The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1934-02-06
Liberal Viewpoint
BY DIR. HARRY ELMER BARNES

TN the light of our tough and bitter experience
L with American banks since the World war,
we are likely to welcome anything which even
appears to assure greater solvency ana oePeno-
ability More than IL 900 banks closed from lSzO
to the time of the great epidemic at the enc Oh
February, 1888 More than five billion collars
were lost to depositors either temporarily or per
manently. If we were to include frozen assets
and still closed banks the total loss would nave
to be placed much higher.
II was inevitable that something drastic
would have to be done to prevent the recurrence
of such calamitous ineficiency and dishonesty
as that which characterized our banking opera
tons in the fifteen years before Mr.. RooseVeiC
Inauguration. The most direct response to this
need for action was the GlaSS-Steagal Dill,
which was signed by the President on June IT,,
1888.
The portion of this act which is most i'm
mediately related to the future protection Of the
American people in the banking field is that
which proposes to guarantee bank deposits.
From Jan l, 1884, to July l, 1884 the United
States government and the participating banks
proposed to guarantee all deposits up to $4,000.
On July |, 1884, the permanent plan will be in
stalled Then deposits will be guaranteed 100
per cent up to $4,000, rs per cent between
$4,000 and $4,000 and so per cent above $4,000.
A IL member banks of the federal reserve sys-
and nonmember banks may join if they meet the
conditions imposed. To effect this guarantee, a
sum of around $425 100000 will be raised, con-
tributed about equally by advances from the
treasury of the United States and the federal
reserve banks and levy of one-haf OF l per
cent of the deposit liabilities upon the other
banks which participate. On the basis of reason
able probability, the losses each year are likely
to run something over S30O,O0OOO
This would seem all to the good to the casual
observer, but the whole plan is bitterly attacked
in an article in the American Mercury, by H.
Parker Willis one of our foremost authorities
on banking and severe critic Of the banks IN
relation to their past follies. His criticism of
the deposit guarantee plan is not based upon
any affection for our bankers.
In the first place, Professor Willis points out
that we are only trying at the best to lock the
stable door after the horse has walked out In
fact in the case of commercial banks the horse
symbolizing actual deposits, was never in the
stable. If we want to act sensibly, the thing
to do now is to put up an effective fence around
the lot where the horse has strayed
In the second place, the whole guarantee.
scheme is manifestly unfair. In any sensible
readiustment of our banking scheme, the dis
honest and inefficient banks should be penalized
for their delinquenceS while the honest and
efficient banks should be rewarded. The pres
ent guarantee plan reverses this whole process
1t seeks to compel the solvent banks to pay the
debts of the insolvent. Bankers who have been
conspicuous for integrity and shrewdness must
now be punished by coming to the rescue OF
simpletons and crooks
In the third place, the guarantee plan is
more likely to destroy banking than it is to aid
our banking system, thus, in the end, running
the very depositors whom we aim to protect.
The new guarantee plan will inevitably require
the average sound bank to devote half or more
of its annual dividends to the payment of ths
losses resulting from the failure of other banks.
1t is a very optimistic person who believes that
our private banking system will long endure un-
der such conditions.
Professor Willis is not opposed to a deposit
guarantee, but he contends that it must be made
in scientific and discriminating fashion. What
must precede any sane and successful guarantee
of bank deposits is a complete reorganization OF
our whole banking system.
WE have already divorced investment bank
w ing from commercial banking. We must go
one step further and separate commercial bank
ing wholly from the savings deposit business.
Let the investment banks handle bonds,
mortgages and other longtime capital obliga-
tions. No guarantee could be expected here. It
is all an investors risk. In the second place,
commercial banks should be prevented from
having in their portfolios longtime paper. If
commercial banks are limited to the handling of
Short-time paper, representing the ability of
borrowers to meet debts promptly at maturity,
there will be no need of guaranteeing deposits
in these banks.
Only in the case of banks that are based
upon savings deposits is there any call for a
guarantee of deposits, and this should never be
established until such banks are compelled to
refrain from commercial banking operations
When they are thus restricted, deposit guarantee
would be both logical and safe.
In this fashion, we could have deposit
guarantee where it is needed without wreckng
the whole banking system through attempting
to guarantee deposits where such action is i'm
possible unnecessary or unjust.