Brief Histories of U.S. Government Agencies Volume Two by Michael Erbschloe - HTML preview

 

Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.

The FDIC receives no Congressional appropriations - it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. The FDIC insures approximately $9 trillion of deposits in U.S. banks and thrifts - deposits in virtually every bank and thrift in the country.

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. The FDIC's Electronic Deposit Insurance Estimator can help you determine if you have adequate deposit insurance for your accounts.

The FDIC insures deposits only. It does not insure securities, mutual funds or similar types of investments that banks and thrift institutions may offer. (Deposit Insurance: What's Covered distinguishes between what is and is not protected by FDIC insurance.)

The FDIC directly examines and supervises more than 4,500 banks and savings banks for operational safety and soundness, more than half of the institutions in the banking system. Banks can be chartered by the states or by the federal government. Banks chartered by states also have the choice of whether to join the Federal Reserve System. The FDIC is the primary federal regulator of banks that are chartered by the states that do not join the Federal Reserve System. In addition, the FDIC is the back-up supervisor for the remaining insured banks and thrift institutions.

The FDIC also examines banks for compliance with consumer protection laws, including the Fair Credit Billing Act, the Fair Credit Reporting Act, the Truth-In-Lending Act, and the Fair Debt Collection Practices Act, to name a few. Finally, the FDIC examines banks for compliance with the Community Reinvestment Act (CRA) which requires banks to help meet the credit needs of the communities they were chartered to serve.

To protect insured depositors, the FDIC responds immediately when a bank or thrift institution fails. Institutions generally are closed by their chartering authority - the state regulator, or the Office of the Comptroller of the Currency. The FDIC has several options for resolving institution failures, but the one most used is to sell deposits and loans of the failed institution to another institution. Customers of the failed institution automatically become customers of the assuming institution. Most of the time, the transition is seamless from the customer's point of view.

The FDIC employs more than 7,000 people. It is headquartered in Washington, D.C., but conducts much of its business in six regional offices, and in field offices around the country.

The FDIC is managed by a five-person Board of Directors, all of whom are appointed by the President and confirmed by the Senate, with no more than three being from the same political party.

 

Historical Timeline

The Mid-1700's

The colonies have no banking system and no common currency. European banks and governments are meeting capital needs. While foreign coins and some colonial paper money is in circulation, bartering is a common means of payment.

1782

The Bank of North America

The Bank of North America, established by the Continental Congress, becomes the first chartered bank in the U.S.

1784

The state of New York charters The Bank of New York.

1791

The U.S. charters the First Bank of the United States—the government's first attempt at a central bank. The bank has a 20-year charter, which is not renewed. In 1811, the bank is bankrolled by New York merchants and chartered by the state of New York. Today the bank is known as Citibank.

1799

A group of New York investors establish the Bank of Manhattan to fund construction of a water supply for New York City. The state of New York charters the bank.

The Early 1800s

The Industrial Revolution produces a new class of merchants and manufacturers. The need for capital increases. Between 1815-1819, the U.S. economy booms and more banks exist. As a developing country, the U.S. has a reputation for not repaying loans, and many European banks refuse to lend to the U.S. government.

1809

The Farmer's Exchange Bank in Glouchester, Rhode Island, fails—the first U.S. bank failure.

1816

The Second Bank of the United States, which is the U.S. government's second attempt at a central bank, is established. Its 20-year charter is not renewed, and the U.S. does not have another central bank until 1913.

1819

More than 420 banks exist in the U.S. All of them printing bank notes and making loans. Early 1800's

The Panic of 1819

The Second Bank of the United States calls its loans, a panic sweeps the U.S., and many banks fail.

1820

Approximately 300 banks operate in the U.S.

1829

New York is the first state to adopt an insurance plan for bank obligations. Between 1829 and 1866, five other states adopt similar plans.

1831

Comly Rich house, Philadelphia. First U.S. home financed by a savings and loan association. Rich, a maker of combs, received a loan in 1831 from the Oxford Provident Building Association, the nation's first savings institution.

1837

With the demise of the Second Bank of the United States in 1837, only state-chartered banks exist. During this period, known as the Free Banking Era, state chartering standards often are not very stringent, and many new banks are formed. Large numbers of them will fail. The era ends with the passage of the National Currency Act in 1863.

The Panic of 1837

The mid-1830s witness an economic boom, characterized by inflation and speculation in public land sales and road and canal projects. The speculation is fueled, in part, by the following three policies:

The removal of federal funds from the Bank of the United States and from other banks.

A distribution of the federal surplus from these banks to state banks.

A requirement that specie (gold or silver coin) be used to buy public lands (which leads to falling land sales and specie shortages).

 The pressure on many banks increases and a lack of confidence in the state banks abounds. The resulting bank panic in 1837 causes many banks to fail over several years. This panic is followed by a sharp depression, tied to a general downturn in the business cycle that lasts until 1841.

1843

The first issue of the Bank Note Reporter is published. This weekly report on the value and validity of the bank notes was the most respected of many such publications that merchants relied upon to evaluate the reliability of currency.

The Mid-1800s

European banks finance 30,000 miles of railway tracks in the U.S.—a new phase in high finance with the potential for large returns. Railroads become the driving force of the economy.

The railroads open up the West and provide demand for the new steel industry, which makes new commerce and new industries possible. New cities emerge along the railways, and commerce organizes around these cities. Speculators seek capital for their new ventures.

By 1914, there are 253,000 miles of railroad in the U.S.

Prior to the Civil War, the U.S. has a loose system of finance and banking. As the nation grows, it demands a more mature financial system. The National Banking Acts of 1863, 1864, and 1865 are a significant movement in that direction.

With the demise of the Second Bank of the United States in 1837, only state-chartered banks exist. During this period, known as the Free Banking Era, state chartering standards often are not very stringent, and many new banks are formed. Large numbers of them will fail. The era ends with the passage of the National Currency Act in 1863.

The Panic of The Panic of 1857

The economy is weak because of overbuilding of railroads and overextension by banks to finance construction. Several hundred banks fail. Most banks suspend specie payments, such as gold coins. Unemployment increases.

1859

Oil is discovered in Titusville, Pennsylvania.

1860

There are 1,562 state banks.

1862

7,000 different bank notes are in circulation; 5,500 fraudulent bank notes are in circulation.

1863

The Civil War destroys the South's economy; the North's economy flourishes.

President Abraham Lincoln composes the final Emancipation Proclamation on January 1, 1863. Civil War

National Currency Act of 1863

(Became known as the National Banking Act in 1864)

 This act: Establishes a national currency: the dollar.

Establishes national banks, which creates the dual banking system with national and state chartered banks—the only such system in the world.

National Banking Act of 1864

This act: Establishes the Office of the Comptroller of the Currency (OCC)

Initiates a system of bank examinations.

National Banking Act of 1865

This act, intent on getting rid of bank notes, levies a tax on state currency. The tax goes from 2 percent to 10 percent, resulting in the use of checks.

1865

There are 349 state banks. There are 1,294 national banks.

1869

The Golden Spike connects the Central Pacific and Union Pacific railroads, commemorating the completion of the first transcontinental railroad in the world.

The Panic of 1873

During and immediately after the Civil War, the U.S. economy booms. This boom is accompanied by reckless financial expansion and speculation. Between 1867 and 1873, more than 30,000 miles of new railroads are constructed at an enormous capital cost.

When a large financier of railroads goes into bankruptcy, a financial panic occurs in the Northeast. Banks, brokerages, and businesses fail, stock prices collapse, consumer prices decline, and unemployment increases. Economic instability lasts for more than 20 years.

 1870s

Entrepreneurs begin to turn to local banks and wealthy individuals for venture capital through New York City banks.

John D. Rockefeller, William Rockefeller, and partners create Standard Oil, the largest oil refining business in the world.

Standard Oil is the first great American trust. The founding partners borrow much of their capital from the large New York bankers. Exxon Mobil is the largest of Standard Oil's descendants.

1877

The Chase National Bank is chartered.

1885

There are 1,015 state banks and 2,689 national banks.United States Congress seal

The Panic of 1893

During the late 1880s and early 1890s, severe weaknesses begin to appear in the economy, especially in the overbuilt, debt-ridden railroad industry, which has become the major sector of the U.S. economy. A railroad declares bankruptcy, and a panic sweeps through the securities markets. Railroad expansion halts.

The Panic triggers the collapse of railroad stock. The railways shift from thousands of small investors to two money trusts.

The economy slows, manufacturing and agricultural sectors operate at a fraction of capacity, and foreign investment declines.

The result: banking panic. For the first time, bank runs occur outside of New York City, in Kansas City, Louisville, Milwaukee, Denver, and Portland.

 1886

Starting in 1886 and continuing until 1933, Congress considers 150 proposals to create deposit insurance plans.

The Late 1800s

Standard Oil becomes financially self-sufficient. It has more cash than any corporation in history and no longer needs Wall Street. The Standard Oil Trust has become a huge bank within an industry. It finances itself against competition and provides venture capital to other entrepreneurs on high-class collateral. The Standard Oil Trust "bank" becomes a natural, spontaneous offshoot of successful commerce.

U.S. railroads desperately need capital, and British investors respond, lending massive amounts of money.

President William McKinley launches the trust-busting era. He appoints several senators to the U.S. Industrial Commission. The Commission's report lays the groundwork for President Theodore Roosevelt's later attacks on the trusts' industrial titans.

Industry generates surplus capital. New York banks emerge from foreign dependence on capital. New York City emerges as an international banking center.

Financial panics and bank runs are common. The U.S. economy does not have stabilizers to provide liquidity, such as a central bank and deposit insurance.

1890

There are 2,250 state banks and 3,484 national banks.

1892

There are 3,733 state banks and 3,759 national banks.

1895

Deposits for First National City Bank (Citibank) reach $31 million—a 158 percent increase from $12 million in 1893.

1896

The Dow Jones Industrial Average becomes a universal yardstick by which investors judge the stock market's performance.

11,500 commercial banks operate in the U.S.

1898

Spanish-American War

The Spanish-American War begins. The U.S. gains control of the former colonies of Spain in the Caribbean and Pacific. Much of the Caribbean's economy is already in U.S. hands, and most of its trade is with the U.S.

The war increases the business and earnings of American railroads, increases the output of American factories, and stimulates industry and commerce.

The Early 1900s

Interstate banking and branching is restricted (this is referred to as unit banking), but some states begin to allow branching at a state level.

1900

Checks become a more common means of payment.

Ownership of capital stock increases as common people become more affluent, have surplus capital, and have access to the stock market.

The Gold Standard Act of 1900

This act stabilizes the economy, establishes gold as the only standard for redeeming paper money, and prohibits the exchange of silver for gold.

The Panic of 1901

First National City Bank (Citibank), led by James Stillman and William Rockefeller, with Standard Oil money, buys $115 million of Northern Pacific Railroad's stock and triggers a stock market panic. Thousands of small investors are wiped out.

1901

Theodore Roosevelt becomes president and continues former President William McKinley's trust-busting efforts.

John Pierpont Morgan creates U.S. Steel, the first billion-dollar corporation. U.S. Steel is a giant integrated steel trust. Capitalized with $1.4 billion at a time when the capitalization of all American manufacturing is $9 billion, U.S. Steel elevates both Wall Street and U.S. industry to a new plateau. When it comes time for J.P. Morgan to sell U.S. Steel, approximately 300 underwriters dispose of the securities.

1902

President Theodore Roosevelt announces an antitrust suit against J.P. Morgan's railroad holding company.J.P. Morgan cartoon

1904

The Bank of Italy is chartered in California. In 1927, the bank is renamed Bank of America of California.

1905

There are 9,018 state banks and 5,664 national banks.

1906

The stock market experiences a speculative boom.

The Early 1900s

Between 1907 and 1917, eight states adopt an insurance plan for bank obligations.

The term robber baron was revived in the 19th century in the U.S. as a pejorative term describing businessman who allegedly used unscrupulous tactics in their business operations and on the stock market to amass huge personal fortunes. Many of their massive businesses controlled a large majority of all activity in the respective industry, often arrived at through predatory pricing schemes that are now illegal.

Some of the most notable robber barons were J.P. Morgan (banking), John D. Rockefeller (oil), and Andrew Carnegie (steel).

The Panic of 1907

The panic is brief but significant in its financial implications. In March 1907, the New York Stock Exchange goes into drastic decline. The subsequent public panic leads to runs on banks. These runs lead to large-scale liquidations of call loans, or loans used to finance stock market purchases. As a result, thousands of businesses fail.

The panic exposes weaknesses in the financial system, particularly the inability of banks to acquire currency during emergencies.

Depositors "run" on the Knickerbocker Bank. J.P. Morgan and James Stillman of First National City Bank (Citibank) act as a "central bank," providing liquidity to the Knickerbocker Bank. Their efforts stop the run.

President Theodore Roosevelt provides Morgan with $25 million in government funds to use to control the panic. Morgan, acting as a one-man central bank, decides which firms will fail and which firms will survive. He organizes a rescue of banks and trusts, averting a shutdown of the New York Stock Exchange, and engineers a financial bailout of New York City.

Morgan is a strong adherent of a central bank like the Bank of England, which is controlled by private bankers. European bankers, who had lent money to the U.S., back away from that role.

 1909

President William Taft begins trust-busting proceedings, carrying on with the intent of Presidents William McKinley and Theodore Roosevelt.

Taft establishes the National Monetary Commission. The commission's goal is to propose a banking reform plan. None of the commission's proposals make it to the floor of Congress. The report is comprehensive. Congress takes years to study its proposals for a central bank and other banking issues.

Moody's Investors Service provides its first credit rating on railroad bonds.

1910

Sears and Roebuck offers lines of credit.

1911

The Supreme Court rules that Standard Oil, which has 64 percent market share, is a monopoly and orders it to be broken up, resulting in the creation of 37 new companies.

Congressman Arsène Pujo, Chairman of the House Committee on Banking and Currency, investigates the influence of money trusts over U.S. finance and commerce. The hearings reveal the scope of control exerted by J.P. Morgan and First National City Bank (Citibank). With 341 directorships on 112 companies, these companies controlled $22 billion in resources.

25,000 commercial banks are operating in the U.S.

The Federal Reserve Act of 1913

This act passes in an attempt to bring stability to financial markets after the Panic of 1907 exposes weakness in an uncontrolled system.

This act:

Establishes the Federal Reserve System, commonly known as the Fed, as the central bank—the nation's third central bank. The bank has a 20-year charter.(The McFadden Act of 1927 gives the FRB permanence.) Federal Reserve seal

Gives the Fed authority to regulate and supervise state-member banks

Allows state-member banks and national banks to borrow money from FRB when they are experiencing liquidity problems

Allows national banks to open branches overseas

Moderately expands national banking powers by permitting real estate loans, time and savings deposits, trust services, and foreign branches.

1913

Congressman Carter Glass sponsors legislation to create a central bank.

World War I: 1914-1918

Congressman Carter Glass

World War I is a major stimulus to the U.S. economy. The economy booms between 1914 and 1918. The financial havoc reigning in Europe presents U.S. banks with new demands for services. The U.S. economy is the largest in the world in terms of GNP. The financial center of the world shifts from London to Wall Street. After the war, the economy flourishes.

1915

There are 18,227 state banks and 7,598 national banks.

1919

First National City Bank (Citibank) has $1 billion in assets.

The Roaring '20s

Woman from the 1920s With their newfound wealth, people buy in record numbers everything from houses to cars to appliances.

Assembly lines increase production.

Department stores give credit cards to their wealthier customers. Metal charge-plates are introduced. Oil companies offer courtesy cards for charging gas.

Banks offer installment loans, mortgages, and loans to stock market speculators on 90 percent margins.

There are no insider-trading laws.

Factory The dramatic expansion in the financial sector introduces new corporate securities issues, especially in common and preferred stock. The stock market undergoes an extraordinary, unprecedented expansion and is caught in a speculative euphoria between 1925 and 1929.

About 10 percent of U.S. households own stock. Today, about 50 percent own stock, largely because of 401(k)s.

Wealthy Americans look for ways and means to invest their surplus funds.

The middle class considers retail brokerage houses and securities affiliates of commercial banks safe investments.

Stock Certificate Banks unveil new securities affiliates with names almost identical to their own to wipe away the distinction between saving and speculating.

First National City Bank (Citibank) and its stock subsidiary, the National City Company, have 2,000 brokers selling stocks.

National City Company repackages bad Latin American loans from its affiliated bank and sells them to unknowing investors as new securities. This is one of the deals that initiate the Glass-Steagall Act of 1933.

Banks speculate on land development.

The financial environment of the Roaring '20s creates new financial products. First National City Bank (Citibank) creates instruments that include the unit trust (known today as the mutual fund) and compound-interest savings accounts.

The McFadden Act of 1927

This act:

Establishes the Federal Reserve Board (FRB) as a permanent central bank

Prohibits interstate banking. This prohibition is not repealed until 1994

Authorizes hometown branches for national banks, if allowed by the state. This authorization helps to put national banks on par with state banks. National banks still cannot branch outside of the city in which they are headquartered

Gives national banks the authority to buy and sell marketable debt obligations.

1929

There are 17,583 state banks and 8,150 national banks.

Black Tuesday: Stock Market Crash of 1929

 October 29, 1929

Black Tuesday The crash of the U.S. stock market heralds the beginning of the Great Depression. The Federal Reserve keeps money tight. The Dow drops 25 percent in two days and 30 percent in one week. Public confidence in government and business plummets.

President Herbert Hoover tells Congress the worst effects of the crash are over.

Important Dates Leading Up To and Following the Crash of 1929

August 22, 1922: The Dow tops 100 for the first time, closing the day at 100.75.

Between 1922 and 1929, the Dow rises 400 percent.

September 3, 1929: The Dow hits its pre-crash high, closing at 381.17.

October 24, 1929 (Black Thursday): The crash begins. A record-breaking 13 million shares are traded, indicating panic. That afternoon, 5 banks pony up about $20 million each to buy stock and restore confidence in the market. It seems to work. There's a late rally, and the Dow closes at 299.47.

October 25, 1929: The rally continues, and the Dow closes at 301.22

October 28, 1929 (Black Monday): The rally ends. Panic selling resumes. The Dow drops almost 40 points (nearly 13 percent) to close 260.64.

October 29, 1929 (Black Tuesday): The Dow drops another 30 points

(nearly 12 percent) to close at 230.07 on trading of 16 million shares. July 8, 1932: The Dow closes at 41.22, an 89 percent drop from its pre-crash high.

November 23, 1954: 25 years after the crash, the Dow reaches its pre-crash high again,closing at 382.74.

The Great Depression: 1929-1939

Great Depression scene The Great Depression, a worldwide economic downturn, hits the U.S. in 1929 and lasts until about 1939. It is the longest and most severe depression experienced by the U.S. Its social and cultural effects are staggering. Many banks fail, many because they have made loans to stock market speculators that are never repaid.

As the Depression eases into a national emergency, reaching its height between 1932 and 1933, the U.S. government establishes several agencies as a means for discharging new and emergency functions. The FDIC is one of these agencies.

Other effects include the following: Industrial production declines 47 percent, GDP falls 30 percent, wholesale price index declines (deflation) 33 percent, unemployment exceeds 20 percent.

In many ways, our lives are still governed by legislation spawned by the crash and the Depression.

President Franklin D. Roosevelt initiates a legislative agenda, known as the New Deal, for rescuing the U.S. from the Great Depression. The major initiatives of the New Deal: stock market reform, aid to the unemployed, and strengthening the banking system.

Hawley-Smoot Tariff Act of 1930

This act steeply raises U.S. tariffs on imports. Foreign governments retaliate, which prevents free trade and lengthens the depression.

Reconstruction Finance Corporation (RFC) Act of 1932

This act is President Herbert Hoover's attempt to stimulate the economy. The act:

Provides loans to banks, savings banks, building and loan associations, credit banks, industrial banks, mutual savings banks, and life insurance companies

Makes loans to railroads, many of which cannot meet their bonded indebtedness payments.

Federal Home Loan Bank Act of 1932

This act:

Establishes the Federal Home Loan Bank Board (FHLBB), which charters and supervises federal S&Ls

Establishes the Federal Home Loan Banks (FHLBs)

Gives the FHLBB authority to regulate and supervise S&Ls

Gives FHLBs the authority to lend to S&Ls to finance home mortgages.

1932

The height of the Depression: 1932 to 1933.

The Senate Banking Committee opens an investigation into the abuses that triggered the Great Depression.

The interest rate on U.S. Treasury bills goes negative because investors are willing to take a loss if they know that their money is safe.

Unemployment is 25 percent.

National income is 50 percent below that of 1929.

Stock market is 75 percent below its 1929 high.

Bank runs and closings are common.

In the absence of money, barter becomes a form of exchange.

Franklin D. Roosevelt On July 2, 1932, Franklin D. Roosevelt accepts the Democratic nomination for president, offering "a new deal for the American people."

1933

New Deal mural Franklin D. Roosevelt becomes president.

On March 6, 1933, President Franklin D. Roosevelt declares a banking holiday and temporarily closes all U.S. banks.

Money supply is 40 percent lower than 1929.

Approximately 4,000 commercial banks fail.

1,700 S&Ls fail.

Foreclosures clog banks and S&Ls with unsaleable assets.

The FDIC examines nearly 8,000 state-chartered banks that are not members of the Federal Reserve Board (FRB).

Emergency Banking Act of 1933

This act, which President Roosevelt signs on March 9, 1933:

Legalizes President Roosevelt's decision to declare a national banking holiday

Permits the Office of the Comptroller of the Currency (OCC) to appoint a conservator with powers of receivership over all national banks threatened with suspension.

The Securities Act of 1933

This act requires strong disclosure statements of publicly held corporations, which deprives bankers of their monopoly on information.

The Banking Act of 1933

President Roosevelt signs this act on June 16, 1933, to raise the confidence of the U.S. public in the banking system by alleviating the disruptions caused by bank failures and bank runs.

From 1929 to 1933, bank failures resulted in losses to depositors of about $1.3 billion. Before the FDIC was in operation, large-scale cash demands of fearful depositors often struck the fatal blow to banks that might otherwise have survived.

Since the FDIC went into operation, bank runs no longer constitute a threat to the banking industry.

This act:

Establishes the FDIC as a temporary