12. Reasons For And Against Paying Interest On Deposits

Foreign banks pay interest on general deposits, and the practice is becoming more common to pay interest on them in this country. The reasons for and against paying interest will be briefly stated.

First, because it is right to share with a depositor the profits earned on his deposit. The bank that receives his money lends it, or a portion, receiving a profit thereon; why, then, should it not, after retaining enough to reimburse itself for all the expense of management, lending it, etc., share in the residue with the depositor who has thus furnished the bank with the means whereon a profit has been earned?

Second, because the trust companies and private banks and bankers pay interest on them, and Other banks must do so in order to get and keep them. This is an unanswerable reason and goes to the heart of the matter. Depositors are drawing more and more toward the trust companies, because they are willing to share the profits which accrue from lending them, with their borrowers. Many individuals keep two accounts: one with a trust company in which they put the cream of their deposits those which arc the least disturbed or used; and another account with a bank where they keep their skim milk or active deposits, - those which are constantly fluctuating and therefore are of less value. Depositors can be prevented from skimming off the cream from their deposits in deposit banks and putting it in the trust company churn, only by offering inducements strong enough to lead them to do otherwise. Yet if banks begin to give a depositor some compensation, others are likely to find this out, and make similar demands, and the practice of paying interest will become general. This, therefore, is the problem confronting many a bank to-day. If interest on deposits is not offered and paid, deposits will inevitably slip away and go into the trust companies; if interest is paid on any deposits, the practice will grow fast and soon spread to all depositors.

Third, depositors are paid by foreign banks and bankers, why should banks in this country refuse to pay them? Furthermore, it is certain that if they arc not paid they will float away more and more to the trust companies and private bankers. For a long period banks and bankers in every part of Europe have paid interest on deposits, and they have wondered why American depositors were so slow in making similar demands of their depositories.

Fourth, the last reason for paying them is, banks demand interest on their deposits when kept in other banks, why should not their customers make the same demands of them? How illogical, it is contended, for them to demand the payment of interest on their deposits and decline to pay it over to those from whom such deposits originally came. For it should be remembered that the deposits in the New York city banks, for example, belonging to the country banks, do not in truth belong to the country banks, but to their depositors. If, therefore, interest is received by country banks on such deposits when they are lent, the reason for demanding interest by their depositors in turn may be applied with equal force by them. There is a law on the statute book of Pennsylvania permitting the banks of that state to receive interest on the deposits of a bank which are kept in another bank, but forbidding it to pay interest on deposits to the individuals to whom such deposits truly belong. This rule, therefore, works only one way; a more illogical law was never enacted.

Having stated the reasons why interest on deposits should be paid, we will state the reasons against paying it. First, banks will take greater risks in lending them in order to earn the interest they have promised to pay This argument is regarded as possessing so much virtue that some states forbid by positive law the payment of interest on deposits. This law is supposed to be the out-come of hard, disastrous experience. It will he easily seen that if a bank agrees to incur an obligation of this nature, it is likely to be more eager to lend its funds, in order to earn the interest on them that must be paid, than it would be did no such obligation exist. And this is founded on long experience.

Second, banks will not do as much to accommodate their depositors in the way of lending them money. This reason clears up the conduct of many depositors in not demanding interest on their deposits. The relation be tween hank and depositor is reciprocal; it is not a onesided arrangement. If a bank pays no interest on deposits to a customer, it expects to square the account by making large loans, to him, or at the most favorable rates of interest. Customers understand this and consequently many are quite content with matters as they are. Again and again, when money has been scarce and the rates very high, banks have continued to lend to heavy depositors, who were also large borrowers, at the old rates, because they kept large balances. If a depositor should ever reverse his practice and demand interest, the highest rate he can get, his bank will also reverse its practice and exact the highest rate of interest of him at all times. The conduct of both springs from the same source, is governed by the same rules, and is as clearly justified on the one side as on the other. There is no difference between the two in motives and practice.

In Great Britain the borrowers of money are not so dependent on the banks as borrowers are in this country. They make their notes and take them to bill brokers, who in turn negotiate them with the banks. It is true that the business men in the United States are getting more and more in the way of making notes and giving them to bill brokers to sell, and of depending less and less on banks for pecuniary assistance. When they become strong enough to break away entirely from banking institutions as borrowers, and intrust themselves on the great ocean of credit, feeling sure that the bill brokers will be able to raise at all times all the money they need, then they doubtless will demand and expect to receive interest on their deposits, the same as men of business in other countries. Until that time comes it is a question of the deepest import to a depositor and borrower whether he shall demand interest or not. On the whole, he doubtless has acted wisely and has received an adequate return thus far in not demanding any return in the way of interest on his deposit.

The payment of interest on public deposits rests on a somewhat different principle. First, the use of such deposits is well known, for the laws and practice define the times when the state, city, or other municipality must pay its obligations. A bank can, therefore, lend them to the best advantage. Moreover, municipalities do not ask for many favors of banks, as they borrow usually on bonds running for considerable periods. The public should insist on proper security for their deposits, though this obvious requirement has not always been observed.