INSURING THE DEPOSITS IN NATIONAL BANKS BY JOHN SCHUETTE, PRESIDENT OF THE MANITOWOC SAVINGS BANK, MANITOWAC, WIS. I HAVE been asked at various times to draft a bill that should embody an idea of a suitable plan for insuring depositors in national banks, and to explain certain features showing how such a plan could be accomplished. I have accordingly drafted such a bill, and prepared the following argument, which will give all a better opportunity to acquaint themselves with the plan, and will enable those more directly interested to determine how such a measure would affect their own interests. I am no attorney, and do not presume to believe that the act I here offer is perfect. I think, however, that it is sufficiently clear to convey its intent. "We have the safest currency on earth. Now let us make our deposits as safe, and then our banking system will be unexcelled." Through the law of averages, every interest can be insured against loss, and nearly every interest is insured. The first step was insurance against loss by fire. It proved so successful that insurance was extended to many other lines-against loss to ships, cargoes, etc., by the elements of nature; against loss by accidents or death; against loss by failure of a creditor; against burglary of banks, and loss from dishonesty of employees. We can, indeed, insure ourselves against almost any kind of a loss except that of our most valuable asset, our savings or surplus money. Whether we keep our money in our pockets, or hoard it at home, or deposit it in banks, we are liable to lose it. The constant fear for its safety hangs like a pall over nearly every one of us, and when bank failures are frequent, this fear breaks out into a panic which seizes the whole population and carries ruin in its track. It seems impracticable to insure the money of each individual in his pocket, in his house, or in his bank. The only practical and safe way is to deposit all surplus money in banks, and then let the banks insure all such deposits in total. This can be done in two 149 ways. Insurance corporations may be organized to insure bank deposits. This, however, could be done only at great cost, and even then it would not inspire the depositors with that confidence so essential in removing all panicky fear. The second plan, and the only one which deserves consideration, as it is the most convenient, the safest, and the cheapest, is that of a bankers' mutual insurance plan under government control. The government might establish such a plan with the stroke of a pen, to speak in common parlance, and with but little extra expense; while corporations would have to spend millions to get the business, and they would require many years to get it all. There seems to me to be but little doubt that, unless a mutual plan is adopted, insurance corporations will be organized in the near future to insure the deposits in bank, and practically every bank will be forced to take insurance of this kind, though under what disadvantageous conditions! The cost would be double that under the plan I am about to propose, and the depositors would not have the same feeling of confidence by any means that they would have if the insurance were under the control of the government. It may be argued that the insurance of deposits should not be compulsory, but voluntary. Freedom in this respect may be permitted, and the banks that are insured might be designated as secured national banks. But would not competing banks in the same locality be compelled to insure its depositors, till finally all would have to come into the mutual plan, whether it were optional or compulsory? The chief objection to this insurance is that at first, and perhaps for some time, the number of banks to join in the mutual system might not be sufficient to insure unquestionable success. The main element of safety in any insurance lies in the large number of risks, spread over a large territory, within the shortest possible time. Thus the desired general average is secured. Such an average would be immediately secured under the compulsory insurance plan, since it would embrace at once every bank; and the prospect of success from the beginning would be much brighter. The direct benefits derived from the mutual plan would be, first, that a bank would be secure against loss of deposits in its reserve or in any other bank; second, that deposits would be largely augmented when it was known that they were perfectly safe; third, that a smaller cash reserve would be necessary. This point is well illustrated in a circular by Horace Lloyd, cashier of the National Bank of Phoenixville, Pa., in which he says: And now I will show that the depositors themselves would be indirectly the ones to establish the insurance fund. Take for example $100,000 of deposits. Most banks (those outside of the redemption cities) are now required to keep a reserve of 15 per cent. of their deposits, which would be $15,000. I propose to reduce this to 13 per cent., $13,000, thus releasing, $2,000; which sum, invested at 5 per cent., would yield per annum $100, which is just the amount of the insurance tax. Could anything be simpler? In fact, a reserve of even 13 per cent. would not be necessary, as such a thing as a run on a bank would be unknown. All the reserve a bank would need would be sufficient funds to do business. If anyone can devise a plan better or simpler, I hope he will do so; but I think the day is not far distant when something will be done along this line. The ever-existing dread of bank runs and stringency in the money market would almost wholly disappear. What a relief this would be to the banker! The much-discussed flexible currency would not require our attention any more, because a money stringency can be brought about only by a loss of confidence in banks. whose depositors are panic-stricken and draw their deposits out of banks to put in safety boxes or to hoard it at home. This is explained by Comptroller J. H. Eckels in his report of 1893, on page 5, in which he shows that in that year, from May to September, 378 million dollars of deposits were drawn out of national banks alone. This was 20 per cent. of such deposits, and the amount drawn from all banks must have been over 1,100 million dollars. He further says on page 24: The financial situation of the past few months was not the result either of a lack in the volume of the currency, of which there is now a plethora, or of a want of elasticity in the present system of issuing it, but arose from a loss of confidence on the part of the people in the solvency of the distinctively monetary institutions of the country. It is worthy of note and of serious consideration that at the very time the scarcity of currency for business purposes was at its height, the volume of currency was increasing the most rapidly. The amount per capita was much larger than in recent years. Under the same peculiar condition of affairs, which marked the monetary situation from May to September, no system, no matter how elastic, or volume |