THE CHICAGO HAJVK.E'R
Founded in 1S98
Volumexxv	CHICAGO, AUGUST 29,	1908	Number 9
Nebraska Idea on Guaranty of Deposits Law
comes largely a question of profit in the transaction. There can be no question as to the ethics or the morals in the case. If the ledger account can be made as safe and secure as the bank note with less cost to the banker for securing the account, than the note, as the law now stands, by what right or reason shall he withhold the security or refuse to uphold a law which shall require it? Still following out the analogy between the bank note and the ledger account as a debt of the bank, we find that in Canada they have worked out the problem of the security of the bank note not by the deposit of bonds as the bank note and the government deposit is secured in the United States, but by the establishment of a guaranty, which is raised by the levying of a tax upon the banks which issue them, exactly as is contemplated that we shall levy a tax to secure the depositors’ balances upon our bank ledgers under a deposit guarantee law. So we find that the primary principle of guaranteeing the debt of the bank is not new but is constantly practiced at present by our largest and best established banks; that the bank note and the bank ledger account stand in exactly the same relation to the banker as a debit, and that in other countries the bank note part of the debt is perfectly and automatically secured by the levying of a light tax which in no wise acts as a heavy load upon the banks, surely any law that would provide a similar security for the ledger debt as is now provided by law in Canada and other countries for the note debt, is a consummation devoutly to be wished, is practical in its application and just to the depositor. In my judgment, instead of being an expense to the bank, such a guaranty would be a means of drawing deposits to it which would reimburse the bank many times over for any money cost that such a fund would put upon it. A proper guarantee or insurance system would prevent panics and do away with runs upon banks. People do not make runs upon banks because they want their money, but because they feel insecure. They don’t want their money, they want safety. If they felt that their deposits w'ere insured, and that they would be certainly paid back every dollar deposited in the bank, hoarding of money would be practically unknown and deposits would largely increase. The principal income of a bank is the interest derived upon its loaned funds. The banker wishes to loan as much credit as he can with safety. Greater deposits mean larger business and more profit. A banking system would never deteriorate under a plan that precluded panics and would insure perfect confidence of depositors. The discussion of bank deposit insurance is no longer academic. We are not exploring untried realms. The young state of Oklahoma has already put it into practice with good results. The deposits in the guaranteed banks are rapidly increasing showing that the money is being drawn from its hiding places in the stockings, under the carpets, inside the stoves and other familiar places of deposit in time of panics, and is being returned to the banks where it again is available for business. Our present financial system is admirable in fair business weather. In troublous times it goes to pieces. The unprecedented action of the banks during the last panic saved the day and mitigated the evil but the banks cannot run to cover every time a panic threatens. When
By A. C. Shallenberger
of Alma, Nebraska
upon their books. The banker who takes a deposit from his county, state or national government, and guarantees its return by the deposit of bonds and further pays for it by the addition of interest, does it because he believes it a profitable and proper business transaction. A portion of the money on deposit in almost every bank in the state of Nebraska is drawing interest as an inducement for its being left with the bank.
By what rule of ethics do you decide that it is good business policy to guarantee the deposits of the state or the county upon which you pay interest, and that it is bad business policy or unfair to in any way secure your other depositors who, in case of a loss, would be much less able to endure it, and whose accounts, as a rule, are much more profitable to you than those more favored whom you guarantee. The only answer I can make is that the county and the nation compel the guarantee or you lose the business, and your other depositors are more lenient, and, therefore, in my judgment, are the more entitled to consideration in this matter. The points that I want to impress clearly upon the bankers is that already deposits are guaranteed to a certain extent, and so far as that guarantee extends, it invariably is a requirement of law and not because of any good intention upon the part of the bank, and the proposition that we are considering here is whether or not we shall go a little farther, and under the administration of the proper legal authorities, in some manner apply a guarantee system for the protection of individual depositors as we now so willingly do to our state and national funds. Every bill that has been offered to Congress or the state legislature, having in view the further security of the depositors of a bank that is now required by law, provides for the establishment of a guaranty fund by a suitable tax to be levied upon the banking corporations, prorated upon the amount of their deposits. This also is not a new banking principle when we consider it fairly. There is no banker who will dispute the fact that the bank note is a liability of the corporation that issues it as long as it remains in circulation. In principle, a national bank note in no way differs from the personal checks of the individual depositor on his bank, except that the bank’s note is in effect certified by the United States government, by reason of its being guaranteed by the deposit of United States bonds by the bank which issues it. If a depositor has a credit of a thousand dollars upon the ledger of a national bank, and presents his check and is paid five hundred dollars by the cashier, the bank still owes him a thousand dollars, five hundred in the shape of the bank notes in his pocket, and five hundred on the balance upon its books.
The law now' requires that the bankers shall guarantee the five hundred dollars of indebtedness of the notes, yet the five hundred dollars upon the ledger is just as vital to the man who owns it as the money in his pocket, and infinitely more profitable to the bank which holds it. Why shall we secure the one and not the other. From the banker’s standpoint it be-
I present my view's upon deposit insurance with some diffidence, knowing that the subject is one that has met with a great deal of opposition from representative bankers. Nevertheless, I feel that the question is one of primary importance to us as business men at this particular time, and I am going to discuss it from the standpoint of the material interests of the banker. You have only to inquire of the average man outside of the counter to learn that he already is a warm convert to the creed.
We all will agree that the primary object in the organization of a bank by its promoters is to make profit in the business. Bankers often discuss their interests upon a broader, more philanthropic and ethical plane, but in the last analysis every one is engaged in the business to make money. The profit in the banking business is derived principally from the interests received upon the money of the depositors that is left with the bank for safe keeping. The capital and surplus are but rarely ever encroached upon for the purpose of making loans, hence, it easily follows that increase of deposits means increase of business, and that anything that will tend to enlarge the deposit account and yet not increase too largely the expense item is a sound business proposition for any banker. The banking business is tw׳o sided in that the interest of the depositor in opening his account is for his own immediate benefit, and that of the banker in receiving it is for increasing his own peculiar profit.
I believe that a careful study of the guaranty of deposit question will convince any fair minded man that it can be so managed as to protect and promote the interest of both the banker and the depositor.
As conservative business men bankers are prone to look upon any new idea with suspicion, yet oftentimes a question may come before us seemingly as a stranger, while in fact only an old idea clothed in new garments and bearing־ another name. Our deposits now are guaranteed by both state and national laws. The capital stock of a bank and the surplus account and the individual liability of the stockholders are all guarantees to the depositor that his money shall be returned to him and are required of those organizing a banking corporation by the law of the land, to be held sacred and inviolate and untouched for that purpose. The requirements as to capitalization and the establishment of a surplus are not exacted of bankers by the law that their business may derive airy profit from them but solely as a protection to the depositor who intrusts them ־with his money.
A great many of our deposits already are guaranteed other than by the capital stock, surplus and stockholders’ liability. The United States government deposits certain of its moneys with approved national banks and every bank that obtains the favor is so proud of it that it invariably. advertises it to the public in gold letters upon the windows of its banking office. But the United States government requires an absolute guaranty for the safe return of its money no matter how safe and solvent the bank may be that receives it. A great many state banks receive deposits trom the count)' or the state in which they do business and guarantee the return of that money so received by the deposit of bonds and also pay interest upon the daily balances shown