insured, does it matter if I stash my money in a good bank or a bad bank? Probably not.

In response
to such concerns, the FDIC demanded, and was granted, the right to terminate the insurance of
banks guilty of unsafe or unsound practices. Unfortunately, this power was almost unusable in
practice, as termination would provoke the very bank run the FDIC was created to prevent. But it did
not really matter. The Banking Act of 1933, better known as the Glass-Steagall Act, made it all but
impossible for U.S. banks to get up to anything too risky. Banks insured by the FDIC were forbidden
from engaging in investment banking or expanding across state lines, and faced limits on the number
of branches they could open. The federal government even established a maximum ceiling on
savings account interest rates to prevent banks from competing with each other to attract funds.
This intrusive regulation limited competition and produced tidy profits for bankers, but also meant
they had little chance of achieving great wealth. Banking was boring, although it was not a bad life.
Bankers were said to live by the “3-6-3 rule:” pay 3 percent interest on deposits, charge 6 percent
interest on loans, and at 3 p.m. head to the golf course. During this time, when bankers were out
golfing, a number of regulatory changes were made that would transform the industry. And yet
banking was so boring that it took a long time for anyone to notice what had happened. The first
crucial change came in 1935, when the FDIC was granted the option to facilitate the merger of weak
banks instead of liquidating them and paying off insured depositors. If a bank was about to fail, the
FDIC could try to induce another bank to buy it, if necessary by subsidizing the purchase using
deposit insurance funds. This had a very interesting implication, in case anyone was paying attention
(no one was). The FDIC was supposed to be insuring only small depositors. But when it arranged a
government-assisted merger—called a “purchase and assumption” transaction—the result was that
all depositors were protected, because all deposits, whether insured or not, were taken on by the
purchasing bank, with the help of an FDIC subsidy. By the 1940s, purchase and assumption
transactions had become the default option for the FDIC. This meant that the FDIC was, in practice,
guaranteeing all U.S. bank deposits. In the 1950s, there was a political backlash against this policy,
and for a time banks were once again left to