FDIC
Do you know why the Great Depression was so severe? One of the reasons is that many banks collapsed back then, which led to the financial crisis and the decline in the money supply. In other words, much of the economic damage was caused by bank runs. When many clients withdraw their deposits simultaneously from the bank, the bank has a problem, since under fractional-reserve banking system, it keeps only a small portion of customers' deposits in cash. Yes, it means that your money at bank is not really safe.
Instead of making the banking system more stable and safer, the authorities – to prevent bank runs – established the Federal Deposit Insurance Corporation (FDIC). What is it? The FDIC is an institution created in 1933 that guarantees bank deposits in the event of a bank failure. As of 2018, the FDIC insures deposits up to $250,000 per depositor, per bank, per ownership category, as long as the institution is a member firm.
FDIC and Gold
What is the link between the FDIC and gold? Well, the very reason why we have the FDIC, is that our banking system is inherently unstable. After all, if banks kept all the reserves, the insurances would not be necessary! Indeed, the FDIC neither prevented the S&L and bank crisis of the 1980s nor the Great Recession and accompanying bank runs nor the coronavirus repercussions crisis. For example, in September 2008, Washington Mutual experienced a 10-day bank run on its deposits. In the UK, Northern Rock experienced a bank run and went bankrupt, as the first British bank in 150 years to fail due to a bank run. Ups!
One has to remember that FDIC only covers retail bank deposits up to $250,000. However, according to some researchers, the economic crisis of 2008 was caused by the run on the repo market – the primary source of funds for the securitized banking system – rather than a run on monetary deposits as in earlier banking panics. It means that although the FDIC could lower the number of classic bank runs, it will not prevent the banking crisis and recessions in the future. Which is good news for the yellow metal – as the gold prices often rise in the aftermath of the economic crises. This is at least what happened when the Lehman Brothers bank collapsed in 2008, as you can see in the chart below.
Chart 1: Gold prices from July 2008 to December 2011.
We encourage you to learn more about the precious metals market – not only what is the link between FDIC and the gold, but also how to successfully use gold as an investment and how to profitably trade it. Great way to start is to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!