story of satisfaction with both systems as administered in Texas, the state system being apparently somewhat preferred.

It appears that since the enactment of the guaranty law, the state banks have increased fifty per cent in number and their deposits have doubled. There were five more national banks in 1909 than in 1913, but individual deposits in national banks have increased twenty-five per cent and if we could make the comparison after the cotton is marketed this fall, a still larger growth would appear.

Nominally it is optional with Texas banks whether or not they shall have their deposits guaranteed. Any bank may, if its directors prefer, file annually with the Commissioner of Insurance and Banking "a bond, policy of insurance, or other guaranty of indemnity equal to its capital stock, or, if it is a private bank, “in

1 Includes Trust Companies.

This

A bond

an amount to be fixed by the Commissioner." option has not proved attractive, however. or policy procured from a bonding or an insurance company is expensive, and it is embarrassing to ask friends, customers, or even directors, to make the bond. Furthermore, a bond with individual sureties has little effect in attracting or reassuring depositors. In 1909, only 42 banks had elected to furnish bonds. In 1912, the number was only 53.

It has not been found necessary to change the original guaranty law materially. It still provides for an initial assessment of one per cent of deposits, and for subsequent assessments of one-fourth of one per cent per annum, with power to levy emergency assessments, not exceeding two per cent in any year, in case the fund is diminished. Assessments are to cease when the fund reaches $2,000,000, The fund is now, October 9, 1913, $778,824.1

The legislature this year, following the example of Kansas and Oklahoma, has provided that the State Banking Board shall refuse charters for new banks where there is not public necessity for them.

Much of the credit for the apparent success of the guaranty system in Texas is accorded to Mr. B. L. Gill, who was Commissioner of Insurance and Banking from January, 1911, to this summer.

Texas, with its rapid economic development and its hundreds of new banks, subject to all sorts of vicissitudes, can scarcely hope always to get off so luckily in failures. The organization of a great many banks during a time of rapid settlement and development has, in other states, been followed almost always by losses to a considerable number of banks and by some bank failures. A good fund is being accumulated in Texas,

1 Telegram from the Commissioner.

however, and the banking department seems to be efficiently organized and administered. The state banking system is getting into position to withstand some rather heavy shocks, if they come. If they do not come too soon, the Texas guaranty plan will probably survive. This prediction could be made with some confidence if the law were amended to provide for payment of depositors only upon the final liquidation of failed banks; but no such amendment is now being urged.

V. GENERAL ARGUMENTS AND CONCLUSIONS

It is now evident that the cause of the Oklahoma bank failures was not deposit guaranty alone, but guaranty plus ineffective examinations, insufficient scrutiny of the previous records of bankers, and unfavorable economic conditions following the period of settlement and rapid growth. This is shown by the fact that in the other states where deposits are guaranteed failures have been few.

The guaranty system has given opportunities to some reckless and criminal bankers in Oklahoma, but it has not turned honest bankers into rogues there, or in the other states we have studied. Deposit guaranty is not stockholders' insurance. Stockholders must lose their whole investment before the guaranty fund suffers any loss, and there is, therefore, not even a financial incentive for a good banker to become a rascal. He may be tempted by guaranteed competition into an unwonted, perhaps unwise liberality, but not to a dangerous extent, if we can judge by the present experience of Kansas, Nebraska, and Texas.

It remains to consider what are the best methods of guaranteeing deposits and whether, in fact, such

guaranty is desirable at all. It is unnecessary here to repeat the arguments stated at some length in the previous article; but one suggestion then advanced should be withdrawn. Deposit insurance by private corporations was mentioned as a possible solution of the problem. But this is now evidently not the solution that is to be used, if the problem is found to be worth solving. While such corporations could select risks and limit their size and distribution, and while there is an example in Kansas of the successful operation of such a company, it is obvious, nevertheless, that if deposits are to be guaranteed or insured on any considerable scale, it will be through the banking departments of the states or conceivably of the United States. The efforts to organize other deposit insurance companies and put them in operation have not met with success. The Kansas example remains solitary.

The stimulus to reckless banking is not the chief danger to the success of deposit guaranty. Kansas, Nebraska, and Texas have so far repressed such tendencies. A greater danger has just been mentioned, the impossibility of limiting the size of single risks or avoiding the concentration of risks in single localities. Whether this danger will prove fatal to the success of the plan, depends largely on the size of the fund accumulated by the time the big losses occur. The Oklahoma fund is insolvent now. Texas is accumulating a $2,000,000 fund, Kansas a $500,000 fund, and Nebraska a fund of one and one-half per cent of deposits, say $1,500,000. Each state should considerably advance the limit now fixed on its fund, and Kansas, at least, should increase its assessment rates. There would then be some probability of establishing reserves large enough to take care of as many failures as can reasonably be expected in these states under present day conditions.

Another danger, social rather than financial, is the real or supposed necessity of accompanying the establishment of the guaranty system with grants of almost despotic power to the state banking departments. The guaranty of deposits is so powerful an inducement to depositors, legislators believe, that for fear of its misuse by the incompetent or unscrupulous the banking departments are empowered not only to regulate and supervise banks, but to say what rates of interest they shall pay, and whether the citizens shall establish more banks. In some states both these powers are exercised. This may be "medieval," but, as in the question whether deposit insurance should be provided by the state or by private corporations, it is sufficient to recognize the irresistible tendency in many forms of industry toward state control. If the state can fix railroad rates, no doubt it can fix rates of interest on deposits. If it can regulate banks, no doubt the power to fix their number and forbid new organizations regarded as superfluous will be upheld. Doubtless the part of wisdom lies in trying to guide this tendency instead of fighting it.

The vital question is whether the public needs greater assurance of the safety of its deposits than can be afforded by the resources of a single bank in a single town. Any reader who may be interested will find the writer's views stated carefully in the article before referred to. Even in states where banking is soundest the bare possibility of failure, and the knowledge of the blight it would bring to business plans and to household life, keeps many people from the banks. They cannot be absolutely sure. They cannot detect the few cases of unsoundness, some or all of which escape bank examiners, business men among the customers, and the

1 Quarterly Journal of Economics, vol. xxiv, pp. 373 et seq.