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THE CHICAGO BANKER
July 4, 1908]
afforded the depositor, should be suddenly withdrawn without notice to the depositor. What would become of the safety which he supposed had been his? Would this be justice to him ?
If the plan is forced upon banks there is no reason why it should be withdrawn from a bank, for the very safety of the depositor which was the end in view, would be destroyed thereby.
The larger financial institutions of the country are opposed to deposit insurance because they claim the advantage they now have over their smaller competitor would be lost, but there should be no discrimination between banks on account of volume of business done. The bank failures of most disastrous and far-reaching hardship have been those of the larger banks and not of the smaller; but a very likely result of the plan would be the decrease of capitalization to the minimum allowed by law. At present, strong banks point with pride to their large capitalization and earned surplus as an indication of their financial strength and the security to depositors. But if all are going to be insured equally there will be no necessity for large capitalization, and it will be reduced to the minimum that greater dividends may be declared, and the dividends certainly would be declared to the stockholder rather than added to the surplus, for it will add none to the security to depositors by remaining in the business, for under the plan each one is alike responsible for the other.
Those opposed to the plan have argued that if deposits are insured by the state or nation why should not the state or nation also insure the loans of a bank, assuring it that when it loans a sum of money it will be repaid without loss. But will not a bank in reality be insuring itself, quite a goodly portion of the loans to itself? A goodly proportion of the deposits in a bank is due to loans made to those who in turn deposit it in the bank. When the bank would make its annual payment toward the insurance fund it would be paying in a sense insurance for the money it has loaned.
It is admitted by the advocates of the plan, that an early result would be the organization of many banks by speculative promoters; but it is argued that the supervision which is designed to go with the plan would soon weed out the speculators.
Another objection is that of a loss to banks in having to pay out annually a portion of their funds to meet losses of banks with which they have no connection; that the law borders on paternalism and that no bank should be held responsible for losses incurred by other banks through their own mismanagement. A similar situation would be that of the railroads if legislation was enacted requiring all railroad companies to contribute annually so much for each passenger carried during the year, the payments to this fund to be held to pay claims for injuries and loss of life by accidents on railroads.
It is a noticeable fact that in the bank failures of last fall not a single bank had to suspend which had been doing a plain, straight, legitimate banking business. Those who were promoting real estate speculations, corners in ice, copper, and oil, or the consolidation of the steamship service of the globe, were caught, and after all it was a good thing. We all felt pretty sick for a time, but after we got over our first attack of hysteria we realized that the atmosphere would be more clear after the smoke rolled away.
(To be continued in the July nth issue of Ti-ie Chicago Banker )
The Ozark Trust Company, of Springfield, Mo., is the title of a new institution being organized with a capital stock of $500,000 by James R. Folts and others.
charges? He would have been accused of jealousy and attempting to destroy the work of an energetic management, and would no doubt have given the accused institution more advertising than he would have done harm.
The argument for depositors’ insurance implies a doubt of all banks. It is a reflection upon the honesty and good intention of every banker. By advocating the plan the weakness of our present system is admitted, but the plan instead of curing would only provide a counter-irritant.
All of the arguments advanced admit that the present methods of supervision are inefficient and could be made more perfect. In fact the principal argument is that the efficiency of the present system would be so radically improved that a bank failure would be practically unknown.
Is it necessary then for us to pay in from one-tenth of 1 per centum to 1 per centum of our average deposits in order to get a more efficient system? If the better supervision would be the result of a depositors’ insurance fund, why can we not have the supervision and reduce the losses, without the fund?
Would you not prefer to pay several times the present cost of your contribution to the present bank commission and have your examination effectual, and know that you were paying for your own protection, and not having to contribute to the failure of some other?
The insurance of deposits by legislation was introduced at a special session of the legislature of Kansas a couple of months ago and defeated by only one vote. The opposition to the plan favored the guarantee through the organization of an insurance company, rather than by any other method. But who is to guarantee the insurance company? What is to prevent methods of high finance, as shown in the investigation of certain life insurance companies a few years ago, being introduced into this field of insurance and in a time of need the funds of the company being swallowed up in unwise investments?
The argument is made that the plan would compel bankers to be careful whether they wanted to or not, but we fail to see how it can compel any more than at present, if inspections were frequent and thorough enough.
Another argument, that the assets of an insolvent bank would not necessarily have to suffer the great depreciation in value that is so often the result of the failure of a bank; that the guarantee fund, after having paid depositors, would hold the assets until such time as a just value could be realized therefor. But many insolvent banks with non-liquid assets would tie up quite a goodly proportion of the guarantee fund, for the length of time of receiverships has been shown to average about four years, and is not a matter of a short time.
The argument that it would keep down unsafe loans which furnish the material for panics and thus reduce the number of failures, -will not hold, for we fail to see how the simple installation of the plan would work any reformation in the manner of loaning; this can only come through more strict supervision, which can be possible without the plan.
The sole reason for runs is lack of confidence. During the panic of last fall it was confidence that was needed and not currency. An argument for the plan is that it ■would serve to calm that disturbed condition of mind which starts men into blind runs to withdraw their deposits. A more strict supervision will eliminate these weaknesses of our banking system which disturb confidence and cause runs.
The argument is advanced that to enforce the requirements of the laws governing banks insured under the fund, in case any bank exceeded the limitations of the law, the benefits of the fund would be withdrawn from that bank. Suppose through some ill-advised management the protection which had formerly been
Depositors’ Guaranty by Legislation
(Continued from page 13) fund for the payment of losses of depositors in insolvent banks by the payment of each and every national bank of one-fiftieth of 1 per centum of the average annual amount of its deposits; and further provided that any state banking institution be allowed to make the deposit the same as national banks, and it should submit to the examinations of the Comptroller of Currency, and should benefit from the fund the same as national banks.
Oklahoma has attracted attention to itself by the passage of a bill insuring depositors, and is the first state to pass such a bill. The Oklahoma plan, which went into effect on February the 16th, requires all banks other than national, which may avail themselves of the law if they wish, to pay annually 1 per centum of its average daily deposits to the depositors' guarantee fund less the deposits of state funds properly secured, and that the amount in the guarantee fund shall at all times be kept equal to this limit.
A few insurance companies have also undertaken to write policies insuring depositors. Owing to the certainty of the ratio of losses of insolvent banks calculated on a basis of previous years, it is argued that a rate should be fixed as sure and certain as the method of calculating premiums in payment of life or fire insurance.
Let us see, for example, how one of tnese plans, say that of the Oklahoma law, would affect banks other than national in California. On March 14, 1908, the total deposits of commercial, savings, and private banks were in round numbers four hundred forty-three million dollars. An annual payment into an insurance fund of one-tenth of 1 per centum would require nearly a half million dollars per annum. If California banks, other than national, were to pay the loss to depositors of the California Safe Deposit and Trust Company, which closed its doors last October, owing depositors practically nine million dollars, and which will not pay to exceed fifty cents on the dollar, and perhaps not that, it would take nine years of an annual payment of one-tenth of one per centum, or what is more probable, extra assessments would be levied up to nine-tenths of one percentum, to meet this one failure alone. One-tenth of one percentum of the deposits of California banks on March 14th would have been equivalent to about seven-tenths of one percentum of the total capital of its banks.
In the financial statement as rendered to the bank commission there is a line calling for “Other Liabilities.” Would it be possible for a bank to truly and certainly state in this report just what its other liabilities might be, if each one is to be liable for an assessment to pay losses of other banks which might be found insolvent?
An argument for the plan of deposit insurance is that it would bring into circulation a large amount of hoarded money, some one having estimated the amount hoarded to be about fourteen dollars for each one of the eighty odd million inhabitants of the United States.
Writers favoring the plan of deposit insurance advance the argument that it will result in stricter supervision, that bankers will watch one another and correct speculative tendencies. We fear, however, that the banker who, mistrusting wrongdoing on the part of his competitor, and reporting same to the bank commission would be very much in the same position as the small boy in school who tattles on his playmate.
Perhaps it is the fact, as was stated before the special committee of the legislature, that San Francisco bankers have known for fourteen years that a certain bank there which failed had been in a failing condition during the entire time. But what would have been the result if one of them had made public his