Banking and Currency
GOVERNMENT GUARANTEE OF BANK DEPOSITS.
After the 1907 panic there were many people who advocated the guarantee of bank deposits as a remedy for panics. The guarantee of bank deposits would have little, if any, relation to the cost of living and would not affect any of the fundamental relations of the people with each other. My only reason for considering this subject at all in this book is because it may be raised as an issue in the contemplated banking and currency legislation.
I have grave fears as to the ultimate success of a guarantee of bank deposits. In the first place, unless there should be some provision prohibiting certain kinds of speculation, or unless human nature should change, even the guarantee of bank deposits will not prevent panics, but will simply defer the day by postponing the hour of fear; for by the very nature of things, when a bull market starts the momentum continues until it reaches a point when economically a breakdown is inevitable.
There is, in so far as the legitimate industrial pursuits of the country are concerned, both a theoretical and a practical possibility of a self-sustained credit system, based upon monetary foundation, but when you inject into that the complications arising out of speculative gambling, the more you reinforce the system of credit and give an unguarded confidence in it, the greater the opportunity the gambling speculators have to fleece us by keeping up a bull market.
I value confidence when based upon solid economic conditions, but I wish to emphasize the necessity for the people to be suspicious enough to carefully scrutinize the Wall Street manipulations.
Just as long as we leave that Wall Street gambling contingent, with its allied banks, in a position that enables it to throw its influence into the markets, we are going to have our occasional panic troubles. It seems to me that it would be more advisable to check up accounts more often in order to prevent panics.
It is probable that if the Government had guaranteed all of the deposits on October last (1907), and continued that guarantee, the panic would not have occurred in that month, but it had to come sooner or later, because the rottenness that caused it would not have been eradicated. Speculative parasites had over-subscribed the credit and crowded out legitimate industry by over-bidding it for the use of the money and credits of the country. If our credit had been still more expansive, and if the people in addition to what they had on deposit had deposited a considerable part of the $1,666,000,000 which they held outside of the banks, industry could have thrived a while longer, but the growth of the speculative parasites would eventually have monopolized the credit. Yes, the speculators would have pushed the bull game, and tossed up the prices until such time as even a Government guarantee could not hold back a panic, and when it did come, it would be greater in its severity in proportion to the amount to which the market was over-bulled, and the fact that the Government was responsible for the guaranteed amount might ultimately destroy the credit of the Government.
We must not forget that our confidence is the stock in trade and capital of the professional gambling bulls, and that we must not give them too much of it, nor should we forget that distrust is the stock in trade and capital of the professional gambling bears, and that these two sets of speculators are watching the plain people with the keenest eyes. They rob us on both the rising and falling markets. The bulls catch us when prices go up and the bears when they go down. A satisfactory remedy for panics cannot be gained by creating confidence unless we can eliminate the professional speculators. In other words, we need confidence in legitimate enterprise and distrust in predators speculation. We plain people must not repose too much confidence in the speculator class of people and thereby permit them to work the confidence game on us to our own ruin. The more confidence we have in our present system, the more we shall lose in the end.
I have another reason for doubting the advisability of the guarantee of bank deposits. Under the present loose system of examining banks, the doors are left open for easy trickery, which makes it possible for sharpers to rob the people. Let me illustrate : Under our present system it is possible for ten men to combine and start a national bank with 50% of the capital required and to immediately borrow, from the deposits that they secure, enough to recoup their 50% capital, and, in addition, enough to fully pay their stock, so as to leave no capital in the bank except their promissory notes, and, what is more, they are free to repeat that operation by starting a hundred banks in as many different towns and not invest an actual dollar. But even that is not all. The loose way in which banks are examined makes it possible for them to put into the banks the notes of irresponsible parties, which notes might eat up the deposits as rapidly as they are received. No one can prevent this condition, except the bank examiners. I have seen an examiner enter a bank in the morning and finish his examination the same day. During that time he had covered a business of several hundred thousands of dollars, without learning the value of the bills receivable. I have seen this happen again and again in various banks. In the cases that I have observed the bankers have been men of integrity and responsibility. Otherwise they could easily have done all that I have described as possible.
From what I have said it may easily be seen that a few schemers could abuse the privilege the system gives them. In fact, some of them could so arrange it that their representatives could have large deposits evidenced upon the books of the bank in their control and never have deposited any money, but merely covered the deposits by the class of notes before referred to. Those deposits, under a guarantee system, would be protected unless the fraud could be established. That cannot often be proven, regardless of the fact that it exists.
If there is to be a guarantee of bank deposits, the guarantee of the deposits of any one person in any one bank should be limited. Under no condition would I be in favor of a guarantee of deposits of the hundreds of thousands and millions of dollars that are owned by single individuals.
But even the guarantee of the smaller deposits would have its dangers, for those with large deposits, if they became frightened, might make a run for the excess and defeat the very objects of the law. Such a law, again, would, from the standpoint of securing deposits, put the careful, conservative, able and honest banker on the same footing with the careless, indifferent or even dishonest banker. Depositors would also be careless under such a system.
The above are, I believe, sufficient reasons to prove that it is unwise for the Government to guarantee bank deposits. Nevertheless, I might vote for such a system if the people generally demanded it, because my office is one of representation rather than one in which I can act entirely from my own convictions.
Let us suppose, for instance, that on October last (1907) instead of a lack of confidence in the bankers, the people should have had so much confidence in them that they had deposited in the banks, and with the trust companies, the most of the $1,666,000,000 that was then in general circulation outside of the banks. What would have happened ? The banks would have made loans to anyone from whom they thought they had a fair chance of getting it back. You would now (1908) see such a boom and inflation as has never been known in the history of the world. That might have continued for two, three or four years. What do you suppose the gambling contingent would be doing during that time ? Everybody knows. Will somebody answer where a guarantee of bank deposits would land us under such conditions when the crash actually did come ?
The people require a system that will make their capital available in order that they may develop the natural physical resources of the country. Everybody desires to encourage enterprise. I have noticed that when there is active enterprise, there is also a tendency to bull the markets, and the mark is constantly being overshot, because the country is honeycombed with speculators possessing the gambling instinct. Setbacks are the economic penalty and there is not the least possibility, even with a guarantee of bank deposits, of averting them under our present plan of finances.
The above statements are quoted from my speech delivered in Congress after the panic of 1907. Since then I have watched more closely than I had before the way that things have been manipulated, and I am more certain now of the correctness of my statements than I was at the time that I made them. A guarantee of bank deposits would only serve to promote a temporary confidence which would be more completely shattered when it was found that that confidence would be seized upon by speculators to further their selfish interests.