The Rock Island Argus and daily union. (Rock Island, Ill.) 1920-1923, 1922-11-04
Washington, D. c., Nov. s.-Here,

warrington, ID. u, NOV. S.-Herc
and there . Recommendation crops
up looking to federal legislation
for the guaranteeing OF bank de-
positA The coming winter prom
Uses to be fruitful In proposals for
banking laws and 1t is quite likely
some bank deposit guarantee bill
will be INTRODUCED. This idea ac-
quired much poppy. arity a few years
ago and even yet has sporadic per-
iods Of favor.
On its face proposal to have
the government guarantee deposit
tors against the 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 rea-
sonable 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 ma
ture. 1t is a psychological objec-
ton. but very strong one. 1t con.
stitutes sort of paradox.
The theory Of guaranteeing bank
deposits is to insure security to the
depositors. The operation. it seems,
is just the reserse. Instead of
strengthening the banks, it weak
ems them. Instead of giving sup
port, the plan removes the strong
est support which a bank has.
Fundamentally, the whole theory
of banking is based upon conf
dence and character. Meyer Roths-
child, the father Of modern bank
ing in the sense of accepting depos-
its, made his success and founded
the great house of which q success
sion Of Barons Rothschild were the
heads, wholly through force of
character. He built up 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 strong
est asset of a-bsnk: infinitely
stronger than any regulation which
governments can devise.
The effect of an impersonal gov
eminent guarantee of bank depos-
its Is to relieve the banker of the
responsibility for taking care OF
them himself. Without such a
guarantee, the banker exercises
the utmost caution to prevent his
banks getting into such shape,
Through speculation or over-ex-
pansion 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, undoubt.
eddy a majority, would be just as
careful with the guarantee as with
out it, but, there are always some
who will relax when there is 4
strong arm to bear the burden.
Theory That of Insurance.
The case is summed up in the an
nual 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
weaknesses which are more seri-
Gus in their effects upon banking
than in their relation to most 9TH
er kinds of business to which in.
surance is applied. Insurance il
sound as a protection against un.
avoidable hazards, but dangerous
whenever it tends to increase the
hazards. The insurance or guar.
antee of bank deposits tends to in
crease the hazards by eliminating
the value of character as a bankers
asset. 1t tends to make all banks
look alike to the public and put;
| the careful, conservative banker
who is unwilling to make large
promises and take large chances
at a disadvantage. The theory i.
at fault in placing more emphasi:
upon the payment of deposits aftel
bank has failed than upon pre-
venting failure. It's weakness al
ways develops in a crisis"