The Topeka state journal. [volume] (Topeka, Kansas) 1892-1980, 1922-11-06
TOPEKA STATE JOURNAL
Information Bureau
GUARANTEEING BANK DEPOSITS
FREDERIC ,. HASKIN. DirecsOr,
WAahinGfon. d. @.


and there a recommendation crops
up looking to Federal legislation for
the guaranteeing of bank deposits.
The coming winter promises to be
1 fruitful in proposals for banking laws
and it is quite likely some bank de-
post 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 sound one. aItho 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 reasonable that guarantee would
be a natural concomitant of regula-
ton.
The prime objection to the plan
and the one which has prevented its
general adoption is one based wholly
on the frailty of human nature. 1t
is psychological objection, but very
strong one. 1t constitutes a sort of
paradox.
T 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 plaza
removes the strongest support which
bank has.
Fundamentally. the whole theory
of banking is based upon confidence
and character. Meyer Rothschild,
the father of modern banking in the
sense of accepting deposits. made his
success and founded the great house of
which a succession of Barons Roths-
child were the heads. wholly thru
force of character. He built up
4 1R -,
his ability to pay back on demand
the sums which people deposited with
him.
This must always be the strongest
asset of bank; infinitely stronger
than any Regulation which Govern
ments can devise.
The effect of an impersonal Gov
eminent guarantee of bank deposits
sponsibility of taking care of them
himself. Without such a guarantee,
the banker exercises the utmost
caution to prevent his banks getting
into such shape, thru speculation or
over-expansionS of bad loans, that he
cannot meet the demands of depos-
itors. 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
a majority, would be just as care.
full 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
annual report of the Comptroller OF
the Currency, which says:-
The theory of the guarantee of
bank deposits is that of insurance, |
but it has certain fundamental weak |
nesses which are more serious in their
effects upon banking than in their
relation to most other kinds of bust |
ness to which insurance is applied. |
Insurance is sound as protection |
against unavoidable hazards, but |
dangerous whenever it tends to in
crease the hazards. The Insurance or |
guarantee of bank deposits tends to
increase the hazards by eliminating |
the value of character as a bankers |
asset. Tt tends to make all banks |
look alike to the public and puts /
the careful, conservative banker, who |
is Unwilling to make large promises /
and take large chances, at a disad- /
vantage. The theory is at fault in
placing more emphasis upon the pay
ment of depositors after a bankf has
failed than upon preventing failure.
It's weakness always develops in
crisis
1t will be seen that this report takes
the view that the guaranteeing theory
Is comparable to the practice of lock-
ing the stable door after the horse is
stolen Instead of preventing bank
failures thru which depositors run
risks of losing deposits, it produces
a condition calculated to increase fail
1res and only comes into active play /
after the real damage has been done.
OF course, the purpose of the guar
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,
but the economists point out that to
sxtend the plan nationally would pro-
luce a situation where there would
not be enough money to go around to
pay the depositors and therefore the
guarantee would be practically worth
ess.
How It Worked in Oklahoma.
An interesting study of just how
he system works can be made with
he State of oklahoma as a subject
Oklahoma in 1908 enacted legislation
bank deposits in State
chartered banks. a fund was
created by assessing the banks in (,
proportion to their deposits. 1t was
expected that the banks so guaran-
md more than a hundred national
banks left the national system and
'eorganized as State banks to take II
advantage of the system.
One of the first effects was to I
Emulate the organization of new
ranks. When THO system was intro Ia
luced there were 495 state banks. At :
he close of 1921 there were 622 state !
)dnkS- EcOhOInlSlS agree luaL IOO
many banks are in themselves a
weakness and the comptroller of the {
has announced that he will
move very cautiously in authorizing
he organization of new national
ankS.
During tie existence of the system
5 Oklahoma banks had to be closed
y the authorities because of weak
ess. The guaranteed deposits of /
hese banks aggregated 81, 050, 900.
he suW available in the guarantee
und was only S3,645,o00. In such a
ase, the law provides that the state
nay issue warrants-that is, borrow /
n the public credit in order to pay
he depositors. This shifts the bur
EN- of bad banking to the whole