One of the most important of these regulations is deposit insurance. During the Great Depression, America's economic decline was seriously aggravated when vast numbers of depositors, concerned that the banks where they had deposited their savings would fail, sought to withdraw their funds all at the same time. In the resulting "runs" on banks , depositors often lined up on the streets in a panicky attempt to get their money. Many banks , including ones that were operated prudently, collapsed because they could not convert all their assets to cash quickly enough to satisfy depositors. As a result, the supply of funds banks could lend to business and industrial enterprise shrank, contributing to the economy's decline.
Deposit insurance was designed to prevent such runs on banks . The government said it would stand behind deposits up to a certain level -- $100,000 currently. Now, if a bank appears to be in financial trouble, depositors no longer have to worry. The government's bank-insurance agency, known as the Federal Deposit Insurance Corporation, pays off the depositors, using funds collected as insurance premiums from the banks themselves. If necessary, the government also will use general tax revenues to protect depositors from losses. To protect the government from undue financial risk, regulators supervise banks and order corrective action if the banks are found to be taking undue risks.
---
Next Article: Banking and the New Deal
This article is adapted from the book "Outline of the U.S. Economy" by Conte and Carr and has been adapted with permission from the U.S. Department of State.
