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of the assessments are not withdrawn from the bank, but are set aside to the credit of the guaranty-fund board and only drawn against when there has been a failure. The board advises, under date of July 6, 1921, that funds to their credit in this account on that date approximated $700,000. It has further stated that the actual cost to members thus far has been $28 to each $100,000 of eligible deposits. The first payment to the contingent fund authorized at the last session of the legislature approximated $60,000—the entire cost to the member banks thus far. The failure of the Scandinavian-American Bank in Seattle occurred recently, but no information is at command with respect to the amount of liabilities that will have to be met on account of this failure. It is learned, however, from the secretary of the depositors' guaranty fund that

the member banks in the system are planning on a reorganization of the assets of the Scandinavian-American Bank, and if effected the guaranty fund will be relieved of this liability. If it should fail, it would mean a complete wiping out of all the guaranty fund and would mean an assessment against the various member banks for a number of years. In such a case, however, the member banks will no doubt withdraw from the system, as the law provides a method by which they can withdraw by paying all assessments, which shall not exceed onehalf of 1 per cent of their average eligible deposits during a period of one year from the date of their withdrawal. It is, indeed, unfortunate that the largest bank in the system should fail, as no doubt the fund could have taken care of any other bank that might have failed.

The condition of State and national banks in the State of Washington in 1917 and 1921 is shown in the following statement:

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The South Dakota guaranty law enacted in 1915 became effective January 1, 1916, and in a communication from Superintendent Hirning, of date of June 24, 1921, it is stated that since the law has been in operation there have been but 3 failures, the combined capital of the banks being $50,000, and deposit liabilities $680,000. In each case failure was due to defalcation of officials.

In a case of a failure of one bank it is stated that out of the assets and shareholders' liabilities a sufficient amount was realized to replace the amount withdrawn out of the guaranty fund and remaining assets then turned over to the stockholders, so there was no loss to the guaranty fund. In the second case liquidation has not been fully effected, but it is estimated that there will be a recovery of 75 per cent on account of the amount withdrawn from the guaranty fund. In the third case it is the judgment of the superintendent that the guaranty fund will be reimbursed to the extent of at least 80 per cent of the amount drawn to pay the depositors. A comparison of the number, etc., of the State and national banks in South Dakota in 1916 and 1921 follows:

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The law providing for the guaranty of deposits in State banks of Mississippi was enacted in 1914, but the banks were given until June 1, 1915, to put their affairs in such condition as to be admitted (or authorized to do business under the depositors' guaranty law) or, failing to do so, were required to go out of business.

The first failure of a bank in the system occurred in 1916, and from that date to June 30, 1921, there have been 12 failures, the aggregate capital being $576,000, surplus and other profits $349,894, and all other liabilities $6,318,882. These banks had paid in to the guaranty fund the sum of $21,000. The total receipts from the assessments on all banks up to June last aggregated $588,933.44. From an analysis of the statements submitted it would appear that the loss to the guaranty fund over and above the amounts realized from the assets and shareholders' liabilities of nine of the failed banks would amount to over $580,000. In one case the loss has not been determined and in the remaining two the assets of the banks were found to be sufficient to liquidate the liabilities.

From an examination of the correspondence with the banking department of the State, it would appear that 6 of the 12 failures were due to criminal acts or acts bordering on criminality, 3 to general business

conditions, and 3 due to misjudgment of the examiner. It is understood that the statement relative to the third cause relates to the reported condition of those banks at the time they entered the guaranty system.

The number, capital, etc., of State banks in Mississippi in 1916 and 1921 and the number of national banks in the State for the same years are shown in the following statement:

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"The theory" (guaranty of bank deposits), states a well-known financial writer in a recent publication, "is that of insurance, but it has certain fundamental weaknesses which are more serious in their effects upon banking than in their relation to most other kinds of business to which insurance is applied. Insurance is sound as a protection against unavoidable hazards, but dangerous whenever it tends to increase the hazards. The insurance or guaranty of bank deposits tends to increase the hazards by eliminating the value of character as a banker's asset. It tends to make all banks look alike to the public, and puts the careful, conservative banker, who is unwilling to make large promises and take large chances, at a disadvantage. The theory is at fault in placing more emphasis upon the payment of depositors after a bank has failed than upon preventing failure. Its weakness always develops in a crisis."

Classifications of Loans Held by National Banks. From the Report of the Comptroller of the Currency for 1921, p. 26.

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On demand, paper with one or more individual
or firm names (not secured by,collateral)..
On demand, secured by stocks and bonds.
On demand, secured by other personal securities,
including merchandise, warehouse receipts, etc.
On time, paper with one or more individual or
firm names (not secured by collateral)
On time, secured by stocks and bonds..
On time, secured by other personal securities, in-
cluding merchandise, warehouse receipts, etc.
Secured by real estate mortgages or other liens
on realty not in accordance with section 24,
Federal reserve act, as amended...
Secured by improved real estate under authority
of section 24, Federal reserve act, as amended..
Acceptances of other banks discounted.
Acceptances of this bank purchased or discounted
Customers' liability on account of drafts paid
under letters of credit and for which this bank
has not been reimbursed..

Total..

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Suggested Readings on Chapter V.

Langston, L. H.-Practical Bank Operation.

Moulton, H. G.-Financial Organization, Chapter XXI. Dewey, D. R., and Shugrue, M. J.—Banking and Credit, Chapters XIII and XIV.

Phillips, C. A.-Bank Credit, Chapters XII and XV.

I.

Questions and Problems on Chapter V.

Some banks require a borrower to keep at least 20 per cent of his borrowings on deposit in the bank. How much would the business man keep anyway? Why does anyone keep an unused balance in the bank? Is the minimum balance which a business man needs related to the amount of borrowings or to some other magnitude in the business?

2. Discuss the proposition that the annual clean-up of loans necessarily proves that the business is not getting fixed capital from the bank.

3. What sets the limit to the amount a bank can loan?

4. From the standpoint of the borrower, what should determine the duration of the loan?

5. Should a borrower be allowed to pay his obligation before it is due, and get a rebate of the discount still unearned? 6. What effect will the tendency of discount rates to go higher or lower have on the amount of borrowing the business man will wish to do and on the duration of the paper he will offer for discount?

7. On December 1, 1920, the discount rates of the Federal Reserve Bank of New York were as follows:

Paper secured by Treasury certificates of indebtedness
Paper secured by Liberty bonds and Victory Notes

Trade acceptances

Commercial paper

52%

6 %

7 %

7 %

Since this was a time of heavy discounting by the banks, these rates would presumably have considerable effect on the rates charged by the member banks. If you were a borrower from a member bank, in what form would you do your borrowing? 8. To what extent can a business man vary the form his loans take?

9. 10.

How much can be done to change commercial custom? There are two methods of granting credit: (a) the method of looking to the goods to furnish the basis of the credit, each transaction standing by itself; (b) the method of considering primarily the credit standing of the parties liable on the credit instrument. In a time of rapid deflation, what dangers are involved in the method of granting credit on the transaction?

II.

How does a depositor choose his bank?

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