by Russ Roberts on December 2, 2008

in Financial Markets, Great Depression

Tyler at MR quotes a speech about the beginning of the FDIC, that alleges that FDR was opposed to federal deposit insurance on moral hazard grounds. But is it true?

Apparently so. Here is FDR in 1932 on deposit insurance:

It would lead to laxity in bank management and carelessness on the part of both banker and depositor. I believe that it would be an impossible drain on the Federal Treasury to make good any such guarantee. For a number of reasons of sound government finance, such plan would be quite dangerous.

He was on to something. Maybe he would have opposed the creation of Fannie and Freddie as well.

The quote is from a 1932 letter to the New York Sun (the original Sun) that Roosevelt had written in October. The New York Times on October 27, 1936 reported that Republicans were bringing this letter to light because the Republicans, particularly Senator Vandenberg wanted to take credit for FDIC which Roosevelt and the bankers had opposed. The Republicans resented that Roosevelt got credit for everything the government did during the New Deal.

Reading the full 1936 story at the Times requires payment or being a home delivery customer…

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Unbathed December 2, 2008 at 7:04 am

Was the FDIC policy proposal in 1932 for unlimited protection, or limited to $D per account?

Unbathed December 2, 2008 at 7:16 am

Here is an interesting part of the statute, cited in Atherton v FDIC :

"A director or officer of an insured depository institution may be held
personally liable for monetary damages in any civil action by, on behalf of,
or at the request or direction of the Corporation … acting as conservator
or receiver … for gross negligence, including any similar conduct or
conduct that demonstrates a greater disregard of a duty of care (than gross
negligence) including intentional tortious conduct, as such terms are defined
and determined under applicable State law. Nothing in this paragraph shall
impair or affect any right of the Corporation under other applicable law." [ellipses in the cited source]

Is it general knowledge that FDIC legislation allowed the corporate veil to be pierced? Is this a way the legislators addressed moral hazard questions?

Were any of the officers or directors in the runup to the meltdown grossly negligent?

Adam December 2, 2008 at 9:11 am

Note: He also promised to uphold the gold standard, while on the campaign trail.

Martin Brock December 2, 2008 at 9:18 am

Is it general knowledge that FDIC legislation allowed the corporate veil to be pierced?

Look at the last sentence. It didn't. The paragraph is a meaningless blurb.

Cliff December 2, 2008 at 9:35 am

That passage appears to have to do with a shareholder's suit by the Corporation against a director/officer. Those are allowed and do not involve piercing the corporate veil. Piercing the corporate veil would be a third party suing the shareholders personally.

Martin Brock December 2, 2008 at 9:53 am

I suppose the passage might have encouraged the alliances between directors and officers that now are endemic in much corporate governance, like the CEO's nomination directors. If you're conniving with the CEO to loot the shareholders' equity, you don't want him nominating directors who'll later sue you.

Mr. econotarian December 2, 2008 at 3:50 pm

"He also promised to uphold the gold standard, while on the campaign trail."

I think that pre-1933, the feeling was that the gold standard could not be touched because of many debt contracts written with explicit "convertible in gold" clauses on repayment. (Hoover explicitly said he would not leave the gold standard because of gold clauses).

In 1933, Congress passed the "gold clause ban" that negated all contracts with gold convertible repayments. After that, going off the gold standard was much easier!

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