRESS OR PASSED BY ONE HOUSE

Initial levy on F. R. banks $150,000,000 in proportion to surplus; 45 percent of net earnings of F. R. banks after dividends; U. S. appropriation of amount received as franchise tax from F. R. banks. Federal Bank Liquidating Board empowered to borrow on assets of insolvent national banks, and to borrow a maximum of $500,000,000 from the Reconstruction Finance Corporation

Capital stock subscription by F. R. banks equal to one-half of surplus on Jan. 1, 1933, and by U. S., $150,000,000. Federal Deposit Insurance Corporation empowered to issue its obligations not to exceed 3 times its capital and surplus

As in permanent plan

Capital stock subscription of U. S. Treasury and Federal Reserve banks ($289,000,000) transferred from temporary fund. Federal Deposit Insurance Corporation empowered to issue obligations not to exceed 3 times amount received by the Corporation in payment of its capital stock and in assessments on insured banks for 1936

Federal Deposit Insurance Corporation authorized to borrow from Treasury a maximum of $3,000,000,000 at any one time

In the Federal Reserve Act as passed by the Senate in 1913 deposit insurance applied to banks members of the Federal Reserve System. In the other acts, all members of the Federal Reserve System were required to participate, and applicant State banks were eligible for participation upon certification of solvency or sound condition by the State authority or upon examination and approval by the administrative Board.