When Were Certificates of Deposit (CDs) Invented?

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.

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

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.