The sponsors of deposit guaranty maintain that banks ultimately pay dearly for all losses to depositors, because failure causes such discredit and suspicion and consequent falling off in business, that in one year banks lose more than it would cost to maintain a safety fund for many years. These losses come to banks that are prudently managed as well as to those under suspicion. To protect bank deposits in 1914-1915, clearing house loan certificates costing 6 per cent interest or more were taken out, and the government made nearly $3,000,000 on the emergency currency issued; at present the rediscount rate is somewhat of the same nature. It cannot be assumed, however, that these costs would be wholly, if at all, obviated by deposit guaranty.
Bankers maintain that the additional earnings from increased deposits and business would not be nearly enough to sustain the burden of deposit guaranty, and that the actual losses to depositors from bank failures are too small to warrant so drastic a remedy. The losses of national bank depositors from 1881 to 1917 were $77.5 million, and the average percentage of losses of depositors to total deposits each year for that period was .023 per cent. The losses for 1917 were $369,000 out of total deposits of $12,769 million. Were failures not concentrated in certain years and often in limited localities, the answer that the losses after all are inconsiderable and do not warrant the expense of maintaining a guaranty fund, would suffice. It is the individual distress of an unwitting depositor, however, that calls for help.
Probably the most telling argument brought against deposit guaranty is that it puts all bankers on the same level, making the deposits in new, inexperienced, reckless, or dishonest banks as safe as deposits in old, proved, conservative, and honest banks; removing all incentive for developing good-will and reputation for sound banking and for accumulation of substantial surpluses; making liberality in extension of loans and payment of interest on deposits the chief inducements to depositors; taxing good, competent, experienced, trained, and conservative bankers in order to pay the losses wrought by the incompetent, inexperienced, untrained, and reckless bankers; giving the unscrupulous and reckless banker the competitive advantage and thereby lowering the personnel of the banking world; and, finally, stimulating the establishment of new, small, and speculative banks since they (at least in Oklahoma) are as safe as the old, well-established institutions.
This argument is largely personal and is offered by the older, better, bigger banks, which naturally do not wish to be put on a level with the other institutions. It ignores the point of view of society, which rises above personal advantages and weighs deposit guaranty as to its net balance for good or evil in society as a whole.
This argument is also much weakened by comparison with the actual facts of deposit guaranty. Depositors have small knowledge and ability to pick the safest banks, and rely largely on government supervision; bank supervision tends to reduce bankers to the same level, and the more severe the supervision the more nearly do they approach the same level. In Oklahoma, where deposit guaranty is in operation, the large majority of deposits are in non-guaranteed banks. In Kansas, which also has deposit guaranty, the banks find little reason for guaranteeing deposits in order to get or hold accounts. The banks are, not in fact, therefore reduced to the same level, and the banker's reputation still counts. Most depositors are at some time or other borrowers at their banks, and they deposit, therefore, where they are best known, with the idea of having a dependable line of accommodation.
It is likewise difficult to show that the actual effect of a guaranty law has been to lower the banking personnel; if the bank supervision is made stringent enough under the law, reckless and fraudulent banking will not develop, and it may raise rather than lower the banking personnel. In fact, an objection often raised against deposit guaranty is that there is a real or supposed necessity of accompanying the establishment of the guaranty system with the grant of almost absolute power to the state banking departments. In Canada and England, where note issue is free, the banks bring pressure to bear on any bank which extends credit dangerously, the Canadian Bankers' Association, by notifying an offending bank that it is issuing notes too freely, the London banks, by discriminating against the acceptances of an overextended institution. It may be that in time the guaranteed banks will undertake such a mutual guardianship, but up to the present time, far from exercising a constant surveillance over each other, they are only too prone to overlook reckless and criminal banking. Where deposit guaranty is in operation government officials, for political reasons, often fail to prosecute offending bankers, particularly when the bank guaranty law is sponsored by the political party in power, which naturally desires to make the law at least apparently successful. The public also becomes less hostile to defaulting bankers and accepts more readily the justification of such bankers, since the depositing public loses no money under the system. The net result is that the conviction of bank officials under the deposit guaranty system is more difficult. To keep the public interested in the prosecution of offending bankers, it has been proposed to levy general taxes to provide part of the guaranty fund.