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Is Deposit Insurance Necessary? A Historical Perspective

Published online by Cambridge University Press:  03 March 2009

Charles W. Calomiris
Charles W. Calomiris
Affiliation:
The author is Assistant Professor of Economics, Northwestern University, Evanston, IL 60208, and a member of the Research Department, Federal Reserve Bank of Chicago, 230 S. La Salle St., Chicago, IL 60604.
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Abstract

The motivation and structure of various banking insurance experiments in U.S. history are analyzed, along with their political alternative, branch banks. In both the antebellum period and in the 1920s, insurance systems that relied on self-regulation, made credible by mutual liability, were successful, while compulsory state systems were not. Branch banking increased stability and resiliency to shocks.

Type
Papers Presented at the Forty-Ninth Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 50 , Issue 2 , June 1990 , pp. 283 - 295
Copyright
Copyright © The Economic History Association 1990

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References

1 See Kane, Edward J., “How Incentive-Incompatible Deposit-Insurance Funds Fail,” mimeograph, Ohio State University, 1988Google Scholar; and Horvitz, Paul M., “The Causes of Texas Bank and Thrift Failures,” mimeograph, University of Houston, 1989.Google Scholar

2 See Golembe, Carter H., “The Deposit Insurance Legislation of 1933: An Examination of its Antecedants and its Purposes,” Political Science Quarterly (06 1960), pp. 189–95,Google Scholarand White, Eugene N., “The Political Economy of Bank Regulation,” this JOURNAL, 42 (03. 1982), pp. 33–42.Google Scholar

3 The rationale behind this peculiar contracting structure is not at all obvious. For a critique of existing explanations and a new approach to this question, see Calomiris, Charles W. and Kahn, Charles M., “The Role of Demandable Debt in Structuring Optimal Banking Arrangements,” mimeograph, Northwestern University, 1989.Google Scholar

4 The desire to insure wealth per se was not the primary motivation of bank insurance (see Golembe, “Deposit Insurance Legislation,” pp. 189–95); rather, it was the desire to preserve liquidity. This explains why intermediaries other than banks (insurance companies, pension funds, and so forth) have not given rise to similar legislation.Google Scholar

5 For discussions of clearinghouse coinsurance, see Cannon, James G., Clearing Houses, (Washington, DC, 1910),Google Scholarand Gorton, Gary “Clearing Houses and the Origin of Central Banking in the United States,” this JOURNAL, 46 (06 1986).Google Scholar For a summary of similar operations in the branching antebellum South, see Govan, Thomas, “The Banking and Credit System in Georgia” (Ph.D. dissertation, Vanderbilt University, 1936),Google Scholar and Calomiris, Charles W. and Schweikart, Larry, “The Panic of 1857: Origins and Regional Responses,” mimeograph, 1989.Google Scholar

6 See, for example, Sprague, Oliver M. W., History of Crises Under the National Banking System (Washington, DC, 1910)Google Scholar; Cartinhour, Gaines T., Branch, Group, and Chain Banking (New York, 1931)Google Scholar; Chapman, John M. and Westerfield, Ray B., Branch Banking: Its Historical and Theoretical Position in America and Abroad (New York, 1942)Google Scholar; Friedman, Milton and Schwartz, Anna J., A Monetary History of the United States (Princeton, 1963)Google Scholar; White, Eugene N., The Regulation and Reform of the American Banking System, 1900–1929 (Princeton, 1983)CrossRefGoogle Scholar; Calomiris, Charles W., Hubbard, R.Glenn, and Stock, James T., “The Farm Debt Crisis and Public Policy,” Brookings Papers on Economic Activity, 2 (1986)Google Scholar; and Calomiris, and Schweikart, , “The Panic of 1857.”Google Scholar

7 Again, see Golembe, “Deposit Insurance Legislation.”Google Scholar

8 This article summarizes and extends the analysis presented in Calomiris, Charles W., “Deposit Insurance: Lessons from the Record,” Economic Perspectives, Federal Reserve Bank of Chicago, 13 (05/06 1989),Google Scholar and “Do Vulnerable Economies Need Deposit Insurance? Lessons from the U.S. Agricultural Boom and Bust of the 1920s,” in Brock, Philip, ed., If Texas Were Chile: Financial Risk and Regulation in Commodity-Exporting Economies (Washington, DC, 1990).Google Scholar

9 For quantitative evidence on losses relative to bank capital for New York and other antebellum states, see Golembe, Carter H. and Warburton, Clark S., Insurance of Bank Obligations in Six States During the Period 1829–1866 (monograph, Federal Deposit Insurance Corporation, 1958).Google Scholar

10 For examples, see Robb, Thomas B., The Guaranty of Bank Deposits (New York, 1921).Google Scholar

11 For summaries of the specific historical experiences, see American Bankers Association, The Guaranty of Bank Deposits (New York, 1933),Google Scholarand Federal Deposit Insurance Corporation, Annual Report (Washington, DC, 1956).Google Scholar

12 Detailed evidence on each of these points is provided in Calomiris, “U.S. Agricultural Boom and Bust.”Google Scholar

13 Again, for more detailed evidence, see Ibid.

14 The collapse of the 1930s demonstrates, of course, that if government policy makers want to destroy a banking system (in that case through deflation and monetary contraction) they have the power to do so.Google Scholar

15 I thank Henning Bohn for suggesting this to me.Google Scholar

16 I thank Peter Diamond for suggesting the usefulness of state-contingent insurance premia in limited supervisory banking coalitions.Google Scholar