By BankingMyWay.com Staff
Today, when most people deposit their hard-earned money into a banking institution they do so with a solid sense of security.

However, that was not always the case.

In the United States in the 1800s and early 1900s, there were numerous bank panics, which lead to serious economic distress. At the end of the 19th century, the concept of the government securing bank deposits became popular, though initially, security measures were primarily at the state level.

In the early 20th century, federal bank security measures utilizing the Federal Reserve System were enacted. Unfortunately, in the few years after the stock market crash of 1929, more than 9,000 banks failed despite the state and federal security measures in place. By 1933, banking operations had effectively ceased and the federal government with Franklin D. Roosevelt at the helm was compelled to step in.

As a result, in 1933, the Glass-Steagall Deposit Insurance Act created the Federal Deposit Insurance Corporation (FDIC) as a temporary government entity. Charged with providing stability to the banking system, the FDIC was also responsible for coverage of member banking deposits, up to $2,500. The deposit insurance went into effect on January 1, 1934, and the FDIC was made a permanent government entity in the Banking Act of 1935. Initially, the FDIC was funded with a $289 million loan from the Treasury and Federal Reserve, but this loan was repaid in 1948 through insurance premiums paid by member banks.

Over the years, inflation has caused the FDIC’s deposit limit to increase. In 1980, thanks in part to the Depository Institutions Deregulation and Monetary Control Act, deposit insurance was increased to $100,000. However, because of the current economic crisis, the deposit insurance limit was temporarily increased to $250,000 in October 2008, a limit which is set to revert back at the beginning of January 2010.

Through the years, the FDIC fund itself has grown significantly. In 1960, it was at $2 billion and by 1980 it had climbed to $11 billion. Going into 2008, the deposit insurance fund had hit $52 billion.

Since its inception, no depositor has ever lost money that was insured by the FDIC, though the FDIC did face its first major test in the 1980s, when numerous economic factors created the worst banking crisis in its history. By 1988, approximately 200 banks had failed and the FDIC was forced to pay depositor claims.

More recently, since the start of the current banking crisis in late 2007, 50 banks have failed, and over 250 more are in jeopardy. The FDIC incurred $18 billion in costs in 2008, and it now projects it will spend an additional $65 billion to cover depositor losses between 2009 and 2013. To finance these projected costs, the FDIC is seeking to increase insurance premiums for member banks.

For depositors, FDIC insurance is a much-needed safety net in times of crisis. The FDIC has proven that it can and will protect depositor money up to current limits.

So despite the recent wave of bank failures, as long as the FDIC is sufficiently funded, depositors can rest assured that their money is safe.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.