So, Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation and University of Massachusetts Amherst professor, has been announced as the commencement speaker for the Class of 2010.

As a quick aside, it should be interesting seeing if the ceremony draws more people than the all-but-inevitable protest over the University once again choosing to honor a Bush administration appointee who played a controversial role in an ongoing disaster.

Honestly, I don’t care. Unless the 2011 speaker is Stephen Colbert I know I will neither attend nor miss my graduation.

Anyways, I’ve been on a bit of an economics kick as of late, and I thought I’d take this unique opportunity of pointing out why the Federal Deposit Insurance Corporation is a perfect example of what’s wrong with the foundations of our entire economy.

The reason we have the FDIC is because of a situation most commonly associated with the 19th century: the bank run. At the time the official currency of the United States was gold with $1 usually being defined as about 5 percent of an ounce of gold. In other words, an ounce of gold was worth $20. By comparison, “the price of gold has changed” as they say in those cheesy commercials: it’s currently around $1000 an ounce.

However, not only is gold very valuable, but it’s also very dense. So carrying it around in your pocket has never been practical and keeping it in your home was an invitation for thieves to take it. Thus, the bank was created as a place where you could safely store your gold. When you made a deposit they gave you a certificate you could exchange later for the gold you deposited. In places where banks became more established, the certificates came to supplant the gold and just be used as money as people came to trust the banks to always be able to come up with the metal.

The same kind of commitment was made with cash. Essentially, you had to be able to walk into your bank and demand to see all your assets held by them. If your life savings were in the Bank of America downtown, you had to be able to go withdraw all that money at a moment’s notice without a penny missing.

In a bank run, people come to believe that the bank won’t be able to come up with the money they deposited, so they all go to the bank and demand their certificates be honored. If the bank can’t honor them, it goes out of business and the people have to accumulate capital for major projects the hard way, and not to mention, protect their own money. So a bank run and collapse was disruptive to local economies.

Congress created the FDIC during the Great Depression to provide a certain amount of insurance for depositors so that they would not be wiped out by bank runs as so many were. A good and necessary measure by the federal government to protect the ordinary people from a capricious market failure, right?

Nope.

It’s pretty fair to say that they were completely missing the point when they created the FDIC. Think about it. You deposit some gold, get some certificates that can be used at any time to redeem that gold and then it’s not there all of a sudden. Your money, the money you worked hard to own and put in a bank for safekeeping has for all intents and purposes simply vanished off the face of the Earth.

You’d understand if there had been a robbery, but there hasn’t. Or, at least, not a robbery with guns and bandits.

Gold has a very interesting property: it’s fungible. That means that as far as we’re concerned every piece of gold is exactly like every other piece. If you deposit an ounce of gold in a bank, it only matters that you get back an ounce of gold. It doesn’t have to be the exact same gold you put in. If we based our system of currency off autographed glamour shots of the Jonas Brothers, for example, then if you deposited your Kevin, you’d want your Kevin back and not somebody else’s Nick, even if their values were the same (but we all know Kevin’s not worth anything).

Because there could be so little gold in circulation at any one time once the certificates started being accepted as money in a community and the gold being withdrawn didn’t have to be the exact same gold as was deposited, an unscrupulous banker could take advantage of the situation in two ways. First, he or she could print more certificates than could be supported by the amount of gold, and second, they could take the amount of gold you had deposited and lend it out to someone else.

Either way, they stole your money.

You can see the flaw: any time lots of people wanted hard money, the bank needed to have it all on hand or fail hard. This tended to happen with some regularity throughout the 19th century because of the number of banks throughout the country and the fact that they didn’t necessarily trust one another. They had good reason not to be trusting, since one bad bank screws everything up. It’s like intentionally writing bad checks.

That brings us back to FDIC. The institution exists to protect us depositors from bank runs by insuring our deposits. A bank run is only a bad thing if the bank has been stealing money from its customers and therefore can’t come up with their cash when they want it.

But the FDIC never addresses the root causes of the bank run and failure. They are only concerned when the banks actually become insolvent and not with what make them insolvent. I suppose they’re not really to blame any more than anybody else, since most economists are content to chalk the whole thing up to “market failure” and not worry about why the market failed. Interestingly, the FDIC doesn’t insure losses due to fraud or theft.

And stay away from my mattress.

Matthew M. Robare is a Collegian columnist. He can be reached at [email protected].