much gold is it to have left a heritage of an honored name and a record of a faithful execution of the highest trust. When the final summons comes to the good banker, he can wrap the drapery of his couch about him and lie him down to pleasant dreams, confident of an awakening into the fulness of his reward.

PAYMENT OF INTEREST BY DISCOUNT BANKS UPON COMMERCIAL DEPOSITS

ADDRESS DELIVERED BY FREDERICK D. KILBURN, EX-SUPERINTENDENT OF THE NEW YORK STATE BANKING DEPARTMENT, BEFORE THE STATE BANK SUPERVISORS' ASSOCIATION, 1905.

It has been suggested that I speak to this convention upon the subject of the payment of interest by discount banks upon commercial deposits. I wish to enlarge my subject by including that of the policy which ought to be pursued with reference to the payment of dividends.

It is obvious, of course, to every experienced banker that that policy in the general conduct of banking business is imperative which will tend to conserve the interests of the institution as a corporation or entity by itself, and which will above all other things insure the safety of depositors. Whatever tends to defeat this general result is contrary to sound banking principles, and will sooner or later lead to trouble, and possibly to failure.

It will, of course, be admitted that one who subscribes to the stock of a bank does so for the purpose of making money upon his investment. This object will be defeated if the policy which I have suggested is even partially ignored. The success of a bank depends more upon intelligent public confidence than upon anything else, for without this, deposits cannot be obtained, and without deposits, money cannot be made. This confidence among intelligent people will be based upon the character and probity of the directors and their management of the institution. If either of these elements is such as to repel public confidence, the institution is doomed sooner or later to failure. This confidence can be inspired only by men of char

acter, and by good, safe, and conservative management. If conservatism is sacrificed to an undue anxiety for larger profits, disaster cannot be far distant.

I have spoken of and written upon the subjects of interest and dividends so frequently that it will be hard for me to do more than substantially repeat the arguments which I have advanced during the last nine years, the time I have been superintendent of banks.

I regard the payment of interest on commercial deposits by discount banks as the greatest menace in banking to-day. This custom has become so general, and the rate paid is on the average so great, that it constitutes the largest item of expense with which a bank has to deal. I do not believe that there is a conservative banker in the country to-day who does not down in his heart deprecate the practice of paying interest on these deposits, and who would not do away with it if he could see his way clear to do so without largely reducing the volume of his business. It is contrary to sound principles of banking, and, while it may in some localities, under peculiar local conditions, not be of that serious character which makes it very objectionable, the influence and example are bad, and unless carefully watched, will grow into proportions which will eventually make it an unsafe practice even in places where to-day it seems to work advantageously.

It is too often the fact that there are men in the banking business whose vision is so contracted as not to extend beyond the narrow limits of their own institutions, and who do not take into consideration anything but the immediate influence or effect which this policy may have upon the institutions with which they are directly connected. There are too many who think that the securing of an extra few thousand dollars on deposit is the one thing to be accomplished. They regard the swelling of deposits, by whatever means, as the one evidence of success which will attract the public. The fact that a course of this kind, if persisted in, may in the long run have a blighting effect upon the banking interests of the state generally seems entirely to escape their notice or consideration. They lose sight of the broad question and its effect outside of their immediate locality, and do not seem to realize that a substantial abolition of the practice throughout the state would make conditions so much better, and banks so much stronger, that their own institutions

would not only be benefited as a part of the general result, but that each bank would experience an immediate and direct benefit through its individual action in doing away with the practice.

This practice of paying interest on commercial deposits has in the last few years grown to such proportions that in many sections of every state it is relied upon as the chief means of attracting deposits. This competition has in many instances, and in many localities, developed into an unseemly scramble, and is often accompanied by undignified, misleading, and in some cases absolutely false advertising. I have many times remarked that the province of a bank, and the underlying idea and intention of its organization, is not to pay interest, but to get interest, to serve the public conservatively, and safely invest the funds committed to its care. Any bank that departs form this general policy enters the field of unsafe practices and speculative adventure.

I would not entirely condemn the payment of interest by banks. My contention is against the payment of interest on commercial deposits—the money used by merchants, tradesmen, and manufacturers in the daily transaction of business. To advocate anything more than this not only would make the task of any supervising officer in accomplishing any reform impossible, but would transform the faint hope of success which may be entertained by the advocacy of the abolition of the payment of interest upon the kind of deposits to which I refer into the certainty of absolute failure.

There are in most states, and especially in the great commercial states of the Union, other institutions organized for the express purpose of gathering and investing the money upon which interest should be paid. In my own state, as in many others, we have savings banks, which are the particular custodians of the money of those whom I have frequently termed the "provident poor." We also have trust companies, with which trust funds and other moneys not used in the daily transactions of commerce may be deposited upon interest. Savings banks are of an eleemosynary character, and best fitted for the care of the moneys which may be properly termed "savings." A bank of discount should not take this kind of money, but leave it to the care and custody of institutions organized for that purpose.

It is entirely proper that trust funds should be deposited in trust

companies, and that a rate of interest based upon existing conditions should be paid upon these deposits. These are not the kind of deposits of which I am speaking. What I decry, and the practice which I condemn, is the payment of interest upon money which is daily employed in the business of the country, and which is therefore necessarily subject to immediate call and frequent and violent fluctuations.

The task of accomplishing any reform in the direction I suggest, as I have already remarked, is a difficult one, and I am fully cognizant of the fact that individual effort will probably result in little or no good. It can be done only through impressing the bankers of the country with the seriousness of the practice, and the advisability of its abolition, or at least its material modification, and with the benefits which would surely follow if this course were taken.

Interest is a continuing and constant charge. It works day and night. It constantly adds to the obligations of a bank, and all banks which to any appreciable extent indulge in its payment must necessarily make corresponding gains and profits in order to meet this everlasting charge. This undermines conservatism. It leads officers and directors into investments which, were it not necessary to meet the interest charge, would not be made. In order to meet this charge there is a great anxiety to loan, and not only this, but to loan at the highest rates obtainable. It is a universal principle in banking that the loans which draw the highest rate of interest are as a rule the least desirable and the least safe. But the loans must be obtained. Good, conservative, gilt-edged loans will not answer the purpose; they will not yield revenue sufficient to meet the exorbitant interest rates paid by the bank upon deposits in addition to the legitimate expenses of the institution. Risks are taken which would not otherwise be done, and the whole conservative, sound, and safe administration of the affairs of a bank is gradually undermined, and, before the officers and directors are aware of the fact, the condition of the bank has perhaps become precarious-and all on account of this unwise practice of paying interest upon daily balances, or upon deposits of the character to which I have referred. The depositor himself loses sight of his own interest when he insists upon receiving interest upon the money which he is daily using in the transaction of his business. He loses sight of the fact that, if

the bank indulges generally in this practice, it is more than apt eventually to become unsafe, and to result in loss to himself and his fellow-depositors.

A bank which does not pay interest upon such deposits may loan money at a cheaper rate, the business of the bank will be more conservatively conducted, deposits will be safe, and business and borrowers will be benefited, and the bank in the long run will be ahead. The interests of both stockholders and depositors therefore demand, if not the entire abolition of interest upon commercial deposits, at least a very material reduction in its rate.

The public is most vitally interested in this question, and in the absolute soundness of the institutions with which it does business; for the effect of a bank failure is not confined to the immediate stockholder or depositor, but is reflected upon the entire community in which the bank is located. My observation leads me to believe that there are more banking failures directly traceable to exorbitant rates of interest paid upon deposits than to any other one cause.

In my own state we have communities where the banks pay as high as 4 per cent. upon a large proportion of their deposits. I have again and again called the attention of the bankers of my state to this practice, and have again and again warned them against its continuance. There is no law preventing it, and perhaps no law can be enacted which will prevent it, and a supervising officer can act only when he can demonstrate that the practice has grown to such an extent that it is unsafe and inexpedient for the institution to continue longer in business; and this simply means that it has been carried to such an extent that it has substantially ruined the institution.

I have succeeded in accomplishing some little reform in some places. In the city of Albany, for instance, not long since the bankers came to an agreement that they would not pay interest upon sums less than $10,000, payable on demand. Everybody in the city is satisfied. The bankers themselves are more than pleased with the result which has thus far obtained. I have succeeded in other places in having the rate reduced; but until the bankers themselves realize the unconservative nature of the practice, and the danger to which it will, in my opinion, ultimately lead, there is but little hope of any general reform. My efforts in this direction have been misinter