Probably the most telling argument brought against deposit guaranty is that it puts all bankers on the same level, making the deposits in new, inexperienced, reckless, or dishonest banks as safe as deposits in old, proved, conservative, and honest banks; removing all incentive for developing good-will and reputation for sound banking and for accumulation of substantial surpluses; making liberality in extension of loans and payment of interest on deposits the chief inducements to depositors; taxing good, competent, experienced, trained, and conservative bankers in order to pay the losses wrought by the incompetent, inexperienced, untrained, and reckless bankers; giving the unscrupulous and reckless banker the competitive advantage and thereby lowering the personnel of the banking world; and, finally, stimulating the establishment of new, small, and speculative banks since they (at least in Oklahoma) are as safe as the old, well-established in stitutions.
This argument is largely personal and is offered by the older, better, bigger banks, which naturally do not wish to be put on a level with the other institutions. It ignores the point of view of society, which rises above personal advantages and weighs de posit guaranty as to its net balance for good or evil in society as a whole.
This argument is also much weakened by comparison with the actual facts of deposit guaranty. Depositors have small knowledge and ability to pick the safest banks, and rely largely on government supervision; bank supervision tends to reduce bankers to the same level, and the more severe the supervision the more nearly do they approach the same level. In Oklahoma, where deposit guaranty is in operation, the large majority of de posits are in non-guaranteed banks. In Kansas, which also has deposit guaranty, the banks find little reason for guaranteeing deposits in order to get or hold accounts. The banks are, not in fact, therefore reduced to the same level, and the banker's reputation still counts. Most depositors are at some time or other borrowers at their banks, and they deposit, therefore, where they are best known, with the idea of having a dependable line of accommodation.
It is likewise difficult to show that the actual effect of a guar anty law has been to lower the banking personnel; if the bank supervision is made stringent enough under the law, reckless and fraudulent banking will not develop, and it may raise rather than lower the banking personnel. In fact, an objection often raised against deposit guaranty is that there is a real or supposed neces sity of accompanying the establishment of the guaranty system with the grant of almost absolute power to the state banking departments. In Canada and England, where note issue is free, the banks bring pressure to bear on any bank which extends credit dangerously, the Canadian Bankers' Association, by notify ing an offending bank that it is issuing notes too freely, the Lon don banks, by discriminating against the acceptances of an over extended institution. It may be that in time the guaranteed
banks will undertake such a mutual guardianship, but up to the present time, far from exercising a constant surveillance over each other, they are only too prone to overlook reckless and criminal banking. Where deposit guaranty is in operation government officials, for political reasons, often fail to prosecute offending bankers, particularly when the bank guaranty law is sponsored by the political party in power, which naturally desires to make the law at least apparently successful. The public also becomes less hostile to defaulting bankers and accepts more read ily the justification of such bankers, since the depositing public loses no money under the system. The net result is that the con viction of bank officials under the deposit guaranty system is more difficult. To keep the public interested in the prosecution of offending bankers, it has been proposed to levy general taxes to provide part of the guaranty fund.
Guaranty as Assessment Insurance Guaranty of deposits is also objected to on the ground that it is a form of assessment insurance, is not actuarial, does not se lect risks, and suffers from a high concentration of risks. It is true that guaranty of deposits is a sort of assessment insurance, but it is without the defects of such insurance. If it were made compulsory on all banks, the danger of the survivor being bur dened and uninsured would not apply; and if, under a volun tary plan, a withdrawing bank should be held to pay losses arising for, say, six months afterwards, and if the amount of the assess ments were strictly limited, the above danger would be mini mized. Besides, the risk, instead of increasing with the age of the insured bank, would normally decrease as the bank matures, becomes conservative, and accumulates a surplus. Bank failures do tend to concentrate in periods of depression and in industrial areas; there is not, and cannot be, the dispersion of risks among many banks of different types, particularly if the guaranty system applies to banks of a single state, nor can there be a classification and selection of risks and an adjustment of premium according to risks, when the system applies to all banks. The necessity of a strict supervision to reduce the banks to uniformity of risk is therefore evident, as is the necessity of a strict examination of the candidate bank before admitting it to the system.