This section is from the "Practical Banking" book, by Albert S. Bolles.
They are, perhaps, more needed in country banks than in the larger city banks, for the reason that in the former class, which have fewer officials, fraud can be more easily perpetrated. When a bank has a cashier, and only one or two assistants, whose president is a nominal officer, and whose board of directors do not actually participate in the direction, it is not difficult for the cashier to perpetrate a fraud, if he be so inclined. In the earlier days of the National banking system, there was no little opposition to public examinations; happily, this feeling has quite died away. It may be that banks yet opposed to them would favor private examinations. In this connection another thought may be thrown out, namely, that the examiner might be appointed by the stockholders from year to year, and, consequently, act quite independently of the board of directors and officers, and so, very properly, serve as a check on them. It must be remembered that his duties would consist simply in examining and reporting; he would have nothing whatever to do with the management. If such persons were appointed generally, the absence of such a man in a bank would be a notice to the world that it did not wish to do business with the care and circumspection exercised by similar institutions. The appointment of this official, therefore, might well be by the stockholders, thereby making him independent of the president, cashier, and directors, and granting to him such power to examine and report to the stockholders as they should deem expedient.
It may be objected that private examiners would imperfectly perform their duties, and sometimes serve as a blind for wrong-doing instead of preventing it. "Can any better service be expected of them," remarks the objector, "than is now rendered by the National bank examiners, and is not that imperfect?" No time need be wasted in explaining to you the difficulties in their way. You well know they are required to examine too many banks to do their work thoroughly, however competent they may be. This is the chief difficulty in the way of adequate National bank examinations. If, however, they were conducted by order of the stockholders, the work of the examiners could be so narrowed as to ensure the highest degree of efficiency.
After devising the best possible machinery, can perfect security be obtained against fraud? Certainly not. The system of checks may be so perfect that one, or two, or three wrong-minded officials cannot perpetrate them, but, if enough combine, they can. The element of trust cannot be wholly eliminated, and, wherever it is placed, fraud is possible. Therefore, after establishing all the guards which are likely to prove effective, honest men must be employed. It is useless to attempt to make or keep men honest through the magic of machinery. This may, indeed, prevent a dishonest man from accomplishing his evil purposes, but cannot change them. How, then, can a bank secure honest officials? Darwin's process of natural selection throws no light on our inquiry. With some brief thoughts on three of the many sides of this inquiry, we shall conclude our paper. One of the most common evils to which bank officials succumb is speculation. Concerning the prevalence and consequences of it, nothing need be said here. We all know that by far the greater number of bank defalcations issue from this poisonous spring. Possibly it may be said that such defaulters were fated, and if they had not wrecked themselves and, generally, others, too, by speculating, they would have done so in another way. We shall not push the inquiry so far. The clearly-exposed fact is lying before every eye, that speculation of the kind with which we are most familiar, is the most frequent cause of defalcations. The practical question to be considered is: How shall officials be treated who engage in speculation? The other day I asked a highly successful banker the question: "If you found out that one of your clerks was speculating, what would you do with him?" He replied: " I would discharge him instantly." Perhaps you imagine that this banker knew all about speculating, yet it ought to be said that I am quite sure that he does not speculate. Probably there are bank officers who would not employ speculating clerks, yet who speculate themselves. In such cases, they would answer that, having more means, their operations are less hazardous to themselves, and, consequently, their business can be conducted with a cooler head, and without anxiety. Nevertheless, we must face three disturbing series of facts: First, the defalcations of prominent officials possessing wealth, cool heads, and sagacity; secondly, a long and nearly unbroken line of decisions by the courts, declaring the business to be gambling, and contracts of this nature illegal and not enforceable at law ;* and, thirdly, no bank whose officers are known as speculators enjoys the high credit, especially in times of financial distrust and disaster, which is enjoyed by the banks whose officers do not speculate. These are the undeniable facts. What opinion ought to be entertained of an officer who pretty regularly attended horse races, and bet on the results? There was a bank defaulter of this type last year. And what opinion ought to be entertained of an officer in any place of trust, who is engaged in a business which the law plainly •declares to be gambling, and which so often leads to disastrous results? The speculator knows, when putting up his margins, that if he succeeds, some other person must necessarily lose; it is not a business in which both parties can gain, as in an ordinary exchange. In view of the clear, legally-defined nature of speculation, and of the disastrous consequences to which it constantly leads, cannot the banks, when seeking to render themselves more secure against fraud, post better sentinels than speculators at their gates?
* It is well settled that when the parties to an executory contract for the sale of property intend that there shall be no delivery thereof, but that the transaction shall be settled by the payment of the difference between the contract price and the market price of the commodity at the time fixed, the contract is void. First National Bank v. Oskalousa Packing Co, Albany Law Journal, Aug. 8, 1885, p. 118; Gregory v. Wattowa, 58 Iowa 711; Murray v. Ocheltree, 59 Iowa 439; Pixley v Boynton, 79 III. 353; Logan v. Musick, 81 111. 415; Corbett v. Under-wood, 83 111. 324; Bigelow v. Bendedict, 70 New York 202; Irwin v. Williar, no U. S. 499; Thompson v. Cummings, 68 Ga. 125; Barnard V. Backhaus, 52 Wis. 593; Flagg v. Baldwin, 38 New Jersey Eq. 219; Cobb v. Prell, U. S. Cir. Ct. 38 Bank. Mag. 622; Melchert v. Am. Un. Tel. Co. 11 Fed. Rep. 193; Gregory v. Wendell, 39 Mich. 337.