[Volume XXV
THE CHICAGO BANKER
18
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(5) In view of the small loss to depositors in over forty years of the national bank system—as if that were not in itself a complete answer to their argument—the advocates of a guaranty fund make the further exhibit of ignorance as to banking operations by saying: If this loss is so small, why not go further and give us absolute security ?
Absolute security, indeed. As if anything in human affairs is capable of absolute certainty. Men are not yet perfect and mistakes may be made in our judgments as to the outcome not only of business but if I may add it in this city, even in political expectations. A commercial bank does business with fallible human beings. A borrower of a bank, when in the midst of important operations, may die or a house borrowing of a bank may have an embezzling official and be crippled, or a general financial depression may unexpectedly cut off collections and oblige banks to continue loans rather than force failures, and yet in view of all these things, the banks are asked to give absolute security. Why not ask a clergyman on becoming a pastor of a church to give absolute security that no one in his flock will ever tell a lie, commit an error in conduct, or go to hell fire? Why not oblige the doctors to insure every patient against death?
Banks or any other business enterprises can no more promise absolute security than a father can promise the moon to a spoiled baby. Take the case of a steamship company. It requires cash or security for tickets from its passengers, yet it cannot possibly give absolute security to them. It does a transporting business dealing with uncertain elements in nature and human beings, it can only do its best in overcoming the dangers of the sea with the best obtainable seamanship and good management. Even then in spite of every precaution there are losses. So it is with banks. There are inevitable risks involved in lending idle funds deposited in banks to the active men who use them in productive industry. There
as they do deposits. Of course they do, but even if there were a shrinkage of 50 per cent in the assets there would on liquidation still remain a cash fund of about $1,000,000,000, or more than twenty times as large as any sum proposed by the advocates of a guaranty fund. It is all available for the ultimate liquidation of deposits.
Next, let us consider (2) immediate redemption. No one is now so extreme as to propose the segregation of a fund large enough for the immediate redemption of all deposits. In fact, the withdrawal of any large sum—even 5 per cent of deposits or $215,000,000—from the banks to the treasury where it would remain uninvested is purely chimerical, and if invested in bonds it is of no use as a cash fund for instant use.
Immediate redemption in cash is impossible in any serious crisis because cash is by the very nature of a crisis out of reach. In the panic of 1907 the closed banks in New York alone had deposits of about $100,000,000. During that panic where in this country could that sum in cash have been obtained? And this says nothing of the closed banks in the rest of the country. The Treasury of the United States did not have enough. In fact it was itself in a panic and planning to get the banks to come to its aid when duties fell off.
If other than the failed banks, the latter having been badly managed, had been called upon when the needy business public were pressing them for loans to put up this cash out of their own resources, on top of the demands from country banks in the interior, the panic would have spread destruction far and wide. Such a guaranty system would have aggravated every evil. That is, just when sound banks were stretching every nerve to save legitimate business concerns they would have had their reserves—their means of lending —reduced enormously, solely to cover the mistakes of unsound banks for whose conduct they could in no sense be held responsible.
after the mismanagement of a bank has destroyed its capital, surplus, profits, and shareholders’ liability, can the depositor suffer loss. Is this effective, in fact? That it is effective, is disclosed by the figures, quoted even by the guaranty advocate, that the loss to depositors in over forty years of the national bank system is only 1-26 of 1 per cent per annum. Here, then, we have final and complete proof that the banks do now insure the depositor at the risk of great loss to themselves. On May 14, 1908, the amount of this ultimate guaranty fund was as follows, for the 6,778 national banks:
Capital........................$912,361,919.59
Surplus........................ 555,000,248.14
Undivided Profits ............. 203,108,414.78
Stockholders’ Liability1 ...... 273,000,000.00
943,470,582.51־$1
Omitting deposits in the national banks by the government and disbursing officers to the amount of about $180,000,000, which are covered by bonds, the private deposits amounted at the same date to $4,313,656,789.59. Therefore the insurance fund for all the banks amounts to about 45 per cent of all the private deposits. This shows, of course, that when a depositor is considering the selection of an individual bank in which to deposit, he gets a larger security, other things being equal, from those having the largest capital, surplus and undivided profits.
But an objector will say the banks themselves keep this fund in their own hands and invest it just
1Although the shareholders’ liability is legally equal to the capital stock held (§912,361,919.59), yet it is well known that actual collections fall short of the legal total. Shareholders may have no other attachable property than their shares. The aggregate capital of insolvent "banks finally liquidated was §59,622,420; assessments levied, $36,246,390; collections from assessments, §17,616,404. Thus the percentage of actual collections to capital is in round numbers about 30 per cent. Cf. Table 73, Kept. Comptr. Currency, 1907.