On the other hand, there is in all probability no corporate activity whose soundness and stability so permeate and affect the financial, economic, and social situation as does banking. A panic halts everything and brings about unrest; and because deposit credit is so important in our national life, because govern ment supervisors and examiners cannot fully guard against fraud, dishonesty, and poor judgment of bankers, and because deposi tors lack ability to pick sound banks or place their funds else where and are helpless to protect themselves, the state may be justified in going further than simply to supervise; it may actually guarantee the deposits.
Effect of Guaranty on Panics The degree of stability that can be achieved by deposit guar anty applies to runs on banks rather than to financial crises. Crises depend upon more comprehensive causes than the con fidence of depositors in their banks, and are brought about by such means as cyclical industrial movements, wars, earthquakes, rainfall, and so forth. Yet a favorite argument for deposit guaranty has been the prevention of panics. Panics are precipi tated by want of bank "accommodation"; loans on which the maintenance of existing business or the completion of projected business depend, cannot be secured. Against such a situation, deposit guaranty offers no protection. If a bank has reached its legal limit of loans, the guaranty of deposits does not remove that limit. In fact, as will appear below, the deposit guaranty may cause overexpansion and speculation, and promote the development of industrial and financial panics. It does, however, prevent runs on banks, or at least make them less panicky, and may, therefore, prevent the closing of sound banks by runs and in this way add to the general credit stability.
Some of the most remarkable failures of guaranteed banks in Oklahoma scarcely disturbed the general business confidence. Depositors were quite indifferent about getting their deposits before the bank closed, and those withdrawn were immediately redeposited in other banks in the same city. Where deposit guaranty is in effect, the ordinary confusion and rush attending a bank failure are absent, for the depositors know that their de posits are safe and that no advantage is gained by hurried demand on the bank.
Guaranty of Savings Deposits and Commercial Deposits Many of the arguments for deposit guaranty start from the point of guaranteeing deposits that originate through the deposit of actual cash or cash items, that is, primarily savings deposits, and pass by confused steps to guaranteeing all deposits. It is
alleged that vast funds are now hoarded by people suspicious of banks and that these funds would be put into banks if deposits were guaranteed. If the argument is one of safety it is answered by the postal savings banks and the war savings stamps. Some eccentric persons or foreigners may be influenced by guaranteeing deposits, but the increase of deposits from this source would probably be small. The argument applies primarily to savings deposits, and in general deposit guaranty, as operating in the several states, applies only to commercial deposits. The repeated proposal of the Comptroller of the Currency to guarantee de posits of every depositor up to $5,000 also springs from the desire to prevent individual distress among the small depositors of savings.
Effect of Guaranty on Banks The sponsors of deposit guaranty maintain that banks ul timately pay dearly for all losses to depositors, because failure causes such discredit and suspicion and consequent falling off in business, that in one year banks lose more than it would cost to maintain a safety fund for many years. These losses come to banks that are prudently managed as well as to those under sus picion. To protect bank deposits in 1914-1915, clearing house loan certificates costing 6 per cent interest or more were taken out, and the government made nearly $3,000,000 on the emer gency currency issued; at present the rediscount rate is somewhat of the same nature. It cannot be assumed, however, that these costs would be wholly, if at all, obviated by deposit guaranty.
Bankers maintain that the additional earnings from in creased deposits and business would not be nearly enough to sustain the burden of deposit guaranty, and that the actual losses to depositors from bank failures are too small to warrant so drastic a remedy. The losses of national bank depositors from 1881 to 1917 were $77.5 million, and the average percentage of losses of depositors to total deposits each year for that period was .023 per cent. The losses for 1917 were $369,000 out of total deposits of $12,769 million. Were failures not concentrated in certain years and often in limited localities, the answer that the losses after all are inconsiderable and do not warrant the expense of maintaining a guaranty fund, would suffice. It is the individual distress of an unwitting depositor, however, that calls for help.