The FDIC: Another Dark Legacy of FDR

By: Jacob Hornberger

In 1933, the Franklin Roosevelt Administration brought into existence the Federal Deposit Insurance Corporation. Along with FDR’s nationalization of gold, his adoption of a paper-money system, his enactment of Social Security, and his conversion of America to a welfare state and a regulated economy, the FDIC stands as another dark legacy of the socialist and interventionist program that FDR foisted on our nation in response to the economic crisis that was produced by the Federal Reserve.

The purpose of the FDIC was to insure people’s bank deposits, but only up to a certain limit. The initial limit was $2,500. But ever since 1933, the limit has been increased. By 1980, for example, the limit had increased to $100,000. In 2008, it was raised to $250,000. Today, U.S. officials are contemplating raising it again. The goal has always been to prevent bank runs by assuring depositors that their deposits were safe if their bank were to go under.

But when the government has to continue raising its deposit-insurance limit to discourage people from withdrawing deposits, that is a pretty good sign that the banking industry itself is in a not-so-healthy condition.

In the wake of the Federal Reserve’s recent dramatic and rapid interest-rates hikes to combat the inflation that it itself brought about, we have already witnessed three bank failures — Silicon Valley Bank, Signature Bank, and First Republic Bank. 

With the first two banks, U.S. officials decided to cover all deposits, including those in excess of the $250,000 insurance limit. Republic Bank was quickly sold to J.P. Morgan, which thereby protected the depositors in that bank.

Why would the FDIC cover all deposits rather just the deposits under its insurance limit? Because officials were terrified that if they didn’t cover all the deposits, depositors in other regional banks would quickly begin withdrawing their deposits. By covering all the deposits, the FDIC was implicitly sending a message to all depositors: “Don’t worry — if your bank goes under, we will do the same for you. Everything is fine. Leave your money where it is.”

Is this the end of the banking crisis? Possibly, but not very likely. Today, the Wall Street Journal is reporting:

PacWest’s already battered shares fell by 40% in premarket trading. The bank said it was talking to potential partners and investors, and would keep evaluating “all options to maximize shareholder value. A raft of other regional lenders fell after the opening bell: Western Alliance Bancorp slid 17%, while Comerica and Zions Bancorp fell by 8% and 7%, respectively. First Horizon sank by 37% after its $13.4 billion sale to Toronto’s TD Bank was called off. The jitters follow the failures of Silicon Valley Bank, Signature Bank and more recently First Republic Bank.

To get a sense of why officials might be a bit nervous, consider this: At the end of 2022, the FDIC insurance fund stood at $128 billion. That fund covers the grand total of 1.27% of insured deposits. 

Covering all the deposits in Silicon Valley Bank and Signature Bank reduced the fund by $22.5 billion. That’s an average of $11 billion per bank. Thus, that means that with the failure of just 10 – 15 more banks, their insurance fund is wiped out. 

Then what? How do they cover deposits if 10 more banks fail? Tax the citizenry? Force the other banks to use their reserves to pay off the depositors, thereby putting those banks in a precarious position? Borrow the money, thereby adding to the more than $31 trillion in federal debt? Print the money to pay off the depositors, thereby causing prices to soar once again in response to the monetary debauchery?

As I have long pointed out, this has always been the fallacy of this part of the FDR interventionist scheme. They can always handle a few banks going under. But what do they do if there is an industry-wide banking collapse? 

Is there a solution to this monetary and banking morass? Yes, but it does not involve making this particular monetary and banking system work. There is nothing that can make this system work. That’s because it is inherently defective. Among the worst things America has ever done was to adopt Franklin Roosevelt’s New Deal program, including FDIC, Social Security, the welfare state, and the regulated economy.

The only solution to the morass that FDR foisted upon our nation is a totally different monetary and banking system, one that relies on the principles of the free market. That would mean a separation of money and the state — the repeal of legal-tender laws, the abolition of the Federal Reserve, and the end of all state involvement in monetary affairs. As I pointed out in my recent article “Why Not Let Banks Fail?” It would also mean a separation of banking and the state — that is, the abolition of the FDIC and the end of all state involvement in banking.