Evening star., 1933-05-27
PANIC CAUSED BANK
GUARANTEE PLANS
Proposal to Insure Deposits
Followed Crisis
in 1907.
Special Dispatch to The Star.


NEW YORK, May 27.-The swift and
destructive panic in 1907, which COM
pelled the use of scrip and clearing
house certificates and limited banking
accommodations In many sections Of
the country. developed the idea of q
guarantee Of bank deposits. This took
form In 1908, first In Oklahoma, spread
ing subsequently to the States Of Ne
braska, Mississippi, South Dakota,
North Dakota, Kansas, Texas and
Washington.
The data covering the movement IN
these States has just been compiled by
the Economic Policy Commission of
the American Banking Association, of
which Col. Leonard P. Ayres is chair
man.
Exploiting of Guarantee.
In Oklahoma. Nebraska. Mississippi,
South Dakota and North Dakota it was
compulsory for all banks operating
under State charters to adopt the de-
post guarantee plan. In Kansas, Texas
and Washington it was optional. Nat
urally there was sharp distinction in
the matter of deposit growth, in the
early stages of its operation, between
the State banks. whose resources were
insured, and the national banks which
continued to function on old lines. This
is a sequal to the insurance plan that
bankers at present cannot overlook,
for it is clear to them that the public
In its present state of mind will seek
what it believes to be the greatest
amount of protection and will be at
tracted by those banks that insure or
guarantee deposits, even II they are
known to be less well managed than
others that may prefer to remain inde-
pendent of any supporting scheme.
The temptation to exploit the guaran-
tee by banks that have come under its
shelter has always been strong. Tnere
is no evidence that 1t would be less
so in any new era OF banking IN
some of the States. notably Texas, all
of the banks in the guarantee fund at
one tine displayed signs reading
guarantee fund bank" They were
allowed to advertise the statement that
no depositor had ever lost dollar IN
a guarantee fund bank in that State.
This was before 1920 After that year,
and before 1925, $50 guaranteed banks
had failed and the final liquidation re-
suited in net losses of $4,000, 600.
An illustration of the way IN wnich
the guarantee fund caused boom IN
State banks is found in the experiences
of Oklahoma and Nebraska. In Okla
homa the number of State-chartered
banks. after the application Of the
guarantee law, rose in three years from
37o to 685, and in Nebraska, between
1911 and 1920, from CAT to over 1000.
| In the former State many national
banks took out State charters, fearing
| the loss of deposits to competitors who
were operating under guarantee. There
was relative increase in deposits OF
guaranteed fund banks. In the case OF
Nebraska funds came from other states
whose banks were not guaranteed.
Naturally deposits of national banks
dropped
In Mississippi, where there was not
| the initial excess of banks as in the
other two States, only moderate gain
| in State banks and q smaller decrease
in national banks occurred. The public
there, as elsewhere, displayed decided
preference for the insured institutions.
In South Dakota the increase in State
banks from 1915, when the plan was
adopted, to June, 1920, was from 486
to $50. The increase Of Is per cent
in their number compared with q gain
Of 146 per cent in deposits, or double
the increase in the deposits of the ma
tional banks In North Dakota the in
crease in State banks, between 1917 and
1920 was only from sos to TIT, or less
than the gain in national banks, though
the expansion of deposits was twice that
of the latter. In Kansas the number Of
State banks In 1909 was 757 and three
years later 800, but with only o mod
crate increase in deposits.
Two Contrasting Periods.
There are two separate and con-
trasting periods in the history Of State
guarantee of bank deposits The first
covers the years between the inception
of the idea in 1908 and 1920; the sec
ond the period from 1920 to 1925, and
tn following five years, during which
practically all efforts at guaranteeing
deposits were abandoned. In the first
portion Of this banking era conditions
favored the banks. There were few
bank failures. This was fair weather
period. The assessment which the
banks paid to establish a reserve fund
was sufficient to cover the small losses
incurred. The insurance plan at this
time was generally acknowledged to ba
a great success. Not so with the second
phase, which began with the tremenA
dous defation in agricultural products
after the war and the break in thu
speculative boom in oil in the South
west. Then it quickly collapsed.
fCODyripht