[Volume XXV
THE CHICAGO BANKER
20
be safe to keep on hand less gold than $200,-000,000 (5 per cent of the national bank deposits) which would be little more than sufficient to pay on demand the total deposits of banks that have suspended in the whole country in any one year. Indeed it may be a question if gold, to cover the deposits of at least three of the largest banks in the country, should not be held. This would mean a very large withdrawal of gold from use for bank reserves and a consequent fourfold contraction of credits available for the business of the country. Even if federal guarantee of bank deposits can be justified in the abstract, this immense contraction of credit would make the guarantee very costly to depositors in the aggregate who make up the business interests.
Statistics are not always a safe guide, much less averages and percentages. The statistics at hand since the organization of the national banks, cover institutions which have been subject to the discrimination and careful scrutiny of the public. If through a system of guaranteeing deposits the necessity for such discrimination and scrutiny had not existed, it is impossible to tell what the figures would show, and therefore it is hardly a sound basis for argument to talk of 1-20 of 1 per cent of deposits as the total possible loss from bank failures. From time immemorial banking has been based upon personal credit, whether it has been done with individuals or with incorporated institutions. The capital paid in, and for which stockholders are in addition obligated, and the accumulated surplus have always been looked to as a provision against possible errors of judgment, or the unexpected in business, rather than actual, or even anticipated dishonesty, and there ought to be the gravest reason, which does not appear as yet, before departing from this fundamental principle. The very proposal of a federal guarantee of deposits is a declaration of lack of confidence, and is therefore a departure from such fundamental principle. Depositors, as such are business creditors, no more, no less. They are capitalists.
It may well be asked if so much advantage will accrue to them from the federal guarantee of their deposits, why they should be so specially favored above all others and why the government should not extend its paternal care over the poor washerwoman, the laborer,
We are all proud of our government’s credit but if we should undertake such a reckless use of it as the guaranteeing of all the private and corporate loans in all the banks of our land, for that is what guarantee of bank deposits means in its last analysis, we would certainly come to rue the day. This seems so self-evident that it would be an insult to common intelligence to undertake to argue the point, to say nothing of the unwarrantable waste of time in doing so, but it is said that the government itself would not be the guarantor, but merely the custodian of a fund contributed by the banks. This would also involve a deception of the people at large who would consider regardless of how it was put, that the government was in reality guaranteeing the banks. The utter insufficiency of federal guarantee is surely manifest.
In New York City alone last fall banks closed with deposits aggregating $100,000,000. At that time it was not in the power of any individual or set of individuals or state government, or even of the government of the United States to pay the depositors of these institutions in cash. The United States government at that time did not have at its disposal for such a purpose one-tenth of that amount. No combination of banks could have taken care of that amount in duty to their own respective depositors. The banks closed because they were insolvent, and it matters not what system of guarantee was devised the same thing would happen again.
If the depositors are to be effectually guaranteed their money when wanted, as they will believe, on the principle that what has happened may happen, the government would not
proposed that the federal government should guarantee the bank deposits. Governments are not omnipotent. Let us look for a moment at the position in which such a procedure as that proposed would place the government.
One does not require to be a prophet, or the son of a prophet, to foresee that a federal guarantee of bank deposits would result, not in greater confidence in the banks, but in disturbance of confidence in the government, for it would involve the government undertaking to do something that it could not possibly make good. The only safe way to judge of a liability is to look at the worst side of it. When an honorable man endorses a note the bank that discounts it accepts his endorsement as a statement from him that when the note matures, if the maker of it is not able to meet his obligation, the endorser is not only willing but (unforeseen circumstances excepted) he will be able to pay the note according to its tenor. It is proposed to have the government of the United States guarantee the obligations of the banks amounting to five times the total national debt at the close of the Civil War. Such an undertaking seems so utterly preposterous that one can hardly see how it can be given reasonable consideration. It is calculated to make one shudder to think of the effect upon the public credit and the whole financial fabric of our country׳■ in the event of our government failing to reimburse depositors in time of distrust and panic, or of its requiring to borrow large sums of money for defense against the invasion of a foreign enemy, or even for peace requirements. The effect of panic, war, or any great public calamity upon the banking institutions and their investments is not difficult to foresee, nor the consequent liability of the government under such conditions.
Reputable authorities seem to agree that fiat money, even when stamped with the “promise to pay” of the government, cannot be depended upon to circulate at par, otherwise the “greenback” would not have been weighed in the balances and found wanting. When this country was disrupted on the subject of “silver,” what people hoarded was not greenbacks, or national bank notes, or silver, but gold, which would pass current always and everywhere in our own country and throughout the world.