Within the past few years laws providing for the guaranty or insurance of bank deposits have been enacted in several of the Western states. Oklahoma adopted a guaranty law in 1907 levying an assessment of 1 per cent of its average deposits on each bank in the system to provide a fund for the payment of deposits of all banks that might fail. Provision was made for a special assessment in case the guaranty fund became exhausted by the payment of claims against failed banks. The law was intended to include all banks in the state, but the Comptroller of the Currency ruled that national banks could not participate in the scheme. As a result state banks increased greatly both in numbers and in deposits while national banks practically stood still.
The original act provided for the absolute guarantee of all bank deposits, but in 1909 it was amended to make the system one of insurance rather than guaranty. The new law provided for an annual assessment upon all state banks of one-fourth of 1 per cent of their deposits until a fund equal to 5 per cent of the total deposits was accumulated. Emergency assessments could not exceed 2 per cent of a bank's deposits in any one year. The amended law also limited the amount of a bank's deposits to ten times the capital and surplus, exclusive of deposits of other banks. Seventy-five per cent of the fund was to be invested in state warrants or other securities which are legal investments for state funds. Depositors of a failed bank were to be paid in full immediately after the closing of the bank. If the guaranty fund were not sufficient to meet all such demands, depositors were to receive 6 per cent certificates of indebtedness for the balance of their claims which were to be paid later from the proceeds of liquidation or from subsequent assessments on the other banks.
The guaranty system was subjected to a very severe test in September, 1909, when the Columbia Bank and Trust Company, a state bank having the largest deposits in Oklahoma, including the guaranty fund itself, failed bringing embarrassment to many other banks. There was no panic, however, and no run on the bank. The guaranty fund was not nearly sufficient to meet the bank's liabilities, and after the emergency assessment was levied a large shortage still remained. The policy of paying small depositors first was adopted, and within two months all individual depositors had been satisfied either with cash or certificates of deposit secured by gilt-edge paper.
The guaranty law was changed in several particulars by amendments made in 1911 and 1913. In 1911 trust companies were excluded from the benefits of the act and provision was made for the deposit of the guaranty fund with the banks paying it, a special certificate bearing interest at 4 per cent being issued therefor to the Bank Commissioner. The amendments of 1913 provide that the regular assessment of 1/5 of 1 per cent of deposits shall not be exceeded except for the years 1914 - 1916 when the assessments may reach 2/5 of 1 per cent, but the assessments are not collected until needed. The permanent guaranty fund to be accumulated is reduced from 5 per cent to 2 per cent.
After the adoption of the guaranty law a great many national banks surrendered their charters and took out state charters. Later when all banks were heavily assessed to build up the guaranty fund a considerable proportion of these banks returned to the national system. Since the establishment of the system twenty-seven banks have failed or have been liquidated with the aid of the guaranty fund; in the same period only three national banks failed. The friends of the guarantee system claim that the increased business of state banks has compensated them for the heavy losses they have sustained.1
Several other Western states, including Texas, Kansas, Nebraska and South Dakota have adopted guaranty laws. The system is compulsory upon all state banks in Nebraska, voluntary in Kansas and South Dakota, while in Texas banks may either enter the state system of guaranty or supply depositors with some other suitable form of guaranty. In three of these states the courts have upheld the constitutionality of the guaranty laws. In Texas nearly all state banks have joined the system and it seems to work well. The same may be said of Nebraska. The South Dakota law is voluntary and no banks have organized under it. In Kansas where the law is voluntary about one-half the state banks have organized under the state guaranty system. In opposition to this system the national banks of Kansas organized a corporation in 1909 to insure their depositors. In April, 1913, this company included 79 national banks and 24 state banks whose deposits it insured. In general it may be said that while state banks have increased both in numbers and in deposits under guaranty laws, the deposits of national banks have increased fully as much as those of state banks.
The principal arguments urged in favor of deposit insurance may be briefly summarized as follows: first, it prevents the individual distress that always attends a bank failure; second, it prevents financial panics by assuring depositors of the safety of their funds, and lessens the tendency to withdrawals in a time of financial stringency; third, it increases the volume of deposits, drawing in funds which otherwise would be hoarded by people afraid to trust the banks.1 On the other hand, the opponents of deposit insurance contend that it is unjust to ask the strong, well-managed banks to guarantee the depositors of badly-managed banks against loss, and that such a system would encourage loose and careless banking methods. This objection, however, seems not to be sustained by the experience of Kansas, Nebraska and Texas.2 If depositors in all banks are protected equally, irrespective of management, the chief inducement would be liberality in loans or in interest rates and great waste would result. To prevent reckless overbidding for deposits the guaranty laws of Kansas and Oklahoma provide that the banking commissioner may fix the maximum rate of interest on deposits. One of the chief difficulties of a state system of deposit insurance is the very heavy burden that may have to be borne by the banks when a single large failure occurs, especially when such a failure comes before a considerable guaranty fund has been accumulated. This difficulty would be greatly reduced in a system of national insurance embracing many thousands of banks. Mr. Thornton Cooke, who has made a most thorough study of deposit insurance, expresses the opinion that insurance by private corporations is not the solution of the problem, "if the problem is found to be worth the solving. While such corporations could select risks and limit their size and distribution, it is obvious, nevertheless that if deposits are to be guaranteed or insured on any considerable scale, it will be through the banking departments of the states or, conceivably, of the United States."3
1 Shibley: History of Guaranty of Bank Deposits, p. 5.
Despite the acknowledged success of the guaranty system in a few Western states the plan does not spread. When the Glass-Owen bill to establish the new Federal reserve system was before Congress the question of the guaranty of deposits was discussed, and as the bill first passed the House it provided that a portion of the earnings of Federal reserve banks should be employed to establish a fund for guaranteeing the deposits of member banks. This provision was not favored by the Senate, and as finally passed the law made no provision for guaranty of deposits. If the new system proves effective in mobilizing reserves and in preventing the recurrence of banking panics, and if it proves advantageous for state banks to enter the system freely, the guaranty of bank deposits is not likely to have a wide expansion in the near future.
1 Thornton Cooke: Quarterly Journal of Economics, Vol. XXIV, p. 85 et seq.; also p. .327 et seq. - Printed as Appendix B in State Banks and Trust Companies (Nat. Mon. Comm.).
2 Ibid., Four Years More of Deposit (Guaranty, Quarterly Journal of Economics, Vol. XXVIII, pp. (69-114.
3 Quarterly Journal of Economics, Vol. XXVIII, p. 110 (Nov., 1913),
Bolles: Money, Banking, And Finance, Chs. VIII, XV. Cooke: two articles on the guaranty of bank deposits,
Quarterly Journal of Economics, Vol. XXIV, pp.
85-108, 327-390; also Vol. XXVIII, pp. 69-114. Fiske: The Modern Bank, Ch. VIII. Howard: Money and Banking, Ch. XX. Moxey: Practical Banking, Chs. VIII-X. Shibley: History of Guaranty of Bank Deposits (Prepared for the Senate Committee on Banking and Currency,
1914). White: Money and Banking, Appendix C.