20. GUARANTY OF BANK DE POSITS. This has been effected by legisla tion in some States (Oklahoma, Kansas, Ne braska, Mississippi, South Dakota and Wash ington), and individual banks in some cases have taken out policies of insurance to protect their depositors. (The Attorney-General of the United States has ruled that this is a legal use of the funds of a National bank). The United States Supreme Court, on 3 Jan. 1911, in cases coming before it from Kansas, Okla homa and Nebraska, decided that the bank deposit guaranty laws of those States were not in conflict with any provisions of the Constitu tion of the United States, and the court fur ther laid down the principle that the legislature may not only regulate banking but may prohibit it except under such conditions as it may prescribe.
Inrinciple, the guaranty or insurance of bank rests upon mutual responsibility. It is objected to on the ground that it tends to place new and perhaps recklessly managed banks on a par, as regards safety, with old established and carefully managed banks. To this objection the reply is made that there ought to be no degrees of safety in banking, but that all deposits in banks should be made safe beyond question, and that in point of service the old bank will tend to have the advantage anyway through the friendships and connections created by its long existence.
Experience with the laws now in force would seem to indicate that the results depend upon the character and administration of these laws. Some of them have recognized that where joint responsibility is assumed, greater stringency in the regulation of banks is essen tial to prevent sound and well-managed banks from being called on to pay the losses of those imprudently managed. In Texas, after six
years' trial, the Commissioner of Insurance and Banking found that each share of stack of the par value of $100 had paid only three and one half cents annually for deposit insurance, and he states that among depositors in guaranty fund banks the closing of one of these institu tions creates no more panic than the closing of a grocery store. Some of the other States have had less satisfactory experiences, and the fact that after long agitation but few States have adopted the law, and that it has not yet been applied to the National banks, warrants the conclusion that the experiences thus far have not justified the general extension of the plan.
A safety fund, originally designed to pro tect the noteholders of the State banks of New York, was later made applicable to the de posits of banks, and the system broke down, chiefly because the fund provided was not large enough to protect both noteholders and depositors.
Through clearing-house examinations of member banks, a qualified form of deposit guaranty has been although direct responsibility is not assumed. The ability, by careful oversight, to detect banking weakness at its inception, renders a bad bank failure almost impossible. A desire to preserve local banking reputation has sometimes led bankers to unite in the protection of depositors in failed banks — the case of the Walsh bank failures in Chicago being the most familiar example.