The History of Certificates of Deposit

Certificates of deposit are bank investment vehicles that offer a specific rate of return over a specified term. The period of the term is often broken down to annually or quarterly but can be extended in periods when people seek to lock in favorable rates for extended periods of time particularly when rates are anticipated to decline over that period. Most certificates of deposits that are held at bank institutions are insured according to FDIC requirements. These are considered safe investments.

Banking Origination

Early European banks of the 1600s had two systems of banking. The first was that of exchange, taking money from one form and converting it the local monetary system. The second was a depository form that took money and gave a receipt to account holders for the amount of money deposited. As banks used the money to loan out as capital sources to merchants, they started to charge interest for the use of the money. In turn, they then had to establish a rate to borrow their own deposits to the customer in order to loan it out for a specified time. This is the beginning of the certificate of deposit that states the account owners has a specified amount of money and will keep that money deposited for a designated period of time for a rate of return.

The Modern Certificate of Deposit

While certificates of deposits, otherwise known as CDs or time certificates, have been around since the the early periods of banking, as legislation was passed to create a national system of financial reserves, the CD became more popular among those seeking long-term earnings on their money. Banks can only loan money that they have under assets. In order to keep assets under management to loan out for a higher rate of return, banks began to use certificates of deposits to entice customers to leave their money in the bank for long durations of time. The interest paid is the cost of being able to loan the money out. It wasn't until 1961 that a fixed rate time certificate was established.

The Federal Reserve Begins

In 1913, the Federal Reserve Act was passed. Prior to the passing of this act, all banks functioned independently with no uniformity for 80 years. The Federal Reserve Act created a monetary system, a central bank and regulations on the amount of reserves a chartered bank must keep in order to maintain solvency in times of economic distress. The act required that chartered banks be members of the Federal Reserve System and as a benefit had access to more favorable loan rates.


The FDIC, or Federal Deposit Insurance Corporation was part of the Franklin D. Roosevelt economic revolution following the stock market crash of 1929. With the collapse of the major corporate and banking institutions, FDIC was established to give time certificate holders and other bank clients assurance that the government would protect their assets to a specified limit. Officially established in 1933 during the Depression, the coverage was initially totaling $2500. In 2009, the FDIC insures time certificates up to $250,000 but will revert back to $100,000 in 2010.

Historical Rates

Certificate of deposits have had a wide variation of rates over the decades. Prior to the establishment of the Federal Reserve, there were no governing bodies to regulate base interest rates and private banks were able to entice people with rates that they may not have been able to maintain. After years of unsettling times in the bank industry, time certificate rates became correlated to the prime interest rate determined by the federal reserve. At times of high inflation, such as the late 1970s and 1980s, certificates of deposit owners enjoyed rates of return at nearly 20 percent on their assets. During other times of economic strife, certificates of deposit were barely above standard savings rates.