Orlando Harmon
The New Deal was a series of federal programs launched by President Franklin Delano Roosevelt to reverse the nation's economic decline during the Great Depression. One of the critical aspects of the New Deal was addressing the banking crisis. Before the New Deal, bank deposits in the USA were not guaranteed by the government, leading to a loss of confidence in the banking system as thousands of banks closed. Roosevelt's administration introduced the Federal Deposit Insurance Corporation (FDIC) through the Glass-Steagall Banking Act of 1933, insuring personal bank accounts and deposits against bank failure up to a certain limit. This measure, along with the Emergency Banking Act of 1933, aimed to stabilize the banking system and restore Americans' confidence in banks.
| Characteristics | Values |
|---|---|
| Name of the program | Federal Deposit Insurance Corporation (FDIC) |
| Year of establishment | 1933 |
| Purpose | To insure personal bank accounts and prevent runs on banks |
| Deposit limit | Up to $250,000 |
| Insurance premium | Paid by banks |
| Gold standard | Removed by Titles I and IV of the Emergency Banking Act, partially restored by the Gold Reserve Act of 1934 |
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What You'll Learn
The Emergency Banking Act of 1933
During this time, the federal government inspected all banks, re-opened those that were sufficiently solvent, re-organized those that could be saved, and closed those that were beyond repair. The Act allowed the twelve Federal Reserve Banks to issue additional currency on good assets so that banks that reopened would be able to meet every legitimate call. The Federal Reserve also committed to supplying unlimited amounts of currency to reopened banks, creating 100% deposit insurance.
The Act also had a historic impact on the Federal Reserve, increasing the president's power to conduct monetary policy independently of the Federal Reserve System. It also authorized the Reconstruction Finance Corporation (RFC) to provide capital to financial institutions.
The Emergency Banking Act, combined with the Federal Reserve's commitment to supplying currency, helped end the bank runs that plagued the Great Depression and set the nation's banking system right. The Act is also regarded as having created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits against bank failure, up to a certain level.
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![Federal Deposit Insurance Act: [As Amended Through P.L. 117–263, Enacted December 23, 2022]](https://m.media-amazon.com/images/I/517mroyL3UL._AC_UY218_.jpg)
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The Federal Deposit Insurance Corporation (FDIC)
Before the FDIC's creation, more than one-third of banks failed, and bank runs were common. The FDIC's insurance limit was initially US$2,500 per ownership category, and this has been increased several times over the years to accommodate inflation. Since the enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010, the FDIC insures deposits in member banks up to $250,000 per ownership category. FDIC insurance is backed by the full faith and credit of the government of the United States, and according to the FDIC, "since its start in 1933 no depositor has ever lost a penny of FDIC-insured funds".
The FDIC was established as a temporary government corporation and was made a permanent agency of the government by the Banking Act of 1935. The FDIC has the authority to regulate and supervise state non-member banks and separate commercial and investment banking. The FDIC is funded with loans in the form of stock contributions from the Treasury and the Federal Reserve Banks.
The FDIC provides extensive resources for bankers, including guidance on regulations, information on examinations, legislation insights, and training programs. The FDIC also answers questions about federal deposit insurance coverage and handles complaints and inquiries about FDIC-insured state banks that are not members of the Federal Reserve System.
The FDIC has undergone some changes and mergers over the years. In 2005, the Federal Deposit Insurance Reform Act merged the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into a single fund. In 2022, the balance of the FDIC's Deposit Insurance Fund was $128.2 billion, an increase every year since 2009.
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The Securities and Exchange Commission (SEC)
The SEC's three-part mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. It enforces laws against market manipulation and regulates and oversees brokerage firms, stock exchanges, and other agents. The SEC has authority over securities exchanges with physical trading floors, such as the New York Stock Exchange, self-regulatory organisations, the Municipal Securities Rulemaking Board, NASDAQ, alternative trading systems, and any other persons engaged in transactions for the accounts of others.
Entities under the SEC's authority are also required to submit quarterly and annual reports, as well as other periodic disclosures. The SEC's Office of Compliance, Inspections and Examinations inspects broker-dealers, stock exchanges, credit rating agencies, registered investment companies, and Registered Investment Advisors. The SEC also has an Office of International Affairs, which represents the SEC abroad and an Office of Information Technology, which supports the commission and staff with IT.
The SEC is made up of five commissioners who are appointed by the US president. No more than three commissioners can belong to the same political party, and their terms last five years. The first chairman of the SEC was Joseph P. Kennedy, appointed by Roosevelt in 1934. Kennedy was a self-made multimillionaire, financier, and leader among the Irish-American community. Roosevelt chose Kennedy partly based on his experience on Wall Street.
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The Glass-Steagall Banking Act of 1933
The Glass-Steagall Act of 1933, also known as the Banking Act of 1933, was a law passed in the United States to prevent a repeat of the banking crisis of the 1930s. The Act was signed into law by President Franklin D. Roosevelt on June 16, 1933, and was part of the New Deal—a series of federal programs aimed at reversing the nation's economic decline during the Great Depression.
The Glass-Steagall Act of 1933 addressed the risky practices of commercial banks that contributed to the 1929 stock market crash and subsequent wave of bank failures. One of its key provisions was the separation of commercial and investment banking activities. Commercial banks were prohibited from engaging in investment banking and were required to choose between the two. This "firewall" aimed to protect depositors' funds from potential losses through speculative investments. The Act limited commercial banks to earning only 10% of their income from investments, with an exception for underwriting government-issued bonds.
The Act also created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits with a pool of money collected from banks. This provision was designed to protect bank customers' deposits in the event of bank failure. Originally, FDIC insurance was limited to deposits up to $2,500, but today it covers deposits up to $250,000. Banks pay insurance premiums to guarantee their customers' deposits.
The Glass-Steagall Act was repealed in 1999 under President Clinton, allowing commercial banks to resume investment banking activities. However, some provisions of the Act remain in place, including the FDIC, which continues to protect bank deposits today.
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The National Housing Act of 1934
The FHA and FSLIC worked to create the backbone of the mortgage and home-building industries. The FSLIC insured savings and loans account holders' deposits, while the FHA insured mortgage lenders and banks against borrower default on their loans for a fee. This guaranteed lenders' investments, making them more willing to provide loans to potential homeowners. The FHA also made low-interest, 60-year loans to local governments so they could build apartment blocks, rented at affordable prices to low-income families.
The National Housing Act was successful in reviving the lending and construction industries, providing more stable and equitable housing for Americans throughout the 20th century. It also helped alleviate unemployment by making credit more accessible through banks and lending organizations. The Act reduced the rate of home foreclosures, which had been a significant issue during the Great Depression, with nearly half of all American mortgages in default by 1932.
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Frequently asked questions
The New Deal was a series of federal programs launched by President Franklin Delano Roosevelt to reverse the nation's economic decline during the Great Depression.
The Federal Deposit Insurance Corporation (FDIC) was established to insure bank deposits against bank failure, up to a certain level. Originally, the FDIC insurance was limited to deposits up to $2,500. Today, deposits up to $250,000 are protected.
The FDIC offered unprecedented stability to the banking system. Before the FDIC, there were over 500 bank failures per year, but after its establishment in 1933, this number dropped to less than 10 bank failures per year.
