Why you don’t have to keep money in a mattress today

During the Great Depression, people supposedly stuffed the money in their mattresses.

That may have been wise since about 9,000 banks failed between 1929 and 1939, wiping out the life savings of many millions of Americans. People simply stopped trusting banks.

That’s why the government established the Federal Deposit Insurance Corporation (FDIC) in 1933. FDIC guarantees the savings of individuals. Today, FDIC regulates and insures deposits for up to $250,000. In the event of a bank collapse, FDIC starts mailing checks within days.

If your money is in a credit union, it is also insured by the National Credit Union Association (NCUA). The NCUA was established by the government in 1970, and it regulates and insures deposits up to $250,000. In the event of a credit union failure, insured deposits are returned.

Banks keep only a fraction of bank deposits on hand to cover withdrawals. Normally, only a small portion of account holders will withdraw their money at any given time. Banks simply need to cover those withdrawals. If depositors panic and everyone tries to withdraw their funds at once, the bank won’t have enough cash to cover the withdrawals. When that happens, the bank fails.

The FDIC and NCUA guarantees are an innovation in banking and were certainly not available during the long history of banks and bank failures.

The first bank to issue bank notes (essentially, paper money) in Europe, the Stockholm Banco, succumbed to a bank run. Stockholm Banco opened in 1656, but excessive lending devalued its bank notes, and as clients started demanding their money back, the bank collapsed in 1664.

During the 19th century, a series of financial panics hit banks. In 1821, the Second Bank of the United States found itself under immense pressure as demand from Europe for American goods plummeted after the Napoleonic Wars. The Second Bank curtailed lending, which put pressure on regional banks and sparked a bank run that led to more bank failures.

The recent failures of Silicon Valley Bank, Silvergate Capital, and Signature Bank are nothing compared to bank collapses in 2008 and 2009. In 2008, 25 banks collapsed, but the worst was yet to come in 2009 when 140 banks collapsed, and in 2010 when 157 banks collapsed. In 2011, about 92 banks collapsed, according to the FDIC. Deposits up to $250,000 were guaranteed.