The Federal Deposit Insurance Corporation (FDIC) has been the government agency responsible for providing deposit insurance to banks since its creation in the Glass-Steagall Act of 1933. While the establishment of the FDIC was an important event in the history of government regulation of the economy, it was not the first instance of deposit insurance in the United States. Several states had previously had state level institutions of deposit insurance in the 1800s and early 1900s.
At various times before the Civil War, Vermont, Michigan, Indiana, and New York insured both banknotes and deposits, while Iowa and Ohio insured only banknotes. Most of these systems operated successfully up to the Civil War, with the notable exception of Michigan’s which had been established immediately before the Panic of 1837 and had failed rather quickly. These state deposit insurance systems generally required participating banks (and participation was voluntary) to pay for insurance to pay off deposit returns from failed banks.
Such systems did not survive the Civil War and nationalization of the banking system. However, interest in state level deposit insurance systems was increasing again by the end of the 1800s, though it was not until 1907 that Oklahoma became the first state since the Civil War to establish a state deposit insurance system. Seven more states followed suit in the following ten years. The deposit insurance systems of the early 20th century had less positive results and unintended consequences. A common observation of banks insured by state deposit insurance in the 1920s was that in spite of nominal regulations against risky behavior by banks, the state deposit insurance actually encouraged risky behavior by banks, increasing the proportion of bank failures and thus insurance burden. By the end of the 1920s the state deposit insurance schemes had largely failed. In some states voluntary participation left banks the option to simply opt out, and most did, while in other states high insurance costs led to deposit insurance being repealed. Yet while state level deposit insurance appeared to be a failure, it was a model that would pave the way for the establishment of the FDIC, deposit insurance on the federal level and subject to stricter regulation.
Vaughn Rennie is a summer museum intern at the Museum of American Finance.