Great Falls tribune. [volume] (Great Falls, Mont.) 1921-current, 1922-11-04

and there a Recommendation crops up
looking to federal legislation for the
guaranteeing of bank deposits. The
coming winter promises to be fruitful
IN proposals for banking laws and It
is quite likely some bank deposit
guarantee bill will be introduced.
This idea acquired much popularity a
few years ago and even yet has
sporadic periods of favor.
On its face a proposal to have the
government guarantee depositors
against loss of their funds because of
the failure Of banks would appear to
be a sound one. although inclined to
the paternal. National banks and even
state banks and trust companies which
are members Of the federal reserve
system are regulated by the federal
government and it would seem reason
able that guarantee would be a natural
concomitant Of regulation.
The prime objection to the plan and
the one which has prevented, its general
adoption is one based wholly on the
frallty. OF human nature. 1t is a psy-
Geological objection, but a very strong
one. 1t constitutes a sort of paradox.
The theory of guaranteeing bank
deposits is to insure security to the
depositors. The operation, it seems,
is just the reverse. Instead of
strengthening banks, it weakens them.
Instead of giving support, the plan re
moves the strongest support which a
bank has.
Fundamentally. the whole theory of
banking is based upon confidence and
character. Meyer Rothchild, the faith
err of modern banking in the sense of
and founded the great house of which
a succession Of Rarons Rothschild
were the heads. wholly through force
Of character. He built up a wide
spread feeling of confidence in his
ability to pay back on demand the
sums which people deposited with
him.
This must always be the strongest
asset of a bank; infinitely stronger
than any regulation which governments
can devise.
The effect of an impersonal govern
ment guarantee of bank deposits is to
relieve the banker of the responsible
ity for taking care of them himself.
Without such a guarantee, the bank
err exercises the utmost caution to
| prevent his banks getting into such
shape, through speculation or over
expansion of bad loans, that he can
not meet the demands Of depositors-
If he has the government ready to pay
the depositors if he is unable to, he
may not be so careful.
To be sure. some men, undoubtedly
d majority, would be just as careful
with the guarantee as without it, but
there are always some who will relax
when there is a strong arm to bear the
burden.
Theory That of Insurance
The case is summed up in the nnnal
| report of the comptroller of currency,
which says:
1.-THE theory Of the guarantee of bank
| DEPOSITS is that of insurance, but It mas
certain fundamental weaknesses which
are more serious in their effects upon
banking than in their relation to most
! other kinds of business to which insur-
ance is applied. Insurance is sound as
q protection against unavoidable haz-
ards. but dangerous whenever it tends
to increase the hazards. The insurance
or guarantee Of bank deposits tends to
increase the hazards by eliminating the
value Of character as a bankers asset
1t tends to make all banks look alike
to the public and puts the careful. con
servative banker. who is unwilling to
make large promises and lake large
chances. at a disadvantage, The theory
IS at fault IN piacing more emphasis
upon the payment of ~depositors after q
bank has failed than upon preventing
failure. It's weakness always develops
in a crisis"
! 1t VIII be seen that this report takes
the view that the guarantee theory is
comparable to the practice Of locking
the stable door after the horse is stolen.
Instead Of preventing bank failures.
through which ~depositors run the risk
of losing deposits. it produces a con
dition calculated to increase failures
and only comes into active play after
the damage has been done.
OF course, the purpose of the guar
/ antee is to insure that the depositor
| gets his money. 1t would have that
effect so long as the theory were re-
stricted to comparatively few banks,