Another thing, this was a new country and property fluctuated considerably, and we had almost a crop failure in this State for three successive years. On account of adverse conditions, the first few years of the operation of our depositors' guaranty law proved very expensive to our banks, which no doubt caused a number of them to nationalize. However, at this time we feel that our guaranty fund is now established on a solid and substantial basis, and we Our last legisfeel that the future success of our guaranty law is assured. lature passed several amendments to our guaranty law which have proven very beneficial.

I am herewith inclosing you a list of the aggregate individual deposits of our State banks on the date of each call since statehood. If there is any other information that you desire relative to our laws, please advise me.

The data referred to is summarized in a later communication from the same banking department.

A second letter from Mr. Stuart, under date of February 12, 1914, says:

I desire to advise you that the average cost of the maintenance of the depositors' guaranty fund since its inception has been approximately four-fifths of The 1 per cent of the average deposits of each individual bank per annum. highest cost in any one year was 18 per cent of the average deposits.

This department has certainly put forth every effort possible to prevent "wild-cat banking" in this State. Of course at the time of statehood banking conditions in this State were very chaotic, and in the hurry to put the depositors' guaranty law into effect a number of insolvent banks were permitted to come in under the law, and they have caused the most of our grief and loss to the guaranty fund.

I am inclosing you under separate cover two copies of our present banking laws, which contain, in addition to the laws, extracts from decisions of the supreme court of Oklahoma construing the depositors' guaranty law. You will also notice from said law that the total assessments that can now be levied in any one year is two-fifths of 1 per cent of the average deposits of our banks.

A third letter, this time from the chairman of the Oklahoma State banking department, J. D. Lankford, under date of February 25, 1914, says:

In reply to your letter of the 18th instant, I desire to answer the questions contained in your letter as follows:

First. The approximate average deposits and capital and surplus in our State banks, by years, have been as follows:

I am unable to advise you the amount of losses charged against the guaranty fund during each year; however, the guaranty fund has never been fully reimbursed for the loss sustained during these years.

Second. In my opinion the increased business of State banks, as mentioned, compensated them for the losses they have sustained under the guaranty system. Of course you must take into consideration the fact that business conditions have been very adverse in this State during the past three or four years, otherwise the business as transacted by our State banks would have been greatly in excess of what it has been. [Original not emphasized.]

Third. Our banking law provides that each stockholder of a State bank of this State is additionally liable for the amount of stock which he owns in our State banks.

The amendments to the Oklahoma law are published in full in an appendix. Also additional court decisions are summarized in the appendix.

IX. THE GUARANTY SYSTEM DISCUSSED.

The operation of the guaranty system in Oklahoma has been much discussed. Mr. Thornton Cooke, who has been quoted in the preceding pages, visited Oklahoma and evidently investigated the system with great care. He, in his lengthy article in the Harvard University publication, describes the crop failures and the other unfavor able factors set forth in the preceding letters, and says:

Now, a record of nearly 30 bank failures in five years, with almost all of them coming in three years, has not been equaled in the United States for a long time.

* * *

The reasons of the heavy losses, as they have been narrated in the foregoing discussion, may be here summarily restated: (1) The banking department was for a long time in politics; (2) unsound banks were admitted and guaranteed at the outset; (3) the record of bankers has not been properly traced; (4) there has been procrastination in closing insolvent banks and timidity in the face of losses; (5) economic conditions have been somewhat adverse; (6) the guaranty of deposits has relieved depositors of all necessity for care in selecting banks.

* *

It is now evident that the cause of the Oklahoma bank failures was not deposit guaranty alone, but guaranty plus ineffective examinations, insufficient scrutiny of the previous records of bankers, and unfavorable economic conditions following the period of settlement and rapid growth. This is shown by the fact that in other States where deposits are guaranteed failures have been few.

The guaranty system has given opportunities to some reckless and criminal bankers in Oklahoma, but it has not turned honest bankers into rogues there or in the other States we have studied. Deposit guaranty is not stockholders' insurance. Stockholders must lose their whole investment before the guaranty fund suffers any loss, and there is therefore not even a financial incentive for a good banker to become a rascal. He may be tempted by guaranteed competition into an unwonted, perhaps unwise, liberality, but not to a dangerous extent, if we can judge by the present experience of Kansas, Nebraska, and Texas.

It remains to consider what are the best methods of guaranteeing deposits and whether in fact such guaranty is desirable at all. It is unnecessary here to repeat the arguments stated at some length in the previous article, but one suggestion then advanced should be withdrawn. Deposit insurance by private corporations was mentioned as a possible solution of the problem. But this is now evidently not the solution that is to be used if the problem is found to be worth solving. While such corporations could select risks and limit their size and distribution, and while there is an example in Kansas of the successful operation of such a company, 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. The efforts to organize other deposit insurance companies and put them in operation have not met with success. The Kansas example remains solitary.

The stimulus to reckless banking is not the chief danger to the success of deposit guaranty. Kansas, Nebraska, and Texas have so far repressed such tendencies. A greater danger has just been mentioned, the impossibility of limiting the size of single risks or avoiding the concentration of the risks in single localities.

*

Another danger, social rather than financial, is the real or supposed necessity of accompanying the establishment of the guaranty system with grants of almost despotic power to the State banking departments. The guaranty of deposits is so powerful an inducement to depositors, legislators believe, that for fear of its misuse by the incompetent or unscrupulous the banking departments are empowered not only to regulate and supervise banks, but to say what rates of interest they shall pay and whether the citizens shall establish more banks. In some States both these powers are exercised. This may be "medieval" but, as

in the question whether deposit insurance should be provided by the State or by private corporations, it is sufficient to recognize the irresistible tendency in many forms of industry toward State control. If the State can fix the railroad rates, no doubt it can fix rates of interest on deposits. If it can regulate banks, no doubt the power to fix their number and forbid new organizations regarded as superfluous will be upheld. Doubtless the part of wisdom lies in trying tɔ guide this tendency instead of fighting it.

The vital question is whether the public needs greater assurance of the safety of its deposits than can be afforded by the resources of a single bank in a single town. * * * Even in States where banking is soundest the bare possibility of failure and the knowledge of the blight it would bring to business plans and to household life keeps many people from the banks. They can not be absolutely sure. They can not detect the few cases of unsoundness, some or all of which escape bank examiners, business men among the customers, and the directors themselves. There is therefore even in the most prosperous days a good deal of hoarding and, what is worse, a failure to use the modern laborsaving machinery of exchange. Some additional business comes to guaranteed banks even in States of settled economic and social conditions, like Kansas and Nebraska. *

Whether the plan will gradually be adopted in other States depends on the force of the present social tendency to distribute more widely by legislation the good and evil of life. Workingmen's compensation is analogous. The tendency underlying this legislation and the guaranty legislation seems to the writer exceedingly strong. If this is so, a State here and there will from time to time supplement its service of bank regulation and supervision by enabling, if not requiring, the banks to effect insurance in a State-administered fund for the benefit of depositors. (Quarterly Journal of Economics, November, 1913, pp. 75-113. Original not emphasized.)

In the above the quotations are limited to statements of facts and principles, omitting the prophecies and advice.

Mr. Thornton's conclusion is that of the six weak spots developed in the Oklahoma system four of them do not exist in the other States, and therefore are no real objection to the guaranty of bank deposits. In other words

politics can be measurably eliminated from the administration of State bank departments. The records of men who wish to organize banks can be found out. Reasonably efficient bank examinations can be had, and weak banks can be closed without the wasteful temporizing seen that we have seen in Oklahoma. And Mr. Thornton adds:

IS BANK GUARANTY PRACTICABLE?

Can any guaranty plan, however, withstand seasons of bad crops, and can any plan otherwise adequate maintain the interest of depositors in the soundness of the bank? It is by these tests that the guaranty principle must stand or fall.

THE ANSWER.

The answer, in the writer's judgment, is:

First. That it is the function of the people's representatives in the banking department of the Government to look after the banks' soundness, and the situation in each bank is such that at times even the ones who go into the bank's books and question the bank's officers can not ascertain the facts. Such being the case it looks impracticable to suggest that the individual depositors are to be expected to look after the "soundness of the bank."

Second. Most assuredly there is a guaranty system that can "withstand seasons of bad crops." The best one that we as a Nation can provide is a nation-wide system, so that bad crops throughout an

entire State or several of them will affect only part of the area embraced in the system. At no time during our history as a Nation has bad crops affected more than a quarter or one-half of our area. That is the very worst that we should plan to meet.

The answer, then, is that depositors in general can be successfully guaranteed against loss of funds in the banks. It follows that the issue is as follows:

THE ISSUE STATED.

Do the people of this Nation, the sovereign power, desire the establishment of a system whereby they will be protected from loss of funds in the national banks?

Manifestly the self-interest of the people is such that there can be but one answer. Of course, the ruling power does not wish to lose any part of its funds in failed banks; especially is this so when, according to the plan in use in the four States under review, this safety does not cost the people a penny. This has come about in those four States as the direct result of the people's increase of power in the Government. The people in those States have taken to themselves the power to make their will the ruling power in place of machine rule. Self-interest has caused the installation of the guaranty of bank deposits just as surely as gravitation brings down the apple from the tree.

In Oklahoma during the time that the guaranty system was costing the bankers huge sums of money they doubtless would have succeeded in bringing about a repeal of the law had it not been for the presence in the voters of a veto power, the optional referendum. But with that final power in the voters the only thing that was practicable was to reconstruct the system on improved lines. The people once having tasted the benefits of protection from losses from closed banks and being the real sovereign power would not return to the old order in which the State and the municipal governments secured themselves against loss by taking security and then left the people to get along as best they could. Naturally, under that former system the State banking department did not exert itself so strenuously to examine the banks and guard against bank failures as they do now under the guaranty system. In each of the four States the banking department has secured from the State an increase of power, described by Mr. Thornton, whereas under the old order of things the people suffered and no amendment of the law was even asked for. The difference is caused by the transfer of the seat of legislative power from the few to the people, this change being the result of the reform of machine-rule party government.

ADVANTAGES OF THE GUARANTY SYSTEM.

In brief the following are the principal advantages of the guaranty of bank deposits, as seen by the writer:

Take for example the guaranty system in connection with the banks in the Federal reserve system.

The Federal Reserve Board, consisting of seven members appointed by the head of the Government and confirmed by the Senate, is to inspect the more than 7,000 banks. Upon the certificates of inspec

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tion by representatives of the Government board the people will patronize the banks, placing with them their ready money. The addition of the guaranty system simply would mean that the Federal Reserve Board will give an effectual certificate of inspection, namely, that the capital and surplus of each bank, plus the stockholder's personal liability for the debts of the bank to an amount equal to the face value of his stock, will actually be sufficient to repay in full the depositors.

Surely the certificate of inspection should amount to that. And in order that such shall be the case the law should require the Federal Reserve Board to make good any shortcoming and not leave the individuals to suffer the loss. They are perfectly innocent of wrong or even negligence, the negligence, if there is any, being in the Government's representatives. And if no one has been negligent then why not distribute the losses? That is the principle in fire and life insurance.

Quite true, everyone must admit. The real question in the case, then, is, Who should contribute the funds to pay the losses?

WHO SHOULD PAY THE LOSSES FROM THE GUARANTY FUND?

Why should the banks pay the losses from the guaranty fund? Take, for example, the losses from bad crops. The losses to the guaranty fund come only after the failed banks have lost all of their capital and surplus and the stockholders have contributed an amount equal to the face value of their capital stock. Is not that enough for the banks and the stockholders to risk? Why not provide that the beneficiaries under the system shall supply the guaranty fund? That is, that both the banks and the people shall jointly supply the fund to meet the losses. That would conform to the insurance principle.

But it may be said that inasmuch as the establishment of a national guaranty system would be likely to benefit the national banks as much or more than the cost of the necessary funds that, therefore, the banks should contribute the funds to meet all of the losses.

In reply it can truthfully be said that that is an indefinite statement, namely, "would be likely to benefit the national banks as much or more than the cost of the necessary funds." Suppose that widespread crop failure should come, or devastating war, should the stockholders suffer all of the losses through the national banks, or should the unusually severe losses fall partly upon those who would be the beneficiaries of the guaranty fund, the people?

At any rate, the issue shifts round from, Should bank deposits be guaranteed? to, Who should contribute the guaranty fund?"

The fact is that the amount of the losses would doubtless be comparatively small. In Nebraska it has been 15 years since a national bank has failed; and with the more stringent system of inspection that would come under a guaranty system, the losses in addition to the entire capital and surplus and the personal liability of the stockholders would likely be almost negligible. It follows that there should be no considerable delay on the ground of reaching an agree ment as to who should contribute the guaranty fund. The writer suggests that a small contribution be levied upon the banks in the Federal reserve system, with a further provision that if at any time