HISTORY OF GUARANTY OF BANK DEPOSITS IN THE STATES OF OKLAHOMA, TEXAS, KANSAS, NEBRASKA, AND SOUTH DAKOTA, 1908–1914.

To the Senate Subcommittee on Guaranty of Bank Deposits, Gilbert M. Hitchcock, chairman; James A. Reed and Joseph L. Bristow, associates:

At your request I herewith present a brief history of the Guaranty of Bank Deposits in the States of Oklahoma, Texas, Kansas, Nebraska, and South Dakota for the years 1908 to 1914. Most of the statements are by the bank commissioners of those States, to whom our grateful public acknowledgment for their efficient assistance is hereby made.

This record shows that not only are the people of these States greatly pleased with the new departure-a total absence of the possibility of personal loss from closed banks-but also that the banks themselves that have been guaranteeing depositors have profited by the system, owing to the advantages secured from the increase in the volume of their deposits and other benefits. This is of vast importance, demonstrating that the system as a whole is a complete

success.

Respectfully submitted.

GEORGE H. SHIBLEY,

Director American Bureau of Political Research. WASHINGTON, D. C., May 12, 1914.

I. OKLAHOMA.

Oklahoma Territory and Indian Territory became the State of Oklahoma in 1907. The first legislature that met provided for the guaranty of bank deposits, being the first State to thus protect its people from losses through State banks.

This system has now been in operation for six years, and the results are summarized in later paragraphs by the bank commissioners, one of the statements being as follows:

In my opinion the increased business of State banks, as mentioned, compensated them for the losses they have sustained under the guaranty system.

II. SPREAD OF THE OKLAHOMA SYSTEM.

The Oklahoma system for the protection of depositors in general in the State banks was established early in 1908 by the legislature and governor. Later in the year in the following States the legislatures and governors then elected afterwards passed laws establishing either a compulsory or a voluntary system of guaranty of bank de

posits: Texas, Kansas, Nebraska, and South Dakota. The system is compulsory upon all State banks in Nebraska, voluntary in Kansas and South Dakota, while in Texas the State banks are given their choice of entering the State system of guaranty or of supplying their depositors with some other suitable form of guaranty.

III. COURT DECISIONS.

The United States Supreme Court has upheld the constitutionality of the compulsory guaranty of bank deposits under systems in which the banks themselves have had to mutually stand the losses. (Noble State Bank v. Haskell, 219 U. S., 104, affirming 22 Oklahoma, 48; Shallenberger, Governor of Nebraska v. First State Bank of Holstein, 219 U. S., 114, reversing 172 Federal Reporter, 999; Abilene National Bank v. Dolley, Bank Commissioner of the State of Kansas, 228 U. S., 1, affirming 179 Federal Reporter, 461.)

The laws of the three States were upheld on the principle that such taxation was not the taking of private property for a private purpose, but was the taking of private property for a public purpose, and a valid exercise of the police power of the State. (Thornton Cooke in Quarterly Journal of Economics, Nov., 1913, p. 70.)

Other decisions by the State courts are given in an appendix.

IV. TEXAS.

The Texas law went into effect August 9, 1909. Provision is made that the guaranty of the safety of deposits by the State banks shall be either by joining the system under the State law or by filing each year with the commissioner of insurance and banking "a bond, policy of insurance, or other guaranty of indemnity" equal to the capital stock of the bank, or if a private bank, " in an amount to be fixed by the commissioner."

Nearly all of the State banks entered under the system provided for by State law.

In 1909 only 42 banks had elected to furnish bonds. In 1912 the number was only 53. (Mr. Thornton Cooke, in Quarterly Journal of Economics, November, 1913, p. 109.)

The State bank system in Texas had been established the latter part of 1905, and the history of the growth of the system and the net result under the guaranty law of 1909 is as follows:

The above data were supplied by Hon. W. W. Collier, bank commissioner, who also wrote:

The average per cent of loss upon the approximate average daily deposits above given during the entire life of the Texas State banking law is 0.012 per cent.

There was nothing unusual that caused the losses in the years 1911 and 1912. There were three bank failures, and in each one the loss was occasioned by a straight steal out. The largest loss was occasioned through the failure of the Harris County Bank & Trust Co., of Houston. Frank W. Vaughn, its president, embezzled very large amounts therefrom and is now a fugitive from justice.

The two losses in 1912 were occasioned by the failure of the First State Bank of Kopperl, from which was embezzled a large amount by S. J. Spotts, who is now serving a term in our State penitentiary for this offense, and the failure of the First State Bank of Paige was also occasioned by a misapplication of the funds of that bank by its president, E. F. Brown. This party has been convicted at the first trial, and his case is now pending before our court of criminal appeals on appeal. I mention these matters to explain to you the reason for these failures and to show you that it is not a defect in our law, neither is it occasioned by unusual conditions or a failure of proper supervision, but has been simply one of these cases where you could not prevent a thief from stealing.

Answering your second question, I beg to say that the depositors' guaranty fund of this State has gradually increased each year, regardless of the small losses sustained, beginning with the first collections on January 1, 1910, until at this time this fund amounts to more than $958,000 in cash.

Answering your third question, you are advised that there is a double liability on stockholders under the laws of this State.

Mr. Thornton Cooke, of Kansas City, who has made an extensive examination into the workings of the guaranty of bank deposits, writes as follows in the Quarterly Journal of Economics of Harvard University, for November, 1913:

Since the enactment of the guaranty law, the State banks in Texas have increased 50 per cent in number and their deposits have doubled. There were five more national banks in 1909 than in 1913, but individual deposits in national banks have increased 25 per cent.

Possibly some of these national banks insured their depositors against loss. But even if they did not, still the showing is that bankers have preferred on the whole to do business under the guaranty system, thereby, demonstrating_conclusively that in Texas the cost of the system is less than the benefits conferred upon the banks.

The law in full and the amendments are quoted in an appendix.

V. NEBRASKA.

The Nebraska system of guaranty of bank deposits is compulsory upon all State banks.

In the annual report of the Nebraska department of banking, dated January 18, 1913, the following statements occur:

The new banking act embodying the guaranty feature, which was enacted in 1909, was held in suspension by injunction until March 30, 1911, since which time the banks have been operating under the law as it now exists. No failures have occurred since the passage of the act, and the guaranty fund has now reached the sum of $774,414.58.

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The guaranty feature of the law has, without question, increased the confidence of the people in the banks. So far few or none of the bad effects anticipated by those opposed to its enactment have occurred. Of course the crucial test of the law has not yet been made, and will not be until a period of depression, panic, or general distrust appears, which we sincerely hope may never occur (p. 3).

On February 11, 1914, the secretary of the Nebraska State banking board, E. Royse, wrote that no loss to the guaranty fund had taken place

no State bank having failed since this law went into effect, and none for several years prior to that time.

Mr. Thornton Cooke writes concerning the operations of the guaranty system in Nebraska:

It would seem that some of the State bankers now see a little benefit arising from the guaranty scheme. (Quarterly Journal of Economics, November, 1913, p. 103.)

In other words, the guaranty of bank deposits in Nebraska has been, and is, benefiting the State banks, as compared with doing business under the national-bank system, owing to the increase in the volume of bank deposits.

VI. KANSAS.

The Kansas system of guaranty of bank deposits was established in 1909, and is voluntary. In opposition there was started a private corporation known as the Deposit Guaranty & Surety Co. of Topeka. About 100 banks in Kansas employed this company to insure their depositors. But this general plan of guaranty has not spread, and an economist who approved the idea some years ago now states that "this is not the solution that is to be used." (Mr. Thornton Cooke, of Kansas City, in Quarterly Journal of Economics, of Harvard University, November, 1913, pp. 96, 110.)

The number of State banks in the guaranty system in Kansas under the State law was 472 in June, 1913, as compared with 466 outside of it, 100 of these outside banks being insured by the private corporation above described. The volume of deposits under the State system was $71,000,000, as compared with $41,000,000 under the two methods of private corporation insurance and without insurance. (Same citation, pp. 95, 97.)

Some changes have been found necessary in the Kansas law. The provision excluding from the guaranty the deposits bearing interest and excluding from participation in the plan banks paying more than 3 per cent interest on any class of deposits have been found too stringent. The law now provides that all deposits not otherwise secured shall be guaranteed. It provides, further, that the bank commissioner shall fix for each county a maximum rate which the banks in that county may pay on deposits. The commission has fixed rates varying from 3 to 5 per cent. (Same citation, p. 96.)

The amendments are published in full in an appendix.

The development of the system of guaranteed deposits under the Kansas State system is as follows:

The above data were furnished through the courtesy of Hon. Charles M. Sawyer, bank commissioner, under date of February 27, 1914.

This is a remarkably fine showing. The cost to the banks of the guaranty system is almost negligible, while the increase of business from the fact of the safety to the depositors is doubtless quite large. In the words of Mr. Thornton Cooke, an opponent of the system:

The increase in the number of State banks [in Kansas] is most striking. (Quarterly Journal of Economics, November, 1913, 97.)

Mr. Cooke endeavors to explain away the bankers' preference for the guaranty system by saying:

The guaranty system may have been an influence in the organization of some of the new banks, but rarely the moving cause.

Quite true. But the fact that the bankers preferred to organize under the State law with its guaranty system and did not organize under the national system shows that that State system as a whole was thought to be preferable. The national system and the use of the private corporation to guarantee bank deposits, mentioned above, resulted in an increase of only seven national banks during nearly four years (November, 1909, to August, 1913), while the State banks increased from 819 to 928 during practically the same time (September, 1909, to September, 1913).

The conclusion as just stated is fully admitted by Mr. Thornton in the following words:

It is significant that the number of banks participating in the depositors' guaranty fund [in Kansas] is increasing. The fact that they [the new banks] can not participate for a year after they are organized means that the banks now coming into the scheme have decided, after opportunity to consider the matter, that the guaranty of their deposits by the State fund will increase their deposits somewhat, or make their deposits rather more stable, or both (p. 98).

VII. SOUTH DAKOTA.

The same year that saw the passage of the guaranty laws in Texas, Nebraska, and Kansas witnessed the enactment of a similar law in South Dakota, except that in the latter State the law was so framed that it has not been used, being so arranged that the bankers were not compelled to operate under it, and they by agreement or otherwise have refrained from doing so. Subsequent legislatures have not amended the system to make it operative.

VIII. DETAILS OF THE OKLAHOMA SYSTEM.

Under date of January 29, 1914, the following letter was received from Hon. R. C. Stuart, assistant bank commissioner of Oklahoma: Mr. GEORGE H. SHIBLEY,

Director American Bureau Political Research,

Bliss Building, Washington, D. C.

DEAR SIR: In reply to your letter of the 26th instant relative to the operation of the depositors' guaranty law in this State, I desire to advise you that at the time our guaranty law became effective banking conditions in this State were very chaotic, as the State banks located in the Indian Territory section of our State had not been subject to examination.