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The Commoner,
VOLUME 8, NUMBER 34
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they were failing in the state banks and trust companies of Kansas
the decrease being $1,153,026,27 between March 31st and June
Wth.
No amount of criticism of the timid depositor can change the
facts; the people who deposit money want more security than the
laws at present give them. They will change banks to get more se
curity, and, if necessary, they will send their money to another state.
For many years efforts have been made in Congress and in the
various states to secure a law guaranteeing deposits, but the in
fluence of the great banking institutions has been sufficient to pre
vent action. Last fall, however, when the banks by a concerted
action suspended payments on checks, the depositors were every
where brought to a realization of the fact that their deposits are in
fact loans, payable on demand under ordinary circumstances, but
payable at the will of the bank in emergencies. The depositors suf
fered a considerable loss during the suspension of payments, and
they have not forgotten the lesson which they then learned. The
democratic party, being more free than, the republican party to re
spond to the needs of the masses of the people, inserted the follow
ing plank in its national platform:
"We pledge ourselves to legislation by which the national banks
shall be required to establish a guaranty fund for the prompt pay
ment of the depositors of any insolvent national bank, under an
equitable system which shall be available to all state banking insti
tutions wishing to use it."
This principle has been applied in Oklahoma and the results
have been very satisfactory. The average annual loss to depos
itors in national banks during the last forty years has been less
than one-tenth of one per cent of the deposits, and the loss to the
fund in Oklahoma under better regulations and restrictions has
- been absolutely nothing during the six months in which the law
has been in operation.
The republican platform is silent on the subject, and the republi
can, candidate not only does not advocate a compulsory system, but
specifically and emphatically opposes it. He says :
"The democratic platform recommends a tax upon national banks
and upon such state banks as may come in, in the nature of enforced
insurance to raise a guaranty fund to pay the depositors of any bank
which fails."
And then he questions the right of the government to enact such
a lav;, saying:
"How state banks can be included in such a scheme under the
constitution is left in the twilight zone of state rights and federal
ism so frequently rimming the meaning and purpose of the prom
ises of the platform. If they come in under such a system, they
must necessarily be brought within the closest national control, and
so they must really cease to be state banks and become national
banks."
His solicitude for the state bank will hardly impress the country,
for he is quite indifferent to states and their reserved rights when he
deals with other subjects. When Congress is in the control of those
who want to legislate for the whole people rather than for the few,
it will not be difficult to frame a law under which state banks can
avail themselves of the advantages of a federal law guaranteeing
.the deposits of national banks, just as it was easy in Oklahoma to
frame a law which permitted national banks to take advantage of
the state guaranty system. It will also be easy to enact a federal
law which will permit national banks to avail themselves of state
guaranty systems until a national system can be secured. Attorney
General Bonaparte's ruling, whether it correctly interprets the law
or not, would not bring such consternation as it does if the repub
lican candidate favored a law allowing national banks to take ad
vantage of state systems for the protection of depositors, but Mr.
Taft's hostility to all guaranty systems is shown in the objection
which he offers:
"The proposition is to tax the honest and prudent banker to make
up for the dishonesty and imprudence of others. No one can fore
see the burden which under this system would be imposed upon the
sound and conservative bankers of the country by this obligation
to make good the losses caused by the reckless, speculative and dis
honest men who would be enabled to secure deposits under such a
system on the faith of the proposed insurance; as in its present
shape the proposal would remove all safeguards against reckless
ness in banking, and the chief, and in the end, probably the only,
benefit would accrue to the speculator, who would be delighted to
enter the banking business when it was certain ttiat he could eniov
any profit that would accrue, while the risk would have to be as
sumed by his honest and hard-working fellow "
He even pictures dire disaster and declares that "if the proposal
were adopted exactly as the democratic platform suggests, it would
bring the whole banking system of the country down in ruin "
As an afterthought he suggests that a voluntary system miffht
be tolerated, but as his objections to a compulsory system applv
3ust as well to a voluntary system we may fairly count him against
( all legislation which has for its object the guaranty of depositors
As Mr. Taft's argument is that presented by the big banks which'
put their own selfish interests above the welfare of the depositors
and the safety of the community, it is worth while to answer the
several propositions which he advances.
Let us take the first sentence, that "the honest and prudent
banker would be taxed to make up for the dishonesty and impru
dence of others." Is not this true of all restrictions on banking?
Does not the honest and prudent banker under existing laws suffer
in order that the depositor may be protected from the dishonest and
imprudent? If .we had no banking laws at all, and banking was
done by private individuals, the honest and prudent banker would
save the money that he now pays for enforced examinations of his
bank, and he could at times make interest on a part of the money
which he is now required to keep in his vault as a rigid reserve.
But because some bankers are not prudent, these laws place a bur
den upon the good as well as upon the bad, it being difficult to dis
tinguish the prudent banker from the imprudent one until a bank
actually fails.
In like manner it might be said that if all people were careful
about fire, fire insurance rates need not be as high as they are, but
the careful have to pay higher rates than they should because some
are not careful. Life insurance rates are higher than would be
necessary to cover the actual risk if everybody took care of his
health, and here, too, the cautious are burdened because some are
careless of their health. All insurance is open to the same objection,
and yet insurance of all forms is growing, and the insurance of de
positors is growing in popularity more rapidly than any other form
of insurance and, I may add, it yields the largest return on the
investment,
Mr. Taft complains that "no one can foresee the burden which
under this system would be imposed upon the sound and conserva
tive bankers of the country by this obligation to make good the
losses caused by the reckless, speculative and dishonest men," etc.
We have the past to guide us, and we have reason, to believe that
the loss will be less in the future than in the past, because when
banks become mutually responsible for each other's deposits they
will be sufficiently interested in each other to favor better regula
tion and greater restrictions.
What has Mr. Taft done to protect depositors from recklessness
and speculation? While he refuses to protect depositors, he praises
the Aldrich-Vreeland law, which invites speculation and stock job
bing. In declaring that the system proposed by the democrats
"would remove "all safeguards against recklessness in banking,"
Mr. Taft betrays an ignorance of the subject, for the plan does not
propose the removal of any safeguards. In fact, it contemplates
stricter regulations of the banks, and Oklahoma has already made
the banking regulations stricter.
He declares that "the only benefit would accrue to the speculator,
who would be delighted to enter the banking business when it was
certain that he could enjoy any profit that would accrue, while the
risk would have to be assumed by his honest and hard-working fel
low." The present banking law requires that a certain amount of
capital shall be investe'd in the business, and that law would still
stand. To enter the banking business, therefore, a man would
either have to have the capital himself or secure the confidence of
men who had the capital. And this capital, together with the 100
per cent liability, would be a guaranty that the stockholders would
not intentionally select careless officials. Why would a "specu
lator" be "delighted to enter the banking business" under the
guaranty system? He is not relieved from pecuniary obligation,
nor is he relieved from criminal liability. He would have nothing
to gain by carelessness, nor would the stockholders have anything
to gain by indifference.
The chief cause of bank failures is the making of excessive loans
to directors or officials of the bank. This is the fruitful cause of
disaster and it has been impossible to secure legislation protecting
banks from their own officials and directors. Why? Because there
has been no mutual responsibility. When all banks become liable
for the deposits of each, the stockholders will insist upon the enact
ment of a law maldng it a criminal offense for a bank official to
loan more than the prescribed amount to one individual. At pres
ent we have a law prohibiting the loaning of more than one-tenth
of the capital and surplus to one person or corporation, but the law
is only directory. Of course, the comptroller can suspend a bank
if it violates the law, but the law is not enforced, because the en
forcement of such a law would throw the punishment upon innocent
stockholders and upon the community, since the suspension of a
bank inflicts a great loss upon stockholders and disturbs the busi
ness of the city or town in which the bank is located.
The law should make it a criminal offense to loan more than the
prescribed amount to one person and we would probably be able to
secure the passage of a law prohibiting market peculation by bank
officials.
The Oklahoma plan is working satisfactorily. A bank recently
failed m Oklahoma; within forty-eight minutes after the notice of