When Were Certificates of Deposit (CDs) 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.

They actually date back to the early 19th century in the United States, although their roots go back much farther.

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 CD?

A certificate of deposit is 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, the CD is both a receipt and a promissory note.

Unlike standard bank savings accounts, CDs are not very liquid. 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.

In return for this commitment, you get a slightly higher interest payment for a CD than for a savings account. The interest rate increases with the length of the commitment. You can buy a CD with a term as short as a few months or as long as five years or more.

When the First CDs Were 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.

For many years, the investors received 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.

Although they are now seen as among the safest 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. Those offered by credit unions weren't protected until the National Credit Union Administration (NCUA) was founded in 1970.

When Negotiable CDs Became 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.

Negotiable certificates of deposit, or NCDs, have a minimum face value of $100,000, although they can go much higher. These CDs are typically purchased by large investors, including companies and governments.

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 CDs

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 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 fully 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.

Frequently Asked Questions

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, 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.

How Long Does a CD Take to Mature?

The term of the CD ranges from a month to five years or even 15 years. The exact term to maturity and the amount you'll receive in interest are set when you deposit the money.

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, transfer it to another account like your checking or savings account, or reinvest it in another CD.

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 want 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.

If the CD is in 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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  1. Financial Industry Regulatory Authority. "Certificates of Deposit."

  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."

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