BANK DEPOSITS

Evening Post, Volume CXVII, Issue 52, 2 March 1934, Page 7

BANK DEPOSITS

XBy "Z.")

ABE THEY INSUEABLE ?

U.S. EXPERIMENT

American comment on the Roosevelt laws generally discriminates . between short-run and long;run effects—between the emergency phase of the crisis, and the permanent adjustment phase. What was likely to be accepted as an emergency measure may or'inay not be acceptable as a long-time condition. For instance, not the least among the innovations is the insurance of. bank deposits on a national scale. The American ".Review of Reviews" for February remarks editorially that "this plan of protecting deposits can be defended perhaps as a temporary measure to allay the fears"-of people who are seeking some ." safe " place in which to deposit their money, but "as a permanent plan it can hardly be well defended." This excess of adverbs suggests an editorial dubiety hardly less than that of the depositor of money himself. Is the insurance of bank deposits merely a straw to clutch at for a moment,- or is it a permanent -reform? That is the type of question that the United States will thresh to a fine point now that the emergency] phase is going, and the. reconstruction phase is to hand. The N.R.A. codes have also come to the cross-roads; hence General Johnson's new "twelve points programme to widen the scope of the codes." He is testing public opinion.- Already his opponents have predicted his downfall. . WILL UNSOUND CORRUPT THE SOUND? A Ijanker view of the insurance of bank deposits, otherwise known as the national guarantee of bank, deposits, is that it fails to guarantee. If, by a levy on all banks, a fund is created out of which to compensate depositors who lose their money in a bank that fails, will this, be a check on reckless handling of deposit money by banks? Consider first the more reckless or incompetent of the bankers that are included in a new guarantee scheme. 'Will the fact that all banks are subscribing, in order to insure depositors in each and-every bank, be an incentive to more care, or less care, on the part of the reckless banker in handling his depositors' money? Again, what will be the effect on the depositor himself? If he knows that the levies on all banks are behind a guarantee fund, will the depositor, find in this fact an incentive to deposit his money with the safe conservative bank, or an incentive to deposit with the.bank that offers better terms with less soundness? The conservative, safe banker fears that this question will be answered in favour of his competitor, for a depositor, it is contended, will have more inclination to take a risk with a reckless or incompetent bank if he knows there is a guarantee, than if no guarantee exists. "Without a guarantee, the depositor has every incentive to seek a well-managed bank. The- guarantee weakens this incentive, and, it is contended, increases the banking competition to which the well-managed institutions are subjected. TEXAS EXPERIMENT. .Following up the same line of.argument, it is pointed out that the levy, in any ease, is a subtraction from..the resources of well-managed banks operating at a reasonable scale of profit. As the losses of deposits in unsound banks rise, the levy may well prove crushing to sound banks. In Texas, a Statewide plan of guarantee reached so > high a rate of levy that, while depositors were paid, "the entire bank structure" in the State of Texas became endangered and the plan had to be abandoned. An enumeration of other Statewide experiments in insurance of bank deposits ?cems to offer equally bad auguries for the, new national system. An Oklahoma guarantee "plan demoralised even good bankers by subjecting them to the ruinous competition of iur competent or reckless men, and by supplanting their own sense of individual honour and responsibility with a sense that the.State would take care of their depositors if they did not." ■ ' ■ The negative criticism of the guarantee, of deposits as being merely a scheme for passing money from sound to unsound banks is, of course, not conclusive, but enough has been quoted to show that this kind of insurance has entered, like the codes, on the emergency wave. Has it come to stay? Does it, in the long run, make for sound banking, or for unsound? If the latter, it goes. If the former, then it' is a system that quite likely may extend, for if deposit capital can be economically insured, other forms of for similar safety.