New-York tribune., 1908-09-07
BANK GUARANTEES
DeDutu Controller Puncfures Demo
cratic FalIacy Boosted by Bryan.
lFrom Tho Tribune Bureau ]

for financial journal which points out the danger
O. the Democratic bank guarantee propaganda ~"
radical changes necessary in banking ia"s'
,h,,Es N- Kane and no socialistic experiments
should be undertaken. Guaranteeing deposits IN
the banks will not stop pancs, he writes faihes
ere the result OF upon the banks. ana iach
OF confidence in the ability 10 pay deposit haoiii-
ties on demand. Amend our inelastlc currency ia"S
so as 70 nlace IL within the power Of the banks TO
meet abnormal conditions, and the problem VIII DC
solved.
The opinion recently rendered by the Attorney
General Of the United States that IT is unlawful for
.nv national banking association enter into such
an agreement is contemplated by the okiahon1a
oeposit guarantee law disposes OF this question: So
far as the legal right of national banks unoer eh
listing laws TO make contract of this nature Is
concerned This oninfon however, does not deal
with nor settle basic principle involved IN TINS
latest monetary problem which has been sudoenls
fnSected into complex banking system ana INTO
state and national politics.
The question is in no sense a political one' III
the common application of that term, and cannot
be correctly solved by party politics 1t is an
economic problem which appeals strongly to a con-
siderable number of people as well as 10 some
well known students of finance, and is attracting
enough attention TO call thoughtful considera-
ton and intelligent discussion by experienced pank
ers and financial scientists. The principle itself
believe to be ethicaly and fundamentally unsouno'
but its baneful tendencies should be demonstrated
hv impartial and logical reasoning. devoid of selfish
considerations. and not by passionate political
strife.
RESULT OF BANK COMPETITION
This movement did not originate with the bank
eepostor 1t is the natural sequence of keen
and more or less selfish competition for business
between the banks in the newly settled and rapidly
developing sections of our country, and has been
seized upon by the politicians as popular tenet
with which to obtain for their party candidates
the votes of the unwary and unthinking. Unless
its fallacy is inteIigenty exposed it is likely to
extend TO other sections OF the country The most
persistent advocates Of this modern financial
heresy among the banking fraternity will be FOUND
fn those sections Of the country where liberal or
excessive Of interest arc offered by banks as
sn iuducement to get deposits, and high rates are
charged for loans The legal rate of interest IN
the State of Oklahoma IS per cent . The contract
rate is Il per cent Next TO Texas. Oklahoma leads
the states of the Union IN the number Of national
banks of the small capital class that have been
chartered since passage Of the act of Congress
OF March il, 1900, providing for banks with mini
mum capital Of $4,000 There are in Oklahoma at
this writing 3O7 national banks. 2l7 Of which have
capital each of less than $4,000 Composition
among this class of banks is keen A large number
of these banks pay per cent on deposits. and re-
ceive Z per cent g year on some loans and from
2 10 per cent a month on others
THE payment Of liberal excessive rates of in
terest inducement to get deposits attracts
funds 10 a bank which would not otherwise be re-
ceived. The natural tendency of such policy is
toward injudcious and speculative banking Be
such deposits a a higher rate of interest than
that paid the bank is compelled TO seek invest
ments for sucn funds in loans securities of
more or less speculative hazardous character
Such a policy makes a depostors' guarantee law
very essential 10 a bank Of this class as means
of maintaining Itself in the community in COM
petition with the conservatively managed institu-
ton which pays interest on deposits subject to
withdrawal on demand, but relies principally upon
the reputation which a safe and conservative man
A,s., TSCv,a aTa S11a
the banking business OF the locality Depositors
who have any regard for the safety Of their funds
should consider well the relative strength and Sc
curity the institution which offers an induce
rnent for deposits liberal excessive rate of in
terest. and the one which pays no interest on ac-
tive accounts or a moderate rate only certain
lines Of deposits. But the depositors' guarantee
scheme offers premium for experience, prudence
and conservatism. 1t holds the careful and rep
utable banker responsible for his proportionate
share Of the deposit liabilities OF his injudcious
speculative neighbor when disaster overtakes the
hazardous ventures OF the latter.
MAKES WEAK EQUAL TO STRONG BANK
THE logical effect of such a system the Okla
homa' guarantee law is to require the strong bank
10 stand sponsor for the weak; the conservatively
managed for the speculative institution. Personal
equation an important factor TO be considered in
the banking business. is eliminated entirely and so
far the depositor is concerned inexperience, in
competency and recklessness count for as much as
and stability of a bank would not concern the
average depositor.@ He would regard his funds as
eafe in the wildcat bank in the sound and
sanely managed institrSion because banks of the
latter class under a compulsory guarantee law
would be responsible to the extent of their un-
known liability for any deficiency in assets in
cess Of the deposit liabilities of the former con-
Germ. In addition thereto the self-reliant banks
would suffer the loss of business diverted to the
speculative incompetently managed institution,
which Il would not have obtained but for the con-
ndence inspired by the security Of the guarantee.
1T is not the function of the government state
or national to guarantee deposits in the banks
any than il is TO insure the business ventures
of the individual, company or corporation. in any
other investment or risk. Neither it legiti-
mate function of banks to insure guarantee the
deposits of each other. 1t is claimed by Of the
advocates of this policy because the state and
national governments exact Of banks security for
public funds the depositor should be likewise
cured. An individual has the same right the
government require security for his deposit, but
neither the government nor the depositor has any
right 10 require bank to guarantee q deposit
sn another bank. A bank may lawfully and legit-
fmately guarantee its own obligation. but it has
no moral right from economic point of view 10
guarantee the obligations of another party, bank
Individual Such policy, based as it would
be upon false premise. must eventually fail be-
cause Of its inherent weakness. On July 2s 1905
the date OF the Attorney Generals opinion the
guarantee law, there were 307 national banks in
operation in the STATE OF Oklahoma On August
the Controller of the Currency notified all of
these banks that it held be unlawful for
any national association 20 avail itself OF the priv
fleges OF the guarantee law, and required such
had entered into a contract OF that nature with
the state banking board to withdraw therefrom.
Only hfty-seven OF these banks found TO
have made contract agreements. and Of this