Los Angeles herald., 1908-10-20
influential agasine Shows Necessity of Bank Guaranty

everywhere that if a state contains
two classes of banks, one of which has
it's deposits safely insured and the
other has not, the latter cannot long
successfully compete for business. As
sured safety will outweigh all other
considerations with most depositors.
AS to the private banks, they would
seem to have no alternative butsto in
corporate. Inasmuch as this would be
no hardship for any responsible pri-
vate banking concern their case is
easily provided for.
The fact that we'll conducted banks
under the new system would be re-
quired to make slight annual con-
| tribution to cover the losses of some
badly managed banks is simply part
of the inevitable price to be paid for
an incalculable benefit. Honest bus-
ness men who carry fire insurance nee
essarily contribute to pay losses oc-
casioned by rascally property owners
who set fire to their own buildings.
1t is a merit rather than a fault of
the proposed change that it would rem
der all banks equally sound and safe
in the MATTER of deposits. That it
would tend somewhat to lessen the
overshadowing Importance of the great
est banks and legitimately to increase
the dignity and Importance of the mod
crate sized ones, would be rather
recommendation than a cause for crit
icism.
A judicious limitation placed by law
upon the maximum amount of depos-
it's which any bank should be per-
mitted to accept lin other words, the
maximum debt which it should be per-
mitted to incuD in proportion to its
unimpaired capital, and also upon the
rate of interest which it should be al
lowed to pay on deposits, and upon
other like inducements to patronage.
would effectively protect large and con-
servative banks from the unfair COM
petition of dishonest or adventurous
| small ones. Besides, it is usually the
high character and dependable person.
ality of the men behind the bank which
obtain and hold desirable patronage.
Under deposit-guaranty system fam
boyant advertising and unbusinesslike
inducements would not once in a thou
sand times attract or retain the custom
of a depositor whose account was
worth having.
Well considered legislation providing
for deposit insurance would naturally
include other safeguards, such as the
prohibition of "chains" of banks under
one ownership, "one-man" banks, the
use of bank funds in promotion enter
prises, and the borrowing of bank
funds, directly or indirectly, in consid-
cradle amounts by it's own officers. 1t
might confer authority on the comp
troller of the currency and secretary of
the treasury to eliminate dishonest and
incompetent bank officials as the comp
troller already has authority to pre-
vent undesirable citizens from obtain
ing bank charters.
The pecuniary interest which all
solvent banks would have in limiting
bank failures would lead them to use
all their special knowledge and in
fuence to check and expose the oper-
Loft 0f 20 11x,
it virtually impossible for the wild
cat" element to continue in the bank
ing business. No better means could
be devised for creating and maintain
ing high standard of banking honor
and solvency than would be furnished
by a sensible general system of gov
ernment controlled mutual bank de-
posit insurance. Naturally all legisla-
tion looking to this end, as Oklahoma
has illustrated, would surround the
system with new and rigid safeguards
based upon experience and common
sense.
Under the proposed new order of
things the clearing house associations
of the various cities would have it in
their power to eliminate and perma-
nently suppress wild cat" methods on
the part of all banks in their member
ship and within the zone of their in
duence. Not only could they withhold
membership anu clearing mouse pr1Vl-
legeS from dangerous and shady bank
ing cc1cerns, but they could create and
maintain banking public opinion
which would render it impossible for
disreputable banks to continue in busi-
ness.
Small Cost of Such Insurance
Concerning the cost of such a sys-
tenn of deposit insurance to the ma
tional banks of the country, it need
only be said that, as shown by the
reports of the comptroller of the cur
rency, the average annual net loss to
depositors from failed national banks
during the thirty-three years since the
system was established, has been equal
| to one-twentieth of per cent upon
the average annual deposits of all ma
tional banks held during the same pc
riod. With this experience as a guide,
it is evident that the expense of the
proposed change to the solvent banks
would be next to inappreciable, espe-
cially after the system had been in
operation half dozen years. by which
| time the circle of liquidation of banks
failing after the law went into effect
would have been completed. Besides,
it is to be noted that in accordance
with we'll understood economic law.
the outlay by the banks for the cost
of deposit insurance would in fact be
distributed over the entire business
| community.
If the guaranty fund is progressively
made adequate in amount, it's interest
earnings should nearly, if not quite,
| and ultimately, meet all demands for
| depositors of failed banks, thus ex-
empting solvent banks from further
| assessments. All the difficulties which
thus far have been seriously suggested
would probably disappear under the
united effort to install the new system
and adjust it to the legitimate interests
of the community. If, when all was
done, some minor Inconvenience should
still result from the change, they would
be infinitely outweighed by the i'm
measurable benefits accruing to every
class, individual and interest In the
republic. Plainly. it is inevitable that
a price shall be paid for every advan-
| tage worth having, and the case under
discussion will probably prove no ex-
ception to the rule-Review of Reviews
NATHAN NEWLY SPEAKS AT
| DACAnENA MIHMIAM rnAINI1-