America's Money Machine

188 PART III/DEBACLE OF AN IDEA
For all Glass's conservatism it was this bill, and the course it set, that
provided the leverage for later, more extreme measures of monetary
control by the Executive.
The deposit guarantee provision can be disposed ofbriefty. The merits
ofthe scheme are not easy to appraise, since the country has experienced
no credit crisis since its establishment. As constituted, a government
controlled institution, the Federal Deposit Insurance Corporation, was
created with capital supplied to the extent of $150 million by the Treasury,
by member banks to the extent of 1/2 per cent oftheir deposits, and
by Federal Reserve banks to the extent of half their surplus on January
1, 1933. Membership in the insurance scheme was compulsory for members
ofthe Federal Reserve System, and depositors were eventually to be
insured as to the first $10,000 oftheir deposits and to a lesser proportion
for deposits beyond $10,000 (75 per cent between $10,000 and $50,000
and 50 per cent beyond $5°,000).
In the 44 years through 1978, total assessments amounted to $10.3
billion; it had disbursed in deposit insurance operations some $5.1 billion,
with losses on these disbursements of $350 million. At the end of
1978, its assets totalled $9.3 billion, 90 per cent of which was held in U.
S. government obligations. The fund represented about 1.3 per cent of
insured deposits; of total deposits of $1,025 billion in insured banks,
some $722 billion were covered by insurance.
From the foregoing, it is apparent that the fund provided another
source of financing government deficits; it also reduced the chances of
panic by allaying public apprehension over the security of deposits; but
it may be questioned whether its operations have tended to make bank
lending more cautious or whether the contrary has resulted. In any case,
under conditions ofpanic, the fund would be inadequate to meet a public
clamor for cash, since its own assets are not in cash but in government
bonds that somehow would have to· be converted into cash, either in the
market or, more likely, by purchase by the Federal Reserve and the
further printing of irredeemable paper notes.
The principal immediate effect of the deposit guarantee was to bring
more hanks within the orbit of Federal Reserve influence. So far as the
Federal Reserve System was immediately concerned, the Banking Act of
1933 was in the direction of greater authority and more centralized au-.
thority over banking. Banks were forbidden to engage in security underwriting
and were required to divorce their investment banking affiliates.
Banks were now permitted to establish branches and to engage in group
banking to the extent that state law permitted. Membership in the System