tional tax" is simply the direct personal tax. The normal tax will doubtless be successful in reaching the large amount of income earned or created by enterprises conducted under the corporate form of organization, much of which would probably escape assessment under a direct personal income tax. But beyond this it is questionable whether the method of assessment at the source as here applied will be of sufficient advantage to justify the administrative complications which it involves.

It seems useless, however, as well as unwise, to venture any predictions as to how successful the tax will be in reaching the income subject to it or how well it will work in actual practice. We can afford to wait and see. Much depends upon the way in which the law is administered. After it has been in operation for a year or two, after its novel features have been tested by actual experience and those provisions which are complicated or obscure have been interpreted by administrative rulings or possibly by court decisions, we shall have a better understanding of the merits or defects of the measure than is at present possible. The law will doubtless require amendment in many particulars even if it does not need to be radically revised. That the income tax in some form will be perpetuated as a permanent part of our system of national finance may safely be predicted. Properly adjusted and wisely administered it should greatly strengthen the financial resources of the government, make possible a closer adjustment of revenue to expenditure, and secure a more equitable distribution of the burden of taxation.

WASHINGTON, D. C.

JOSEPH A. HILL.

FOUR YEARS MORE OF DEPOSIT

GUARANTY

SUMMARY

Bank Deposit Guaranty in four states, 69. Upheld by U. S. Supreme Court, 70.—I. Oklahoma; many failures, 71. Adverse economic conditions, 72.- Politics and the Guaranty Law, 73. Cases of dishonesty, 74. Details of certain failures, 75. — Insolvent banks kept going, 77. — Heavy losses in Oklahoma City, 82. — Legislation of 1911 and 1913, 83. - Powers given to State Bankers' Association, 84. Other new provisions, 84. - The national system now gaining over the state system, 87. People still have faith in guaranty system; its future uncertain, 91.-II. Kansas; participation optional, 94. — One guaranteed bank fails, 94. - More than one-half the state banks participate, 95. - Legislation of 1911 and 1913, 96. — Commissioner fixes maximum interest rates by counties, 96. Progress of state and national banks, 97. Good and bad points of Kansas system, 99. III. Nebraska; no failures for some years, 99. Summary of the law, 100. - Progress of state and national banks, 101. - Advantages and defects of Nebraska law, 103. — Its influence on deposits, 103.-IV. Texas, 104. - Some failures; losses relatively small, 104. - Progress of national and state banks, 106. — Most banks elect the guaranty plan, few the bond security plan, 107.- Legislation of 1913, 108.- Charters refused where no necessity for banks, 108. — The future in Texas, 109. — V. General Arguments and Conclusions, 109. Guaranty alone does not cause failures, 109. Large single risks and concentration of risks, 110. Guaranty funds should be larger, 110.

- Grants of power to state banking departments, 111. Is guaranty a public need? 111. Effect of currency legislation on sentiment for deposit guaranty, 112. - Will plan be continued where now in force, and adopted in other states? 112.- Funds should be available only in final liquidations, 113. American banking will remain individual, 114.

If the reader has visited Texas, Oklahoma, Kansas, or Nebraska within the past few years he has probably noticed on the windows of some of the banks the sign

"Deposits Guaranteed." If he has gone inside he has found the same advertisement on the stationery. Bank deposits in these states are protected by funds raised by special taxation of the banks and administered by the state banking boards. The system, established in Oklahoma as an outgrowth of the panic of 1907, and followed with variations in the three other states mentioned, has for its objects the distribution among bank stockholders generally, of losses that have heretofore fallen upon the depositors of failed banks, and as consequences, the prevention of individual distress, the prevention of panics by maintaining the confidence of depositors, and the increase, due to such confidence, of the volume of deposits and the usefulness of banks. This experiment, unparalleled, except for the New York episode of three-fourths of a century ago, was discussed by the present writer in these columns four years since.1 The progress of the experiment since that time now warrants further conclusions, and it is proposed now to review the incidents of the intervening period.

At the time of the former study, the question of the validity of the Oklahoma, Kansas, and Nebraska deposit guaranty laws was pending in the Supreme Court of the United States. The Texas law had not been attacked, its opponents being willing, apparently, to abide by the results of litigation over the laws of the other commonwealths.

The three laws attacked were all 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 states. It was held that the state undoubtedly had the authority to lay

1 Quarterly Journal of Economics, vol. xxiv, pp. 85, 327; reprinted in Sen. Doc., No. 659, 61st Cong., 3d Session, Appendix B.

down such conditions precedent to the conduct of the banking business. 'In short," said the court, "when the Oklahoma legislature declares that free banking is a public danger, and that incorporation, inspection, and the above described co-operation [the provision of a guaranty fund by taxation] are necessary safe-guards, this court certainly cannot say that it is wrong.' " 1

This litigation had been conducted with bitterness on both sides and its termination was a relief. While the legal problems were much the same in the various states, the financial and administrative questions have differed, and the experiences of the various states require separate consideration.

I. OKLAHOMA

The first results of the guaranty legislation in Oklahoma had some appearance of success. The state banks gained rapidly in number and in business, while many national banks surrendered their charters and reorganized under the state law, the business of the remaining national banks keeping barely steady. For more than three years now the current has been the other way and the Oklahoma experiment is found to have cost the solvent state banks in five years more than two million dollars. Bank after bank has failed. Banks in large numbers have left the state system to enter the national system for the purpose of escaping the heavy assessments levied under the state law. remaining state banks have now forced through a new law limiting more closely the annual assessments for the guaranty fund, and have been compelled to take

The

1 Noble State Bank v. Haskell, 219 U. S., 104, 31 Supreme Court Reporter, 186; Shallenberger v. First State Bank, 219 U. S. 114, 31 Supreme Court Reporter, 189; Assaria State Bank v. Dolley, 219 U. S. 121, 31 Supreme Court Reporter, 189; Abilene National Bank v. Dolley, 33 Supreme Court Reporter No. 10, p. 409.

matters, as far as possible, into their own hands. Such a result was forecasted in the articles in this Journal three and four years ago.

The Oklahoma laws of 1907 and 1909 provided for the accumulation of a guaranty fund of five per cent of the deposits of the state banks, out of which the depositors of failed banks should be paid the amount of their deposits as soon as banks closed, no matter whether the fund had reached the five per cent maximum or not. In case the accumulations in the fund should ever be insufficient to pay the deposits of any failed bank, interest bearing warrants were to be issued to the depositors. The conclusion from a study of the situation in 1909 was that any plan that provided for payment of depositors immediately upon the closing of the banks must fail, unless as a matter of simple luck failures should be very few until a large fund could be accumulated.1 The luck has been the other way. The Oklahoma crops of 1910 and 1911 were poor. crops of 1912, tho on the whole good, were not sufficient to restore the former level of prosperity. The year 1913, except in the cotton raising counties, has been unfavorable. The real estate boom that had been going on in many Oklahoma towns collapsed in 1910 and the succeeding years. Since the date of our former study, therefore, the state of Oklahoma has not enjoyed even average prosperity for the working out of the experiment of deposit guaranty.

The

No fewer than twenty-seven banks, with about $7,000,000 of deposits, have failed since the establishment of the guaranty system, or have been liquidated with the aid of the guaranty fund, and at least two others have required assistance from the guaranty fund. These failures, however, cannot be attributed to the

1 Quarterly Journal of Economics, vol. xxiv, p. 340.