Explain the purpose of the Federal Deposit Insurance Corporation.

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pohnpei397's profile pic

Posted on (Answer #1)

The Federal Deposit Insurance Corporation (FDIC) was created as part of the New Deal following the Great Depression.  The purpose of the FDIC was to ensure that people would not lose the money they had deposited in banks if those banks should fail.

Early in the Great Depression, many banks failed.  The money that people had deposited in those banks was largely lost.  This made many people poor since they had just lost everything they had saved.

The government wanted to guard against a recurrence of such problems.  Therefore, it created the FDIC, which guarantees that depositors will get their money back up to a certain (rather high) limit. This protects depositors from being harmed by the mistakes (such as making excessively risky loans) their banks make.  It also protects the economy from the damage that would be caused if millions of people were to lose their savings.  

kipling2448's profile pic

Posted on (Answer #2)

The Great Depression and the Stock Market crash of 1929 wiped out the savings of millions of Americans, leaving them economically destitute.  The wide-spread failure of the nation's banking industry illustrated in dramatic fashion the vulnerabilities underpinning that vital component of the country's financial infrastructure -- the component most closely attached to individual citizens.  While "Wall Street" might have represented a distant and nebulous entity, communities large and small all across the nation engaged in routine interaction with banks.  Their nation-wide failure represented one of the most catastrophic and emotionally devastating elements of the depression.  

As the newly-installed administration of President Franklin D. Roosevelt began to formulate steps to raise the country out of the depths of the Great Depression, one of the earliest and most important steps it implemented, with the support of Congress, which dutifully passed the Banking Act of 1933, was creation of the Federal Deposit Insurance Corporation (FDIC).  The FDIC was given the mission of insuring individual deposits in banks, up to a certain specified limit, while subjecting banks that chose to participate in its program to a series of annual examinations intended to ensure that each bank was being operated properly.  The purpose of the FDIC, then, is to insure savings accounts against future bank failures.  Currently, savings deposits are insured against such failures up to a limit of $250,000, thus ensuring that the overwhelming majority of individual savings accounts are protected.


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