Does Deposit Insurance Promote Deposit Stability? Evidence from the Postal Savings System during the 1920s

Abstract We evaluate whether deposit insurance (DI) promotes liquidity by influencing depositor behavior. We use the postal savings (PS) system and state‐adopted DI schemes during the 1920s to examine the effect of bank suspensions on PS deposit growth in pairs of border cities (DI versus non‐DI). After a nearby bank suspension, (i) deposits in non‐DI‐PS offices increase sevenfold compared to deposits in adjacent DI‐PS offices, and (ii) county‐level deposits per bank decline in non‐DI counties but not in adjacent DI counties. In both cases, the effect steadily declines through the 1920s, consistent with the decreasing viability of the DI schemes.