Rensselaer Semi-Weekly Republican, Volume 41, Number 5, Rensselaer, Jasper County, 25 September 1908 — VIEWS OF AN EXPERT. [ARTICLE]

VIEWS OF AN EXPERT.

Shall Banks Be Made Liable for , One Another’s Debts 2 —- Recognized Authority on Financial Questions Discusses Practical Bearings of Proposed Guarantee Plan. (By George E. Roberts, former Director of the Mint. I The proposal to require the banks of the country to guarantee each other’s "deposits owes its present strength to the financial disturbance of last fall. It is urged as a means of preventing

panics, and there is no disagreement about the desirability of accomplishing that purpose. Most of us agree that a repetition of the conditions which existed last fall should be made impossible, but this is by no means the only way to do it, or the best way. For years the advocates of comprehensive currency reform have pointed out that with $14,000,000,000 of bank deposits in the country and only about $3,000,000,000 of money all told in the country, both in the banks and out, there should be some method provided by wblcb, on the basis of good assets, the supply of-lawful currency could be readily increased to meet exceptional demands, whether such demands were due to seasons of unusual business activity or to alarm among depositors. Their foresight and arguments did not avail, but they are hardly to be swept off their feet now by Impatient zeal for this new, and, as they regard it, Illconsidered scheme. They stand for a complete and scientific treatment of the subject. The guaranty of deposits Is a crude and imperfect remedy at best. It does not recognize or attempt to- cure the defects in our banking and currency systems, but aims only at persuading depositors not to draw their deposits. The losses to depositors by the failure of national banks has become an insignificant percentage, and is growing less every year, as a result of natural, evolutionary progress In banking. The standards are being constantly raised, and the efficiency of official inspection and supervision constantly improved. The true line of development is not by any revolutionary policy, but by holding individual bankers to yet stricter account, and at the same time enabling every properly conducted hahk to readily obtain a supply of currency to meet all demands upon it. The fundamental weakness in our currency system is in the fact that it is not readily responsive to the needs of the country. The legitimate demand for money varies from year to year, and from season to season in the same year. It is a familiar fact that there is a great deal more business to be handled from September Ist to December 31st each year than in any other four months of the year, but there Is no more money in the country unless -gold Is -Imported for the purpose: ' m ~ Would Load to Reckleaa Banking. As a remedial measure the guaranty of bank deposits is not only inadequate, but it Is worse than Inadequate, for It proposes to overturn the principle of individual responsibility by means of which the banking business has been raised to Its present high standards, and upon which all individual and social progress is based. The proposal contemplates that the public shall be relieved entirely from the exercise of judgment and discrimination in the choice of banks, and while it is highly desirable that all banks shall be made safe, to the end that even the most ignorant and confiding may be protected, It is still true that an alert public opinion has great influence In maintaining proper banking standards. We cannot afford to do without that Influence.

Under present conditions the investments, the personal habits, the general character and abilities of the banker are under the constant scrutiny of the community, and a matter of public interest. Notwithstanding occasional instances In which the public has beeii deceived, it may be stated as a general proposition that an unblemished character and a reputation for good buslnesa ability and conservative judgment have been necessary to success in the banking business. The public looks over the Individual who is to receive, and Invest and be responsible for its money with some discrimination, and the elimination of the unfit by the scrutiny and composite judgment of the community la a factor of the highest value In maintaining the standards of the banking business. It is, however, a factor entirely overlooked by the advocates of this scheme.

They calculate the Insignificant percentage of loss to total depoeits under present conditions, and assume that no greater losses would occur after character ceased to be a factor hi the buslneaa, and all deposits were given blindly to whoever would bid highest for them. To the objection that this elimination of character aa a factor In the acquisition of deposits must tend to promote reckless banking, reply Is made that bankers will be deterred from recklessness by fear of losing their own money. The reply misses the point All men are not deterred from recklessness by fear of losing their own money, hot reckless men are now.

v •, I ,w. .... ' as« rule, kept out of the banking budness by the unwillingness of the public to entrust money to their care. Cureful Banking Bent. Under present conditions there are compensations In favor of. careful and conservative banking. There are people who are not influenced in their selection of a bank by the highest rate of interest offered on deposits, and who have their suspicions aroused by the tender of exceptional inducements. They know that such offers put a strain upon the business, and they deliberately prefer to place their money with a banker who will not subject I himself to such strain. These depositors esteem safety above all other considerations, and they are numerous enough to exercise a very wholesome restraint upon reckless tendencies in the business. A hanker now prizes the reputation of doing a safe business, and cannot afford to have a reputation for imprudence and speculative inclinations. And yet, although held in check by these powerful considerations, the pressure of competition carries ths business near the danger line even now. There is too much competition for deposits, and the ambitions of the more venturesome members of the fraternity, and the pace they set, puts the whole system under strain. But what are likely to be the conditions in the business when the public is no longer concerned about the management of a bank, and all the rewards for conservatism and restrants upon recklessness are removed? The considerations which in the past have tended to safeguard the business and advance Its standards would be gone. The public would care nothing for the personality of the banker. Instead of looking to the Institution which received the deposits, the depositor would rely on an outside fund. A banker might bet Ml the deposits on horse races without the fact becoming a matter of any concern to his customers. And how would the conservative, prudent hanker fare under these conditions? The legitimate reward for maintaining that character would be lost to him. He would get no deposits unless he bid as high for them as his rivals, for the government would stand behind the latter, and assure the public that they were just as safe as he. and tax him to make them so. In short the reckless and incompetent peo pie, who are now either excluded from the banking business, or held in check hy the distrust which a discriminating public feels towards them, would make the pace to which everybody else in the banking business would be obliged to conform or get out of the business.

Would Demoralize Bunine... The hardest competitor in any line of business is the Incompetent or dishonest man who does anything to get business. Such people get into the banking business even now, but their number and influence for mischief would be greatly increased if they were backed up by unlimited credit In other lines there may be some question as to the quality or service offered by rivals, but all bankers deal in the same kind of money, and if deposits were made a Joint liability, there is no reason why they should not go to the bankers who offer the greatest inducements -to .attractthem. The careful banker would have no ofT-set or protection against demoralizing competition, arid he would be placed in the strange position of being liable for his competitor’s obligations. All efforts to make it appear that the interests of bankers are on one side of this question and the interests of depositors on the other are untrue to the facts. Nothing that In the long run is harmful to the banking business, that puts it under strain and tends to lower its standards, can be beneficial to depositors or the public. It cannot be advantageous to the community to have its savings and working capital pass into the hands of the venturesome class of bankers who will bid most for them. The actual waste and loss through unwise Investments would inevitably Increase. It would fall at first on the conservative bankers and penalise them. Instead of an elimination of the unfit, which is the true process of evolution, the tendency would be to an elimination of the best Eventually the burden of Increasing waste would have to be borne by all depositors and ths whole community.

Oklahoma Trial Inconclusive. The fact that the first bank failure In Oklahoma after the law went Into effect, was followed by Immediate reimbursement of the depositors, proves nothing as to the practicability of the system In the long run. The fact that the State banks of Oklahoma have gained deposits since the system went Into operation, while national - banks within the State have lost. If true, proves nothing as to the merits of the system. The law Itself requires that all public dejtoslts must be kept In banks that belong to the system, and this provision alone would cause a considerable transfer of deposits and Influence some banks to Join the srstem. The real test of the policy will come In Its Influence upon the banking business In the long run. Will it tend to secure more careful end prudent Investment of the vast sums which the people of the country keep In banks, or will Jt tend to weaken the personal responsibility for these funds and divert them into Incapable and wasteful hands. It la a superficial view which lays all emphasis upon the Immediate results of tb« law and gives no consideration to its violation of fundamental principles and the consequences which most follow.