When Were Certificates of Deposit Invented?

Today's CDs can be traced back to the 1800s

Certificates of deposit, or CDs, have become such a familiar financial product that it may seem like they've been around forever. But they actually date back to the 1800s in the United States.

Key Insights

  • Banks in the U.S. have been issuing certificates of deposit since the early 1800s.
  • In the 1900s, many bank and credit union CDs began to be covered by federal insurance, up to certain limits.
  • Negotiable CDs, in amounts of $100,000 or more, were introduced in the early 1960s.

What Is a Certificate of Deposit?

A certificate of deposit is basically a contract between a financial institution, such as a bank or credit union, and a depositor. The depositor turns over a certain amount of money to the financial institution, which agrees to pay it back, with interest, on a certain date. In this way, it serves as both a receipt and a sort of promissory note. Unlike other types of bank accounts, CDs are not very liquid; that is, you can't take your money out before the end of the agreed-upon term unless you are willing to pay a substantial early-withdrawal penalty.

When Certificates of Deposit Were First Introduced

Banks in the U.S. were issuing certificates of deposit by the early 1800s, although the concept goes back to at least the 1600s in Europe. Initially, they often took the form of ornately engraved certificates, in part to reassure depositors that their money was in good hands. Today, although many CDs are sold online, customers can still request an actual piece of paper certifying the amount they've deposited, the CD's interest rate, and its term.

Though they were seen as relatively safe investments, certificates of deposit issued by American banks weren't formally insured by the federal government until the creation of the Federal Deposit Insurance Corporation (FDIC) in 1933, while those offered by credit unions weren't protected until the National Credit Union Administration (NCUA) was founded in 1970.

Negotiable Certificates of Deposit Become Available

A more recent innovation in the CD market is the negotiable certificate of deposit, created by the First National City Bank of New York, now known as Citibank, in 1961. Also known as jumbo CDs, negotiable certificates of deposit, or NCDs, have a minimum face value of $100,000, although they typically go much higher than that. As a result, these CDs are typically purchased by large investors, including companies, governments, and wealthy individuals.

Like regular CDs, NCDs are not meant to be redeemed before maturity. However, they can be traded on the secondary market, making them somewhat more liquid than regular CDs.

How Insurance Works for Certificates of Deposit

Following the establishment of the FDIC in the 1930s and the NCUA nearly 40 years later, many Americans were able to rest easy knowing their accounts were backed by the federal government. However, that's not always the case. While the FDIC insures most banks and the NCUA insures most federal and state credit unions, depositors should verify that coverage before they purchase a CD (or open any other account).

What's more, both FDIC and NCUA insurance is limited to certain maximums. Currently, the limit is $250,000 per depositor, per financial institution, per ownership category. People who wish to make larger deposits can establish accounts in different ownership categories (such as an individual account plus a joint account) or spread their deposits among several financial institutions to be sure they're covered.

Brokered CDs, which are sold by brokerage firms and independent salespeople, are not directly insured by either the FDIC or the NCUA, making them potentially riskier.

In the case of negotiable certificates of deposit, the federal insurance limits still apply, making any amount over $250,000 subject to risk.

What Are Certificates of Deposit?

Certificates of deposit (CDs) are financial products offered by banks, credit unions, and other institutions to customers who agree to leave their money untouched for a specified amount of time in exchange for a higher interest rate than they would receive on a savings or checking account. At the end of the CD's term, the depositor will receive their original principal plus interest.

Can You Take Money Out of a CD Early?

Certificates of deposit are meant to be left untouched until their term ends. In some cases, however, you may be able to get your money out early by paying a penalty. This is a good reason not to commit to a long-term CD if you think you might need the money sooner than that.

How Long Does a CD Take To Mature?

How long you'll have to wait until the money you deposited in your CD comes back to you is set in the terms you agreed to with the bank. You can typically select a term of anywhere from one month to 15 years. Generally speaking, the longer the term of the CD, the higher its interest rate will be.

What Happens When a CD's Term Ends?

When your CD reaches maturity, you can take the money in cash or reinvest it in another CD with a similar or different term. If you don't provide your bank with specific instructions, it may automatically roll the funds into a new CD, whether that's what you wanted or not.

Is the Interest on a CD Taxable?

Yes. Unless you're holding the CD in an individual retirement account (IRA) or other tax-advantaged retirement account, the interest is taxable for the year you receive it. With a traditional IRA, you won't owe tax on the money until you withdraw it, while with a Roth IRA it won't be taxed at all if you meet certain conditions.

The Bottom Line

Certificates of deposit, or CDs, have been around since at least the early 19th century in the United States and centuries longer in other parts of the world. They remain in wide use by individuals, businesses, and governments.

Article Sources

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  2. John Thom Holdsworth. "Money and Banking," Page 31. D. Appleton and Company, 1925.

  3. Rare Americana. "Bank of Wilmington and Brandywine 19th Century Engraved Certificate of Deposit."

  4. Federal Deposit Insurance Corporation. "Are My Deposit Accounts Insured by the FDIC?"

  5. National Credit Union Administration. "Deposits Are Safe in Federally Insured Credit Unions."

  6. Office of the Comptroller of the Currency. "The Negotiable CD: National Bank Innovation in the 1960s."

  7. Federal Deposit Insurance Corporation. "Deposit Insurance FAQs," Select, "Q: What is deposit insurance?"

  8. National Credit Union Administration. "How Your Accounts Are Federally Insured."

  9. Office of the Comptroller of the Currency. "What Are the Penalties for Withdrawing Money Early From a Certificate of Deposit (CD)?"

  10. Internal Revenue Service. "Topic No. 403 Interest Received."