ABSTRACT
This chapter provides a brief review of developments in the growth literature and examines some of the policy implications of the new models of growth. It explores one particular policy and its effect on economic growth, the enactment of compulsory deposit insurance in both Canada and the United States. Data are presented that support a private interest theory of deposit insurance. The chapter argues that deposit insurance has affected the efficient allocation of savings and the growth rate. The financial system is crucial in the transformation of savings into firm capital. Government-provided non-risk-rated deposit insurance is a major intervention by government in the operation of the banking system. Deposit insurance was introduced in Canada in 1967. Until 1967, banking in Canada consisted of a small number of large national banks and entry barriers into national banking. The Canadian evidence clearly demonstrates that a stable financial system can exist without government-run deposit insurance.
