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Is Deposit Insurance Necessary? A Historical Perspective

  • Charles W. Calomiris (a1)

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.

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

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,and White, Eugene N., “The Political Economy of Bank Regulation,” this JOURNAL, 42 (03. 1982), pp. 3342.

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.

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.

5 For discussions of clearinghouse coinsurance, see Cannon, James G., Clearing Houses, (Washington, DC, 1910),and Gorton, GaryClearing Houses and the Origin of Central Banking in the United States,” this JOURNAL, 46 (06 1986). 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), and Calomiris, Charles W. and Schweikart, Larry, “The Panic of 1857: Origins and Regional Responses,” mimeograph, 1989.

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

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

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), 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).

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).

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

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

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

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.

15 I thank Henning Bohn for suggesting this to me.

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

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The Journal of Economic History
  • ISSN: 0022-0507
  • EISSN: 1471-6372
  • URL: /core/journals/journal-of-economic-history
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