17
BANKER
THE CHICAGO
November 14, iço8\
( Department of Chicago Banker )
An Open Forum Dedicated to the Associated Chapters A. I. of B. in Which to Advance the Great Movement for Independent Action and Universal Membership
banking to pay for incompetence, unsoundness, mismanagement, carelessness and dishonesty.
Is this the way to further good banking—to make bank deposits safe? Here is an illustration used by Prof. Laughlin in his speech before the Illinois Bankers Convention. “Suppose you wanted to encourage honesty and thrift. If a burglar, ‘A’ robs ‘B’s’ house, go to ‘C’ and rob him to pay for ‘B’s’ loss—it will increase the eagerness of all men to be honest and discourage burglary, ‘C’ the successful man, will enjoy paying for ‘B’s’ carelessness in keeping no locks on his house. As ‘C who had nothing to do with the case is penalized, and not ‘A,’ the burglar, the plan will discourage burglary and encourage all to be honest and thrifty, so that they can pay for all the deviltry in town.” This is not more absurd than the proposition before us. In fact it is exactly what this measure proposes to do.
This proposed legislation is opposed to the principles of sound economics. The strength of a system or of any organization depends upon the soundness of its units. It proposes that fallacy of all sound economics, a tax upon the sound to support the unsound, penalizing the successful to support the unsuccessful. This idea might, with reason, be applied to charity, but charity and business as everyone knows do not mix well.
This scheme would take away from the bank management the incentive to make their institution the strongest and most conservative, and from the banker personally the rewards of a reputation for conservatism, sound judgment, and integrity. This scheme strikes at the basis of all banking, trust. Confidence in the ability and integrity of the banker. This has always been the prime requisite to all banking. Under present conditions you cannot operate a bank without it. It is the only legitimate bid of the banker for deposits.
Now they offer a measure that will place all banks on a par for since all are guaranteed one will be no better than another from the depositors’ standpoint. Experience, business standing, reputation for conservatism, large capital and surplus, will count for nothing. The bank that will offer the largest rate of interest or the most accommodations in the way of loans, etc., will be the one that will get the patronage, and that will be the one that will take the greatest risks. The factors that invite confidence in the banker and the bank have no place in this programme. Instead is offered an artificial basis of confidence, the guaranty fund. Confidence would be transferred from its rightful object, the bank and its management, to the government and the guaranty fund.
Let us imagine a bank organized under our present laws. The organizers after providing for adequate capital must select to manage the institution men who can command the confidence of the community, men of known integrity and sound judgment, if the bank is to take its proper place in the confidence of the people. Then after it is successfully launched in its career, every dollar added to its surplus from its earnings, besides adding to its intrinsic strength, adds to its standing with its patrons and the public. Now let us imagine the same institution under the guaranty
First negative debate paper in the Chica{|o-Indianapolis chapter contest at the Indiana bankers convention ::	::	::
all the assets of the bank, the capital, surplus, and undivided profits of the bank, and the stockholder’s liability. These last two items according to the report of the Comptroller for 1907 amount to about 44 per cent of all deposits in national
C. R. WHEELER
Chicago
banks. The assets of the average national bank must shrink more than 44 per cent before the depositor can lose a cent.
If this is not enough then pass laws requiring larger capital; more liability of shareholders, more rigid supervision to see that capital is unimpaired and that assets are kept clean and convertible. Require anything making for greater safety from the individual bank, so long as each stands on its own merits, but place the burden where it belongs, not on the innocent, not on the sound survivors after the unsound and rotten institution has defaulted.
Nothing can be more to the detriment of the depositor than a measure that will result in lowering the standard of efficiency and integrity of the individual banker and the soundness and safety of the individual bank. It is proposed to lev)׳ a tax on all the banks in the national system, to form a fund out of which the losses of failed institutions shall be paid. Now the sound banks would have to pay their proportion of the tax without deriving any benefit from it, as sound banks do not fail. The fund would be solely for the benefit of depositors in weak and unsound banks. This measure you will observe does not provide against losses, it merely shifts the burden and the responsibility. It proposes to penalize all the qualities which make for sound conservative
We are opposed to this scheme for guaranty of deposits in national banks. We hold that it is wrong in theory—founded on misconception of the science of banking, and being wrong in theory it cannot but lead to evils in practice. We predict that, if put in operation, it will defeat the very object for which it is intended—the security of bank deposits.
In the first place the demand for this legislation arises from a misconception. It is the result of a false position, it assumes that the interests of depositor and banker are antagonistic. The advocates of this legislation would have you believe that because the bankers are opposed, almost unanimously, to it, it must needs be in the interests of the depositor. Nothing was ever further from the truth. Are not the owners of a steamship as much interested in its safety as the owners of the cargo? The interests of depositor, banker and shareholder are identical and anything detrimental to one is detrimental to all.
Another misleading statement made by the advocates of a guaranty of deposits is this. They say the depositor gets nothing in return for the use of his money. All he asks is that he get it back when he wants it, that it is the depositor who makes banking profitable. Let us see if this is true. Deposits, as Prof. Laughlin of the University of Chicago has well said, are only the raw material. The banker furnishes the skilled labor that works up this unproductive raw material, without his skill and wise management there would be no profits. Banks have come into existence in response to the needs of the business public. Persons deposit in bank voluntarily because they get privileges, in return, interest on deposits, collection of checks deposited, a chance to get loans, and above all, the banks provide a medium of exchange which is the safest, most convenient and generally used medium of exchange in the world, the check system. The work of exchanging goods done by this medium is greater than that done by all the money issues of the government. The expenses of this check system, and the book-keeping necessary to carry it on are borne by the banks and furnished free to the depositor, yet they say that the depositor is given nothing in return by the banks.
If the depositor wishes none of the privileges of a commercial bank, he can find absolute safety in a safe deposit box. He has himself chosen against this. Absolute safety is impossible if the privileges of a commercial bank are given. The funds must be invested and the banker must deal with finite, fallable, human, man. There is a small element of risk. Sometimes the banker’s judgment is at fault, or his confidence is misplaced. Sometimes an empkryee robs the bank, and sometimes the banker himself is false to his trust, and losses result. Yet the advocate of guaranty of deposits asks for absolute safety as a matter of justice. He asks for what is humanly impossible. Deposits are as safe as the assets are good and all depends on the character of the management.
But they say the depositor should have security for his money; the banker demands security from the borrower.
We say he has security, first the reputation and business standing of the banker, prior claim on