and a bonus post, The Best Financial Book You've Never Read
Today's topic is yet another acronym. This time it's the FDIC or Federal Deposit Insurance Corporation.
But first, a little history (no groaning!) of the Great Depression. October 24, 1929 is known as Black Thursday. It's the day the stock market plummeted, causing investors to panic sell their stock shares, exacerbating the market crash.
After the stock market crashed, consumer spending and investment also declined markedly, which lead to a decrease in production and output.
This economic instability caused people to become increasingly mistrustful of the banks. When we take our money to the bank, the bank doesn't actually keep our money there. Rather than acting as a store house, banks are lending institutions. This means they only hold a fraction of deposits in cash at any one time, with the rest being lent to borrowers or used to purchase interest-bearing assets like government securities.
As the economy worsened, the banks began to fail. In 1929, more than 650 banks failed. In 1930, that number rose to over 1,300. This had the domino effect of causing "bank runs." During a bank run, a large number of depositors lose confidence in the bank and all request their money at once. Because the bank doesn't keep that much cash on hand, banks have to liquidate their assets, often selling them for less than they paid, affecting the bank's ability to remain solvent.
These bank runs happened on a large scale four times from 1930-1933. Then, on March 6, 1933, President Franklin Roosevelt declared a bank holiday, closing all banks in the country and permitting their reopening only after their solvency was verified by government inspectors.
On June 16, 1933, President Roosevelt signed the Banking Act into law, which included the creation of the FDIC. The FDIC is a U.S. government corporation that sells deposit insurance to banks.
The FDIC guarantees up to $250,000 per depositor, per insured bank, for each of the following ownership categories:
- Checking Accounts
- Savings Accounts (both statement and passbook)
- Money Market Deposit Accounts (MMDAs), and
- Certificates of Deposit (CDs)
The FDIC does not insure the following:
- Mutual Funds
Most banks are FDIC insured, although a few online banks are not. To determine if you bank is FDIC insured or to learn more about the FDIC, go here.