The Jekyll Island Club House in Georgia , site of the secret 1910 meeting of influential bankers and financial leaders , including Senate Finance Committee Chairman Nelson Aldrich , which led to the founding of the Federal Reserve Bank .
From left : Vice President John Nance Garner and President Franklin Delano Roosevelt , with First Lady Eleanor Roosevelt , Secretary of Agriculture Henry Wallace , Attorney General Homer Cummings and Secretary of State Cordell Hull , 1934 . President Roosevelt and Vice President Garner initially disagreed on deposit insurance , with Roosevelt opposed and Garner in favor of implementing it .
Library of Congress was required to re-establish the flow of credit . The banks knew that if they went beyond the limits , they — not the people of Canada — would bear the consequences .
The Introduction of Deposit Insurance ( 1933 )
Twenty years after the establishment of the Federal Reserve came the greatest depression in American history . Many banks were engaged in speculative investments and lax lending practices , as precedent suggested the government would be there to intervene if the crisis warranted . It was not left to private institutions to rectify the Great Depression . In 1932 , President Herbert Hoover introduced the Reconstruction Finance Corporation ( RFC ), which issued securities guaranteed by the government that would be lent to organizations experiencing liquidity issues . In times of crisis , these organizations could rely on the government to assist .
In response to the Great Depression , discussions of establishing Federal Deposit Insurance began and FDR wrote in a 1932 letter to the New York Sun that deposit insurance “ would lead to laxity in bank management and carelessness on the part of both banker and depositor .” The future President — Franklin D . Roosevelt — even acknowledged that the introduction of deposit insurance would incentivize banks to act more recklessly . Why then — if the
President of the United States , as well as his Secretary of the Treasury , William H . Woodin , were initially opposed to deposit insurance — did it become law ? It became law because Vice President John Nance Garner III , one of the President ’ s chief advisors , was a risk-averse banker from Texas — a state which had deposit insurance .
While President Roosevelt opposed deposit insurance , he supported a fourday banking holiday , which began two days after his inauguration , on March 6 , 1933 . The Banking Act of 1933 was introduced later that year , enabling the government to regulate and reorganize the banking system , provide financial aid to solvent banks and issue new currency . It also introduced the Federal Deposit Insurance Corporation ( FDIC ).
The FDIC was officially established in 1934 and created a shift in the allocation of resources and incentives for the banking industry , as banks were no longer as subject to the threat of a run , thanks to their newfound protection . Deposit insurance shifted the onus onto the FDIC to protect depositors and allowed more room for banks to take risks , as moral hazard became increasingly enmeshed in the system
Canada faced an even worse Great Depression than the United States . This was not helped by the Smoot-Hawley Tariffs , which saw Canadian exports to the United States decline by 55 % between 1930 and 1932 . In 1930 , Canada had elected as Prime Minister a self-made multi-millionaire , R . B . Bennett , who had been legal counsel to the Royal Bank of Canada , as well as a member of its Board of Directors from 1927 to 1930 and a major shareholder .
Bennett was faced with an entirely different situation than the one facing President Roosevelt . Where 9,000 American banks failed between 1900 and 1930 , no Canadian bank failed in the six decades from 1923 to 1983 . As Richard N . Langlois writes in his recent opus about the introduction of deposit insurance in the United States , “ More than 80 % of the failed banks were small state-chartered outfits , the obvious way to prevent further crises would have been to do away with the fragmented unit-banking system by allowing national branching . Canada , which had only 10 banks but nearly 4,000 branches , had had no failures .”
There is no evidence that Bennett ever considered introducing deposit insurance , although there is ample evidence that he was concerned about Canadian banks . Instead , he appointed a Royal Commission to conduct a Review of Banking and Currency in Canada in place of the normal decennial review . Lord Macmillan , a British peer , chaired the commission , which also included one other Englishman and three Canadians , but no Americans . On a 3 – 2 vote , the commission voted in favor
18 FINANCIAL HISTORY | Fall 2024 | www . MoAF . org