WORKING PAPER SERIES

Does Deposit Insurance Promote Financial 

Depth? Evidence from the Postal Savings 

System During the 1920s 

Lee K. Davison 

Federal Deposit Insurance Corporation 

Carlos D. Ramirez 

George Mason University and 

Federal Deposit Insurance Corporation 

November 2016 

FDIC CFR WP 2017-02 

fdic.gov/cfr 

NOTE: Staff working papers are preliminary materials circulated to stimulate discussion and critical 

comment. The analysis, conclusions, and opinions set forth here are those of the author(s) alone and do not 

necessarily reflect the views of the Federal Deposit Insurance Corporation. References in publications to this 

paper (other than acknowledgement) should be cleared with the author(s) to protect the tentative character 

of these papers. 
Does Deposit Insurance Promote Financial Depth?

Evidence from the Postal Savings System During the 1920s

Lee K. Davison

Division of Insurance and Research

Federal Deposit Insurance Corporation

Washington, DC

and

Carlos D. Ramirez1

Department of Economics

George Mason University

Fairfax, VA 22030

Center for Financial Research, FDIC

Washington, DC

September 2016

Abstract:

This paper tests whether deposit insurance promotes financial depth by influencing depositor behavior. 

To do so, we rely on two schemes operating in the U.S. during the 1920s: the Postal Savings System and 

the deposit insurance schemes that some states had adopted. We exploit the discontinuity in deposit 

insurance across state borders and compute changes in postal savings deposits in cities located along 

the borders of states that did and did not have deposit insurance. We examine the relative growth of 

postal savings deposits in pairs of border cities when bank suspensions occurred within a short radius 

(10, 20, and 30 miles). Our results indicate that, following a bank suspension within a 10-mile radius, 

deposits in postal savings offices located in the non-deposit insurance state increased by 16 percent 

more than deposits in the neighboring postal savings office located in the deposit insurance state. The 

magnitude of the effect declines with bank suspension distance. It disappears when deposit insurance is 

not in effect. Using county-level data, we find that deposit insurance is associated with a 56 percent 

increase in local banking capacity.

Keywords: bank failures; Postal Savings deposits; deposit insurance; banking capacity

JEL Classification Codes: N12, N22, E44, G21, G23

 1 Corresponding author. E-mails: ldavison@fdic.gov (Lee Davison) and cramire2@gmu.edu (Carlos Ramirez). We 

would like to thank Peter Bernstein for his very capable research assistance. We would also like to thank Ed Kane, 

Haluk Unal, and Jack Reidhill and participants at an FDIC seminar for comments and suggestions. Ramirez gratefully 

acknowledges financial and logistical support from the Center for Financial Research at the FDIC. The views 

expressed in this paper do not necessarily reflect those of the FDIC.
2

I. Introduction

It is widely acknowledged that one of the primary purposes of deposit insurance is to prevent the 

contagion of bank runs by influencing depositor behavior. During periods of extreme financial distress, a 

“contagion of fear” can engulf depositors, resulting in an outright panic (Friedman and Schwartz, 1963; 

Iyer and Puri, 2012).2 In the absence of some mechanism to arrest panics and restore confidence to the 

banking system, sustained deposit withdrawals destroy banking capacity and undermine economic 

growth.3

The logic of this argument has been recognized for more than a century. The debates about deposit 

insurance in Congress going back to at least 1886 speak about its benefits for the banking system in 

terms of preventing deposit runoffs (Golombe, 1960; White, 1997). This argument was again articulated 

during the debates over deposit insurance in the early 1930s, which culminated in the establishment of 

the FDIC, and again in recent times, in particular during the 2007-09 financial crisis.4

Despite the argument’s long history, it has proven to be challenging to evaluate the hypothesis that 

deposit insurance promotes financial depth through its influence on depositor behavior. In this paper, 

we offer a unique strategy to test that hypothesis and to quantify the effects. Specifically, we utilize two 

schemes that were operative in the U.S. during the 1920s: the Postal Savings System, which was 

implemented nationwide in 1911, and the state deposit insurance schemes adopted in eight—primarily 

Midwestern—states beginning in 1908. Identification is attained by the discontinuity in deposit 

insurance across state borders. We exploit this discontinuity and examine the relative changes in postal 

savings deposits in cities located along the borders of states that did and did not have deposit insurance. 

 2 See Iyer and Puri (2012) for additional references.

3 There is a large literature quantifying the systemic adverse effects of banking crises, starting with Friedman and 

Schwartz (1963). For a more complete list, along with historical evidence, see Kupiec and Ramirez (2013).

4 See, for example, “A Two-Pronged Push to Aid Ailing Banks,” by Binyamin Appelbaum and Carrie Johnson, 

Washington Post, October 1, 2008. http://www.washingtonpost.com/wpdyn/content/article/2008/09/30/AR2008093000799.html
3

In particular, we examine the extent to which the relative growth of postal savings deposits in the two 

border cities responded to bank suspensions taking place within a short radius (10 miles, 20 miles, and 

30 miles).

We argue that the amount of deposits in the Postal Savings System is a valid proxy for measuring 

“money under the mattress.” Specifically, we show that, nationwide, the ratio of postal savings deposits 

to total bank deposits is highly correlated with the currency-deposit ratio, which is known to rise during 

periods of banking distress when confidence in the banking system is compromised (Boughton and 

Wicker, 1979; Friedman and Schwartz, 1963). In addition, we provide narrative evidence based on 

contemporary records.

The quasi-experimental strategy of exploiting a policy discontinuity at a state border has been 

shown to control much more successfully for the influence of observed and unobserved factors.

5 Turner, 

Haughwout, and Van Der Klaauw (2014) point out that the reliability of the test hinges on the 

assumption that unobserved characteristics across borders are not correlated with the policy differences 

being evaluated. In the context of this paper, this premise translates into unobserved characteristics

across the cities straddling the state border not being correlated with the adoption of deposit insurance. 

We offer several arguments to justify our contention that the results are unlikely to be driven by 

unobserved factors. First, the adoption of deposit insurance is a statewide policy. It is difficult to claim

that interests concentrated at state borders (or, for that matter, border city attributes) systematically 

influenced states' decisions to adopt deposit insurance at the expense of interests elsewhere in the 

state. Second, in nearly all states in our sample deposit insurance legislation was introduced and 

 5 This strategy has become increasingly popular, especially in recent years, as a way of analyzing the impact of 

regulation. Dube, Lester, and Reich (2010), for instance, use policy discontinuities at state borders to estimate the 

effects on employment of minimum wage regulation in the restaurant industry. Their strategy involves comparing 

outcomes in contiguous county pairs that abut state borders with and without the minimum wage legislation. 

Rocco (2008), uses pairs of contiguous counties along different state borders to evaluate the extent to which 

removal of bank branching restrictions at the state level had an effect on local economic growth. Rocco’s article 

also cites earlier papers that use a similar methodology.
4

debated during the 1908 to 1917 period. Clearly, legislative debates took place in the "treated" sample 

of states since after all they adopted deposit insurance. However, we document that deposit insurance 

legislation was also introduced and debated in all but one of the states we use as controls. The fact that 

some state governments ended up adopting deposit insurance, while others did not, suggests that the 

process was driven largely by the political landscapes of the various states. Third, we exploit the fact 

that these deposit insurance schemes were discontinued at different times in different states. We use 

the variation in the dissolution of deposit insurance in our econometric tests to further evaluate the 

robustness of the results.

Our findings support of the hypothesis that deposit insurance promotes financial depth. Specifically, 

we find that, following a bank suspension within a 10-mile radius, deposits in post offices that accepted 

savings deposits (hereafter postal savings offices) located on the non-deposit insurance side of the 

border increased by 16 percent more than deposits in the neighboring postal savings office located on 

the other side of the border (in the deposit insurance state). We also find that distance mattered—bank 

suspensions that occurred 20 miles away also influenced relative postal savings deposit growth, but the 

effect was smaller—about 9 percent. And when the suspension took place 30 miles away, the effects on 

postal saving deposits were negligible.

While these results show that deposit insurance reduced the extent to which money went "under 

the mattress" (literally and metaphorically) we argue that the observed magnitude is an underestimate 

of the actual effect. The reason is that, as we discuss below, the Postal Savings System imposed a 

deposit limit of $2,500 per individual account. Narrative evidence indicates that this limitation 

constrained deposit intake very severely, especially in times of distress. 

To get a more accurate estimate of the extent to which deposit insurance mattered, we 

complement our study by estimating the increase in local banking capacity when deposit insurance was 

in effect. Specifically, we test whether deposits at the county level for state-chartered banks were higher 
5

in counties with deposit insurance, relative to the levels in the immediately adjacent county in the nondeposit insurance state. The results indicate that deposit insurance is associated with a 56 percent 

increase in county-level deposits for state-chartered banks. By contrast, no statistically significant 

increase is observed for deposits in national banks (which were not allowed to participate in the various 

state deposit insurance schemes).

Our research contributes to the ongoing debate regarding the merits of deposit insurance, which 

generally speaking, revolves around two key aspects: (i) whether deposit insurance promotes financial 

stability and banking capacity by reducing the likelihood of bank runs (e.g. Diamond and Dybvig, 1983; 

Chari and Jagannathan, 1988; Allen and Gale, 1998; Iyer and Puri, 2012), and (ii) whether deposit 

insurance generates moral hazard problems since it incentivizes banks to undertake riskier projects, 

even when it is “actuarially fair” (Merton, 1977; Chan, Greenbaum and Thakor, 1992; Pennachi, 2006). 

Previous studies have shown that the deposit insurance schemes of the 1910s and 1920s generated 

moral hazard problems (Calomiris, 1992, 1993; Wheelock 1992, 1993; Wheelock and Wilson 1994). 

Nonetheless, our results are helpful in quantifying the first aspect mentioned above: the stabilityenhancing component of deposit insurance.

The literature that investigates the extent to which deposit insurance prevents bank deposit runoffs 

is limited. For example, research on the U.S. that discusses the benefits of deposit insurance primarily 

relies on the assertion that after 1933, when the FDIC was created, the number of bank runs declined 

dramatically and that no pre-Depression era style banking panics have since taken place.6 There are, to 

be sure, studies that investigate whether deposit insurance promotes financial depth (e.g. Cull, Senbet, 

and Sorge, 2005) or banking sector stability (e.g. Demirgüç-Kunt and Detragiache, 2002) using cross-

 6 Friedman and Schwartz were among the first to point this out, asserting “That is why we regard federal deposit insurance as 

so important a change in our banking structure and as contributing so greatly to monetary stability—in practice far more than 

the establishment of the Federal Reserve System.” (Friedman and Schwartz, 1963, pp. 439, 442). In addition, Chung and 

Richardson (2006) present evidence suggesting that the state deposit insurance schemes of the 1920s changed the composition 

of bank failures in those states. We elaborate on this finding below.
6

country data. But because the data those studies rely on is countrywide, the tests end up absorbing a 

combination of hypotheses (e.g. the potentially positive effects of greater banking capacity with the 

potentially negative effects of moral hazard). In addition, due to endogeneity concerns, such crosscountry analyses need to control for a whole host of factors that can mediate the deposit insurancebank (in)stability link. Thus, it is difficult to make inferences regarding the effect of deposit insurance 

forestalling deposit runoffs using cross-country data. 

More recently, Iyer et.al. (2016) exploit an exogenously implemented reduction in the insurance 

limit of the deposit insurance scheme in Denmark in 2010 to study how exposed depositors reacted to 

this event in a time of crisis (in 2010–11). They find that depositors with balances above the imposed 

limit reduced their balances substantially, with a clustering taking place at the threshold. They also find 

that the reduction in deposits was much more pronounced in non-systemic banks, relative to systemic 

banks. There was a 25 to 50 percent reduction in non-systemic banks, versus an 8 to 20 percent 

reduction in systemically important institutions. These findings give empirical support to the notion that 

fear about safety can precipitate runs on banks. They also suggest that implicit guarantees influence 

depositor behavior.

Egan, et. al. (2015) is another recent paper that investigates the extent to which deposit insurance 

may lower the likelihood of a systemic banking crisis. In particular, they develop a structural model of 

depositors’ preferences in a setting the includes competition between banks. To calibrate the model, 

they use a dataset that includes large U.S. banks over the 2002–2013 period. Their main findings 

indicate that a bank’s ability to attract uninsured deposits is dependent on the bank’s solvency

(measured using CDS spreads and balance sheet information). Their model implies that increasing FDIC 

insurance could enhance the survival probabilities across banks.

Despite the historical nature of the data, our results carry valuable policymaking implications for 

modern times. For instance, Basel III calls for new liquidity requirements scheduled to be adopted by 
7

2019—the Liquidity Coverage Ratio (LCR) requirements. The formula used to compute the LCR ratio is 

based on the assumption that during times of distress some 3 percent of "stable deposits" and 10

percent of the "less stable" deposits run off (Bank for International Settlements [BIS], 2013). Yet, as 

Allen (2014) and Diamond and Kashyap (2016) argue, the new requirements are not grounded on firmly 

established theoretical or empirical research. Our results, which show that deposit insurance increases

local banking capacity by 56 percent suggests that deposit runoffs are likely higher than those assumed 

by the BIS during times of distress. Indeed, our results are more consistent with those of Iyer et. al. 

(2016), showing that deposit runoffs can be as high as 50 percent for non-systemic institutions.

The rest of this paper is organized as follows. Section II provides a brief description of the Postal 

Savings System in the U.S. In that section we also show that, at least during the sample period, 

movements in postal savings balances were correlated with “mattress” money. Section III describes the 

deposit insurance schemes adopted by some states. Section IV presents the empirical methodology, 

which relies on a difference-in-difference estimator of the growth rates in postal savings deposits from 

contiguous cities laying on different sides of borders of states that had and did not have deposit 

insurance. Section V discusses the main findings. Section VI offers some concluding remarks.

II. The Postal Savings System: A Refuge for Depositors 

In the previous section we emphasized that postal savings deposits can be used as a proxy for 

“mattress” money. In order to articulate that argument more clearly, we provide a brief background

discussion that delineates the Postal Savings System’s institutional framework. We then provide the 

statistical and narrative evidence showing that the system became a refuge for depositors, especially in 

times of banking distress.
8

A. Background

The Postal Savings System was instituted in the U.S. in 1911.7 The system was intended to promote 

thrift and attract savings from immigrants and other small savers, targeting money that was hidden in 

mattresses and cookie jars. The emphasis on small savers was made clear by limiting the maximum 

deposit for any individual to $500 (by 1918, this had been increased to $2500). In addition, no depositor 

could deposit more than $100 in any one month.8 After the Panic of 1907, there was increasing demand 

and agitation for deposit insurance (or deposit guaranty as it was called at the time), and a national 

deposit guaranty program became part of the Democratic platform in 1908, and was championed by 

their populist candidate William Jennings Bryan. In response, Republican politicians pushed for the 

Postal Savings System as a less intrusive alternative, and it was enacted by the Taft administration.9

Postal savings deposits were backed by the full faith and credit of the United States,10 and so depositors 

could view them as extremely safe—indeed far safer than deposits in banks. 

Bankers in general disliked both postal savings and deposit guaranty systems, but in order to allay 

fears of competition, the law establishing the Postal Savings System mandated that most of the money 

deposited with the Post Office would be re-deposited in local banks. At the inception of the system, any 

bank could qualify as a depository for postal system deposits after posting the required collateral 

(acceptable government and municipal securities) and agreeing to pay the required interest rate 

established by the Post Office.11 After the creation of the Federal Reserve, in 1916 the law was changed 

so that Fed member banks received preference over nonmember banks. During the 1920s, therefore, 

postal savings deposits were offered first to local member banks in proportion to their capital and 

 7 For more details on the history of the U.S. Postal Savings System see Kemmerer (1917) and Sissman (1936 and 

1938). 

8 O’Hara and Easley (1979), 744.

9 O’Hara and Easley (1979), 742-43. 10 See 36 Stat. 819 (1910), Sec. 16, which states “the faith of the United States is solemnly pledged to the payment 

of the deposits made in postal savings depository offices.” 

11 This collateral meant that in the event of a bank’s failure, the Postal Savings System would not suffer any loss in 

making good its deposit liabilities.
9

surplus; only after no member bank wanted the deposits would they be offered to qualifying local 

nonmember banks. Given that there were relatively few state member banks, most banks accepting 

postal deposits were national banks. If no local bank wanted the deposits, the Post Office was to try to 

place them in other banks within the state; if no such bank was available, the Postal Savings System 

itself would invest the deposits in federal government securities.12

B. Postal savings and the currency-deposit ratio

Postal savings became a refuge during times of financial distress. One way of demonstrating this 

claim is by showing how it correlated with the currency-deposit ratio. Previous research has established 

that during periods of banking distress the currency-deposit ratio rises as depositors convert their bank 

funds into currency (Boughton and Wicker, 1979; Friedman and Schwartz, 1963). To the extent that 

postal savings was perceived to be a safe alternative to those funds, the rise in the currency-deposit 

ratio should also be associated with a rise in the ratio of postal savings balances to bank deposits.

Figure 1 displays two time series: (i) the ratio of postal savings balances to bank deposits, and (ii) the 

currency-deposit ratio.13 Visual inspection suggests that both time series are indeed highly correlated. 

Formal tests (i.e. Johansen cointegration test) indicate that both series are cointegrated with rank 1, 

corroborating what the figure suggests.

C. Narrative Evidence

The time series evidence discussed above shows that there is a tight correlation between postal 

savings deposits and the currency-deposit ratio. Cointegration suggests that movements in the currency-

 12 From 1921-23, the amounts redeposited in banks were unusually low (32%, 32% and 47%), but for the rest of 

the decade the amounts redeposited ranged from 72 to 82 percent. See Sissman (1938), 347. 13 Monthly figures for postal saving balances are from the Annual Report of the Postal Service Commissioner, 

various years. Monthly data on bank deposits as well as the currency-deposit ratio are from the St. Louis FRED 

database.
10

deposit ratio and movements in the postal saving deposits shared a similar reason—panicked depositors 

withdrawing money from the banking system in times of bank distress.

Contemporary accounts from reports from various postal savings offices confirm this argument. To 

illustrate, we present in Exhibits 1 and 2 some of the narratives published in the 1915 Congressional 

Record. The narratives are self-explanatory. It is worth noticing the extent to which the limitations on 

postal deposits constrained the intake of funds, particularly in times of distress. We address the effect of 

this limitation on our empirical results further below.

III. State Deposit Insurance

Between 1908 and 1929, eight states instituted some form of deposit insurance.14 But widespread 

bank failures taking place during the early to mid 1920s proved to be too onerous for the states' 

insurance funds. By 1930 all state deposit insurance schemes were repealed.

The wave of suspensions that overwhelmed the banking system during the 1920s affected primarily

small banks. Prior research has highlighted a variety of causes for these suspensions including 

agricultural shocks (Alston, Grove, and Wheelock 1994), overbanking (O’Hara 1983), lax supervision by 

state banking authorities (Gambs 1977; White, 1983), and the increasing use of the automobile allowed

customers to bank at other financial institutions farther from home (Alston, Grove, and Wheelock 1994). 

There were also several local panics that ended up amplifying the incidence of suspensions during this 

period (Davison and Ramirez, 2014).

But deposit insurance itself has also been highlighted as a cause explaining the incidence of bank 

failures (Calomiris, 1992, 1993; Wheelock 1992, 1993; Wheelock and Wilson 1994). Numerous studies

have investigated the mechanisms through which these deposit insurance schemes influenced bank 

failures. Most of them point out to the moral hazard problem it generated (Calomiris, 2000; Wheelock, 

 14 Table 1 lists the states that adopted deposit insurance, the year in which each scheme was enacted, key 

features, and the year in which they were dissolved.
11

1992; Wheelock and Wilson, 1994). Evidence also suggests that banks also reduced their capital to asset 

ratio, and relaxed their lending standards (Calomiris, 1990; Calomiris, 2000). In addition, deposit 

insurance may have increased the exposure of banks to economic conditions (Kupiec and Ramirez, 

2013). 

Nonetheless, recent research suggests that these deposit insurance schemes may have had some 

beneficial aspects for depositors. Chung and Richardson (2006) report that in states with deposit 

insurance, failures due to bank runs declined even though failures due to mismanagement rose. Thus, 

they find that deposit insurance changed the composition of bank failures, but not the total incidence. 

Accordingly, their evidence suggests that these deposit insurance schemes may have reduced the 

number of depositors “running” from the banking system during times of distress.

15

IV. Identification strategy

As mentioned in the introduction, our identification strategy exploits the policy discontinuity 

generated by some states having adopted deposit insurance, while others did not. In order to isolate the 

effect of deposit insurance from confounding or unobserved factors, the discontinuity test rests on a

comparison of the growth rate of postal deposits taking place within a narrow geographical area with 

postal savings offices lying on opposite sides of state borders with the different policies. Specifically, we 

identified all postal savings offices that were positioned within 30 miles of each other, straddling deposit 

insurance (DI) and non-deposit insurance (NDI) state borders. This quasi-experimental methodology has 

proven to be more successful in identifying an effect than has the traditional regression methodology 

typically subject to the influence of omitted variables. 

 15 See Ramirez (2009) for additional evidence.
12

The DI states included were: North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Texas, and 

Mississippi.16 The NDI states included were: Minnesota, Iowa, Missouri, Arkansas, Louisiana, Tennessee, 

and Alabama. We identified 74 city pairs in these 14 states.17 Figure 2 displays a map of all 74 city pairs.

The computation of the relative deposits is as follows:

















+

+ ≡

di k t

ndi k t

k t ps

ps RPS

, ,

, ,

, 1

1

log

Where and are the total amount of postal savings deposits located in either the state 

with deposit insurance (di state) or the one without it (ndi state) for the city-pair k and at time t. Our 

justification for this choice of the computation is straightforward. The ratio controls for time-invariant 

city-level differences.

18 The relative growth of the postal savings deposits for city-pair k is thus:

Our regression specification is:

(1)

Where is the change in the number of bank suspensions taking place within R miles (R=10, 20, 

30) of each of the two cities in city-pair k at time t. The regression is estimated with OLS, using robust 

standard errors (clustered at the ndi city level)19 with city-pair fixed effects as well as time fixed effects.

 16 Although Washington adopted deposit insurance, we exclude it because its deposit insurance system was 

discontinued in 1921, the first year of our dataset of individual bank suspensions. Therefore, we are unable to 

conduct a DI-NDI comparison test using this state. 17 Although North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Texas also share a border with the western 

states of Montana, Wyoming, Colorado, and New Mexico, the postal savings offices were much more scattered on 

the western side, so very few DI-NDI pairs (in fact, by our count, only two) could be formed. 18 The log transformation is done to facilitate the computation of the growth rate. A "1" is added to both the 

numerator and denominator of the ratio to ensure that the variable is well-defined even when zero postal savings 

deposits are reported in the city.

19 Due to the topology of the area, our pairing algorithm resulted in some postal savings offices (in DI states) being 

paired with the same postal savings office (in the NDI state). Clustering the standard errors at the NDI city level 

corrects for the mechanical reduction in variance that the repetition introduces. See Dube, Lester, and Reich 

(2010) for more details.
13

The reliability of our test rests on the premise that differences in unobserved factors across the 

state border are not correlated with the adoption of deposit insurance. We offer several arguments to

defend this premise. First, as mentioned in the introduction, deposit insurance legislation took place at 

the state level. It is implausible that interests concentrated at state borders (including city-level 

attributes) systematically influenced states' legislative decisions on deposit insurance at the expense of 

interests elsewhere in the state. Second, it should be noted that six out of the seven NDI states actually 

introduced deposit insurance legislation between 1908 and 1917 (Minnesota, Iowa, Missouri, Arkansas, 

Louisiana, and Tennessee).20 Those bills were ultimately defeated in state legislatures. This is worth 

emphasizing because it points to the “exogeneity” of deposit insurance legislation—virtually all states in 

the sample considered it, but for political reasons (Democrats, on the whole, favored it, while 

Republicans were against it), ended up passing in some states but not others.

Our third argument hinges on time series variation of the adoption and dissolution of deposit 

insurance. Specifically, our hypothesis should only be valid during the period deposit insurance is in 

effect. If the city-pair comparison test is driven by unobserved characteristics, they ought to be driving 

the results even when deposit insurance is not in effect.

21 Finally, as we elaborate in the following 

section, a systematic comparison of county-level characteristics for the city pairs reveals that the 

adjacent neighbors are indeed very similar in observable attributes, which suggests that the city pairs 

may be equally similar in unobservable ones.

 20 MN: The Pioneer (Bemidji, MN), March 2, 1909, p.1; MO: La Plata Home Press (La Plata, MO), February 4, 1909, 

p.2; TN: The Tennessean (Nashville, TN), March 8, 1909, p.3; LA: The Times Democrat (New Orleans, LA), May 17, 

1912, p.2; AR: Arkansas Democrat (Little Rock, AR), March 30, 1909, p.4; IA: The Humeston New Era (Humeston, 

IA), February 1, 1911, p.3.

21 This argument implicitly assumes that changes in those characteristics are not correlated with changes in deposit 

insurance status.
14

V. Data

As indicated above, the geographic pairing of the postal savings offices is designed to reduce the 

influence of extraneous variables or unobservable attributes. However, due to data limitations, we are 

unable to formally compare attributes and characteristics at the city level for the paired cities. 

Nonetheless, the 1910 Census provides population and basic economic characteristics at the county 

level.22 To ensure that our pairing algorithm is yielding comparable localities, we provide some basic 

economic characteristics for the counties in which the city pairs were located. Table 2 presents the 

summary statistics for these variables. The list includes: (1) population density, (2) the total number of 

farms in the relative to the county’s population, (3) the percent of the county area used as agricultural 

land, (4) the illiteracy rate, (5) home density, (6) the number of properties in the county with some 

mortgage debt divided by the total number of properties in the county, and (7) the total value of all 

crops in the county divided by the county’s population. Undoubtedly, this list of characteristics is not 

comprehensive but is determined by data availability. Nonetheless, it is helpful for comparative 

purposes. What is most important here is that for all seven ratios, the average is statistically the same 

for the DI and NDI counties.

The data underlying the regression specification described above are deposits at various postal 

savings offices, as well as individual bank suspensions. The Annual Report of the Postmaster General on 

the Operations of the Postal Savings System lists the location as well as deposit information for all postal 

savings depositories in the U.S. From that source, we obtained deposit data for the postal savings offices 

that satisfied our selection criteria, as delineated in the previous section. The location-specific postal 

deposit data are annual in frequency, starting in 1921 and ending in 1929.

23

 22 We use county-level data from the 1910 Census (as opposed to the 1920 Census) since the state deposit 

insurance schemes and the postal savings system were adopted around that time. Source: Minnesota Population 

Center (2011).

23 The start year is constrained by our bank suspension dataset. Nonetheless, it is worth pointing out that far fewer 

bank suspensions took place between 1911 (the year the Postal Savings system was implemented) and 1920. 
15

Our bank suspension data for the years 1921–1929 are drawn from a manuscript list of bank 

suspensions compiled during the 1930s and held by the FDIC. These lists were contained in papers kept 

by Clark Warburton, an FDIC economist at the time. The lists contain each suspended bank’s name, 

state, city, and charter type. The lists also provide the date of each bank’s suspension and (if any) the 

date of each bank’s reopening.

24

Postal savings and bank suspension summary statistics for the matched city pairs are presented in 

Table 3. The table reveals that, on average, there were more deposits in postal savings offices located in 

the NDI states, relative to deposits in postal savings offices in the DI states. These postal savings offices 

were located approximately 18 miles from each other. In terms of the number of bank suspensions, the 

table indicates that on average, there were fewer suspensions taking place within 10, 20, and 30 miles 

of the postal savings offices in the DI states, relative to the same figures in the NDI states. However, 

because of the relatively high standard errors, none of the averages computed for the DI states is 

statistically different from those computed for the NDI ones. Evidently, the relatively high variance 

masks important differences that exist across city pairs in the sample. The econometric model 

delineated above is intended to facilitate a more careful analysis of the data.

VI. Results

Tables 4, 5, and 6 present the key findings of our study. These tables report a variety of regressions 

testing the effect of deposit insurance at various radii (Table 4), whether the effects were persistent 

(Table 5), and whether deposit insurance affected local banking capacity (Table 6).

 

Specifically, the average annual bank suspension rate between 1911 and 1920 was approximately 0.3%, while the 

average annual rate for the 1921 to 1929 period was 2.22% (Kupiec and Ramirez, 2013). Thus, it is unlikely that 

pre-1921 data would add a significant number of observations. 24 A more detailed description of this dataset is provided in Davison and Ramirez (2014).
16

A. Table 4: Main Results

Table 4 presents the estimates of regression (1). The results indicate that bank suspensions taking 

place within a radius of 10 or even 20 miles had a disproportionate effect on the deposits of postal 

savings offices located in the NDI state, relative to deposits in postal savings offices located in the DI

state. Specifically, the reported coefficient of 0.162 (10-mile radius, DI in effect) indicates that deposits 

in the NDI postal savings cities grew 16 percent more than deposits in the DI postal savings cities

following a bank suspension taking place within 10 miles. For the 20-mile radius, the effect is still 

positive and statistically significant, but smaller—about 9 percent. For the 30-mile radius, the effect is no 

longer statistically distinguishable from zero. The fact that the magnitude of the coefficient dwindles 

with distance suggests that the effects were localized.

The table also reports regressions for the same sample of city pairs, but estimated after deposit 

insurance was discontinued. In contrast to the results when deposit insurance was in effect, the effect of 

a bank suspension at any of the radii considered is estimated to be statistically nil. As noted above, this 

result is noteworthy because it suggests that the observed findings under deposit insurance are not 

being driven by an omitted factor.

B. Table 5: Persistence

Many studies have shown that depositors (and, in particular, uninsured depositors) discipline banks 

by withdrawing their funds when the institutions are performing poorly or when the financial system is 

in distress (Iyer, Puri, and Ryan, forthcoming; Martinez Peria and Schmukler, 2001; Berger and TurkAriss, 2015; Maechler and McDill, 2006; Egan, Hortacsu, and Matvos, 2015). Complementing this 

research, several studies relying on episodes of bank runs, as well as U.S. historical evidence have shown 

that once depositors exercise that discipline, they are very slow to return their funds to the banking 

system at all, even after the crisis has passed (Iyer and Puri, 2012; Ramirez, 2009; Ramirez and 

Zandbergen, 2014). Thus, the disciplining effect of depositors appears to be asymmetric—deposits run 
17

fast when leaving the banking system, but come back in a slow and subdued fashion. This pattern 

suggests that the dynamic effect of depositors is persistent.

To examine the degree of persistence in the context of this study, we investigate the dynamic 

effects of bank suspensions on postal savings deposits. If the effects are persistent, the 

disintermediation that bank suspensions cause in terms of deposit runoffs would be long-lasting.

A straightforward way of testing for dynamic effects is to include a lagged dependent variable in the 

regression.25 Table 5 presents the regression results.26 The table indicates that the coefficient in the 

lagged dependent variable is negative (and statistically significant), suggesting that the effect of bank 

suspensions on relative deposit growth tends to decline over time. But perhaps more importantly, the 

coefficients on the bank suspension variables (for the 10 and 20 mile regressions) are robust to the 

inclusion of the lagged dependent variable.

The bottom part of the table reports some quantitative estimates of the cumulative effects. The 

results indicate that the effects are clearly persistent. For the 10 and 20 mile radii equations in 

particular, bank suspensions result in an increase in postal savings deposits that is sustained over time. 

This result suggests that disintermediation effects of bank suspensions are long-lasting.

C. Table 6: Banking Capacity

Another issue worth addressing is the extent to which the state deposit insurance schemes, despite 

their moral hazard drawbacks, were able to stimulate local banking capacity. In theory, we would not 

expect to observe an effect with a "fully operative" postal savings system. The reason is that, as 

indicated earlier, postal savings deposits were re-deposited in local banks. So even if depositors "ran" 

more under an uninsured banking system, thereby making relatively more use of postal savings, local 

 25 See Enders (2004) for a description for modeling dynamic effects. 26 Since our city-pair data are longitudinal in nature, the inclusion of a lagged dependent variable may affect the 

consistency of the regression coefficients (Holtz-Eakin, Newey and Rosen, 1986). For that reason these regressions 

are estimated using the Arellano and Bond (1991) GMM procedure.
18

banking capacity would not necessarily be compromised. In practice, however, this effect was heavily 

constrained by the imposed deposit limit of $2,500 per individual postal savings account. The narrative 

evidence we presented earlier suggests that in many occasions, and in particular during times of 

distress, this deposit limitation ended up constraining deposit intake quite severely. In addition, as 

pointed out in the background section above, due to institutional constraints the re-depositing rate from 

the postal savings system to local banks was not 100 percent. Because of these reasons, the Postal 

Savings System cannot be considered to have been "fully operative." It is worth stressing that these

limitations do not invalidate the results reported in Table 4, showing that postal savings deposits grew 

faster in NDI states. However, they do indicate that the estimated coefficients in those regressions are 

an underestimate of the true effects of deposit insurance.

To get a more accurate estimate of those effects, we investigate whether the level of deposits at the 

county (which we take as our measure of the local banking market) differs with deposit insurance. For 

the same reasons discussed earlier, we concentrate our analysis using pairs of counties straddling the 

DI-NDI state borders. Thus, for each county we obtained deposits held by state banks as well as deposits 

held by national banks.27

Formally, our regression specification is:

( )t k t k t

ndi j k t

di j k t DI

cd

cd

,

, , ,

, , ,

1

1

log =α + β + g +φ +η 















+

+

(2)

Where cd represents county deposits at either the DI or NDI state, for county-pair k, at time t. Subscript j

identifies the charter type (either state or national). The independent variable of interest is "DI" which 

takes the value of 1 if deposit insurance was in effect (for the relevant state) at time t, and 0 otherwise. 

We also include county fixed effects as well as time fixed effects. Note that since different states 

 27 Our source for these data is the Federal Deposit Insurance Corporation dataset of bank deposits held and 

maintained by ICPSR, Federal Deposit Insurance Corporation (2001). That dataset set reports aggregate (countylevel) deposits for all banks, as well as national banks. The portion of county deposits held by state banks is 

estimated by subtracting national bank deposits from total deposits.
19

discontinued their deposit insurance schemes at different times there is sufficient "within county" 

variation to estimate the DI coefficient even after including time fixed effects.

The results from estimating regression (2) are presented in Table 6. The first two specifications 

are for county deposits in state-chartered banks, while the last two are for county deposits in national 

banks. Overall, the results indicate that county level deposits at state banks were approximately 56% 

higher with deposit insurance. To ensure robustness, one of the specifications does not include time 

fixed effects. But the magnitude of the coefficient is hardly affected. By contrast, the results for county 

deposits at national banks (which were disallowed by the OCC from participating in state deposit 

insurance schemes) are not statistically affected by deposit insurance. While the coefficient is positive, 

the standard errors are large enough to render the coefficient statistically insignificant at the usual 

levels. This set of results is consistent with the contention that deposit insurance promoted banking 

capacity.

VII. Concluding Remarks

One of the most harmful consequences of banking crises is the loss of depositors’ confidence in the 

banking system. In the absence of some mechanism—such as deposit insurance—aimed at maintain 

confidence, depositors' mistrust can amplify the incidence of bank failures and the adverse systemic 

consequences for the real economy. 

While this argument has been understood for more than a century, validating it empirically has been 

challenging. In this paper we rigorously test whether deposit insurance was able to arrest the outflow of 

deposits away from the banking system during periods of bank distress. We do so by comparing the 

experience of postal savings deposits located in contiguous cities on different sides of the borders of 

states that did and did not have deposit insurance. Our findings indicate that deposits in postal savings 

offices located on the non-deposit insurance side of the border increased by 16 percent more than 
20

deposits in the neighboring postal savings office located on the other side of the border (in the deposit 

insurance state) following a bank suspension within a 10-mile radius. The magnitude declines with 

distance—the effect is about 9 percent when bank suspensions occur within a 20-mile radius, and it is 

statistically insignificant when bank suspensions occur in a 30-mile radius. Using county level data, we 

find that deposit insurance is associated with a 56 percent increase in local banking capacity.

Undoubtedly, the deposit insurance schemes that states adopted after 1907 were faulty. Previous 

research has shown that they encouraged moral hazard and risk-shifting. Nonetheless, our estimates are 

useful for quantifying the liquidity-enhancing features of deposit insurance. 

Although our data are historical in nature, our results can be helpful for policymaking in modern 

times. To illustrate this point, consider the recently implemented Basel III reforms regarding the 

Liquidity Coverage Ratio (LCR) requirements, which are scheduled to be fully implemented by 2019. This 

new set of regulations is motivated by the illiquidity problems that engulfed financial institutions during 

the recent financial crisis (Allen, 2014). But as Diamond and Kashyap (2016) points out, there is currently 

insufficient theoretical and empirical research on which to firmly ground the justification for the LCR 

requirements. For example, the LCR requirements operate on the assumption that during times of 

distress some 3 percent of "stable deposits" run off, while the "less stable" deposits runoff rate is 

assumed to be 10 percent (Bank for International Settlements, 2013). Our results showing that deposit 

insurance increase local banking capacity by 56 percent suggests that deposit runoffs are likely higher 

than those assumed by the BIS during times of distress. Indeed, our estimates are closer to those 

observed in other studies using modern data.
21

Figure 1

Currency-Deposit Ratio and Postal Savings

Note: “Postal Balances/Deposits” is the log of the ratio of balances in postal savings deposits to total 

deposits in all commercial banks per month minus the log of the average postal savings balances to total 

bank deposits over the entire sample period. “Currency/Deposits” is the log of the currency deposit ratio 

per month minus the log of the average currency to deposit ratio over the entire sample period. 

Sources: Annual Reports of the Postal Savings Commissioner, various years and St. Louis FRED database. -1

0 1 2

Log Deviations

1913m1 1916m1 1919m1 1922m1 1925m1 1928m1 1931m1

Date

Postal Balances/Deposits Currency/Deposits
22

Exhibit 1

Exhibit 2

Source: Congressional Record 1915-House of Representatives, pp.926–27.
23

Table 1

State Deposit Insurance Schemes of the 1920s

State Year 

Enacted/Amended

Deposits Insured State Banks 

Participating

Year 

Discontinued

OK 1908/

1909,1911,1913

All deposits not otherwise secured and 

on which rate of interest was within 

limits specified by law

Compulsory for all 

state banks and trust 

companies

1923

KS 1909/

1911,1921,1923

All deposits not otherwise secured and 

on which rate of interest was within 

limits specified by law

Voluntary for all 

incorporated state 

banks. Trust 

companies and private 

banks excluded. Banks 

organized after 

passage eligible to 

apply after one year

1929

NE 1909/

1911

All deposits except money deposited on 

a collateral agreement or condition other 

than an agreement for length of time to 

maturity and rate of interest

Compulsory for all 

incorporated state 

banks

1930

TX 1909/

1921, 1923

Non-interest-bearing deposits not 

otherwise secured. Excluded public 

deposits, secured deposits, certificates of 

deposit, deposits made for the purpose 

of converting a loan into a deposit 

covered by the fund, certificates of 

deposit converted to non-interestbearing deposits within 90 days of failure

All state-chartered 

banks required to 

choose between 

guaranty fund system 

or bond security 

system

1927

MS 1914 All deposits not otherwise secured nor 

bearing interest exceeding 4% per 

annum

Voluntary until May 

15, 1915. Thereafter 

compulsory for all 

banks operating under 

state law including 

trust companies and 

savings banks

1930

SD 1915/

1921

All deposits not otherwise secured. 

Deposits could not pay interest in excess 

of 5% unless authorized by depositors 

guaranty fund commission and in no case 

more than 5.5% per annum

Compulsory for all 

state and private 

banks

1927

ND 1917/

1923

All deposits not otherwise secured and 

on which interest was within limits 

specified by law

Compulsory for every 

corporation in 

business of receiving 

deposits or buying and 

selling exchange 

except national banks

1929

WA 1917/

1921

Deposits subject to check or other forms 

of withdrawal and not otherwise 

secured. Payment of interest at rates 

higher than authorized by guaranty fund 

board subjected bank to loss of insurance

Voluntary for all state 

banks including trust 

companies but 

excluding mutual 

savings banks

1922

Source: FDIC, Annual Report for the Year Ended December 31, 1952, 68; Annual Report for the Year Ended December 31, 1956, 

54–60. 
24

Figure 2

Map of Postal Savings Offices Contiguous Cities

Notes: Deposit Insurance states are: Mississippi, North Dakota, South Dakota, Nebraska, Kansas, 

Oklahoma, and Texas. Non-deposit insurance states are: Alabama, Minnesota, Iowa, Missouri, Arkansas, 

Louisiana, and Tennessee.
25

Table 2

Comparing County Characteristics of City-Pairs

Variable NDI DI

Pop. Dens. Average 60.89 60.24

Std. Dev (86.38) (120.36)

Farms /Pop Average 0.10 0.11

Std. Dev (0.04) (0.04)

Perc Ag Average 0.72 0.75

Std. Dev (0.23) (0.25)

Ill Rate Average 0.08 0.07

Std. Dev (0.10) (0.08)

Home Dens. Average 13.77 13.48

Std. Dev (20.45) (27.75)

Perc Prop Debt Average 0.41 0.38

Std. Dev (0.19) (0.15)

Crops/Pop Average 117.73 127.38

Std. Dev (80.04) (91.90)

Notes: This table presents summary statistics of the counties where the city pairs are located. NDI is for the counties of the 

postal savings offices located in the non-deposit insurance states. DI is for the counties of the postal savings in the deposit 

insurance stated. “Pop. Dens.” Is population density, defined as total population divided by the county area (in squared miles). 

“Farms/Pop” is the total number of farms in the county divided by the county’s population. “Perc Ag.” is the percent of the 

county area used as agricultural land. “Ill Rate” is the illiteracy rate, defined as the number of persons 10 years and older who 

are illiterate divided by the county’s population. “Home Dens.” is home density, and it is defined as the number of homes 

divided by the county area. “Perc Prop Debt” is the number of properties in the county with some mortgage debt divided by the 

total number of properties in the county. “Crops/Pop” is the total value of all crops in the county divided by the county’s 

population. Standard Deviations are reported with parentheses under the averages.
26

Table 3

Summary statistics for city-pairs, all years

DI NDI 

Deposits in PS Average 28,718 111,707

Std Dev. 103,316 861,874

Suspensions 10 Average 0.182 0.416

Std Dev. 0.547 1.327

Suspensions 20 Average 0.591 1.387

Std Dev. 1.199 2.826

Suspensions 30 Average 1.329 3.269

Std Dev. 2.127 5.524

Distance Average 18.008

Std Dev. 6.956

Notes: This table presents summary statistics for matched city pairs between DI states (states with 

deposit insurance) and NDI states (states without deposit insurance). “Deposits in PS” is defined as total 

deposits held in the city’s postal savings depository. “Suspensions 10” is the number of bank 

suspensions taking place within 10 miles of the postal savings office, averaged over all city pairs, and all 

years. “Suspensions 20” is the number of bank suspensions taking place within 20 miles of the postal 

savings office, averaged over all city pairs, and all years. “Suspensions 30” is the number of bank 

suspensions taking place within 30 miles of the postal savings office, averaged over all city pairs, and all 

years. “Distance” is the average distance between the two matched postal savings offices.
27

Table 4

City-Pairs Regressions:

Relative Postal Savings Deposit Growth and Bank Suspensions

10 mile radius 20 mile radius 30 mile radius

VARIABLES DI=YES DI=NO DI=YES DI=NO DI=YES DI=NO

0.162** -0.0724

(0.0784) (0.235)

0.0933** 0.0985

(0.0407) (0.156)

0.0223 0.132

(0.0175) (0.0996)

Constant 0.0997 0.124 0.133 2.852*** 0.149 2.975***

(0.236) (0.149) (0.232) (0.593) (0.239) (0.454)

Observations 524 66 524 66 524 66

R-squared 0.058 0.170 0.059 0.176 0.044 0.199

Notes: This table presents regression results of the relative growth of postal savings deposits for each city pair on 

the increase in the number of local bank suspensions at various radii. Relative growth of postal savings deposits for 

each city pair is defined as ∆RPSk ,t , where [( ) ( )] k t ndi k t di k t RPS ps ps , , , , , = log 1+ 1+ , and where is 

total deposits in the postal savings office located in the side of city-pair k at time t that did not have deposit 

insurance, and is total deposits in the postal savings office located in the side of city-pair k at time t that 

had deposit insurance. is the change in the number of bank suspensions taking place within R miles (R=10, 

20, 30) of each of the two cities in city-pair k at time t. “DI=YES” means that deposit insurance was in effect. 

“DI=NO” deposit insurance was not in effect (repealed). All regressions include city-pair fixed effects, as well as 

year fixed effects. Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1

∆bs10,t

∆bs20,t

∆bs30,t

psndi,k ,t

psdi,k ,t

∆bsR,t
28

Table 5

Dynamic Effect on an Increase in Bank Suspensions

(1) (2) (3)

-0.205*** -0.188*** -0.201***

(0.0546) (0.0548) (0.0554)

0.182***

(0.0596)

0.119***

(0.0343)

0.0284

(0.0196)

Constant 0.157 -0.707** 0.212

(0.342) (0.341) (0.354)

Dynamic Effects:

Year 1 0.145*** 0.096*** 0.023

(0.048) (0.029) (0.016)

Year 2 0.152*** 0.100*** 0.024

(0.050) (0.030) (0.016)

Implied long term 0.151*** 0.100*** 0.024

(0.050) (0.030) (0.016)

Observations 380 380 380

Notes: This table presents Arellano-Bond dynamic panel-data regressions of the relative growth of postal savings 

deposits for each city-pair k at time t, ∆RPSk ,t , on its first lag, ∆RPSk ,t−1 , and on the increase in the number of

local bank suspensions at various radii. RPSk ,t is defined as [( ) ( )] 1 psndi,k ,t 1 psdi,k ,t log + + , where psndi,k ,t is 

total deposits in the postal savings office located in the side of city-pair k at time t that did not have deposit 

insurance, and psdi,k ,t is total deposits in the postal savings office located in the side of city-pair k at time t that 

had deposit insurance. ∆bsR,k ,t is the change in the number of bank suspensions taking place within R miles (R=10, 

20, 30) of each of the two cities in city-pair k at time t. Dynamic Effects in Year i (=1,2) measures the impact of an 

additional bank suspension on relative postal savings deposit growth after i years. The implied long-term effects 

from the additional suspension are also presented. Instruments for the difference equation: lags 2 through 6 of the 

dependent variable, and the first difference of ∆bsR,k ,t . All regressions include city-pair fixed effects, as well as 

year fixed effects. Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1

∆RPSk,t−1

∆bs10,k,t

∆bs20,k,t

∆bs30,k,t
29

Table 6

State Deposit Insurance and Local Banking Capacity

(1) (2) (3) (4)

State Banks State Banks National Banks National Banks

DI Active 0.574** 0.557** 0.165 0.267

(0.259) (0.260) (0.108) (0.190)

Constant -1.009*** -1.007*** -0.454*** -0.441***

(0.234) (0.243) (0.0980) (0.126)

Year Effects NO YES NO YES

Observations 410 410 414 414

R-squared 0.062 0.065 0.002 0.031

Notes: Depended variable: [( ) ( )] di,j,k,t ndi,j,k,t log 1+ cd 1+ cd , where cd represents deposits at the county 

level where the city-pairs k are located. The remaining subscripts are di or ndi (deposit insurance or not), 

bank charter category j (state banks or national banks), and year t. “DI Active” is an indicator variable 

equal to 1 if deposit insurance was in effect in the state where the county is located, 0 otherwise. 

Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1
30

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