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By J.H. Puelicher
Former President, American Bankers Association

     "A BANK'S primary responsibility is to protect its depositors' money, and the banker who tries to make profit through unreasonable risks at the expense of deposit liquidity is headed for trouble"

     The antique banks illustrated on these pages are from the unique collection of Elmer Rand Jacobs of New York City

     BANKS and bankers are accustomed to be cussed and discussed but the flood of harsh words about them has risen during the past two or three years to unreasonable heights. Along with most of my colleagues in this country's 19,500 banks, I find myself astonished by the general conversation about the incompetence of bankers and the breaking down—that is the popular phrase, is it not?— of the nation's banking system in the face of an emergency.

     It is time to state the other side of the case, for there are many grave dangers in allowing so much wild talk to go unchallenged. If everybody gets to believing that the situation is as bad as the loud-speakers would have us think, then we shall probably see all sorts of drastic remedies tried. Such nostrums might kill the patient—likewise might cause irreparable harm to a good many people who do not realize how intimately their own well-being is linked with the patient's.

     Let us have a look at the situation, to learn how bad it actually is. If we believe the newspaper scareheads and the alarmist orators of the radical and opportunist political camps, it must be pretty bad. So let us get this part of the task behind us.

     Just to bring the situation down to figures that can be easily grasped, and to make it personal, we shall suppose that on October I, 1929, you owned $100,000 in cash. You decided that to play safe you would deposit this money in the savings departments of all the banks in the United States, allotting your deposits in proportion to the size of each bank. Thus you placed yourself in the situation of the average of all savings depositors of the country; you became for the purpose of illustration a cross-section of our banking situation.

     You divided your $100,000 into about 25,000 parts, one part to each bank then in business. Your largest deposit was $2500 in the nation's largest bank, a New York institution. Your smallest was less than a dollar. Like most bank depositors, back in 1929, you felt completely safe. Under anything like normal conditions your sense of security would have been justified.

     Just how badly have you fared in three years? Newspaper headlines, debaters in legislative halls and in the corner cigar store, and general conversation should make you despair of ever seeing any worthwhile share of the tidy little fortune you had trustingly turned over for safekeeping to 25,000 banks in 1929.

     Today you have only about 18,500 bank accounts. The number has decreased by some 5,500 since you made your deposits. At first blush this looks bad for your money. However, a large part of this decrease in banks has occurred through mergers these banks for your use.

     Alas, 4,200 of your banks are definitely closed, failed, or whatever you choose to call it. This looks as if you have lost some of your money—and so you have. Your losses depend on the size of your account—which is in direct proportion to the size of the bank—and also on how much salvage there will be in each closed

     In the largest bank that has closed you had less than $450 and proportionately less, until your smallest is under one dollar. Altogether, there was just about $4,500 of your total of $100,000 in banks which have actually closed in these three troublous years. The other $95,500 is in banks that have steadfastly remained open in the face of the most difficult test that has ever confronted the nation's financial institutions. Therefore, even if the deposits that happened to be in the closed banks were totally lost, you would have lost about $4,500. But inasmuch as most of these banks in liquidation are paying sixty percent to eighty percent, your losses would probably be about $1,200. This is a good deal of money, but it is a small percentage of your original $100,000.

     Meanwhile, of course, your money has been drawing interest from the banks which have remained open. This interest totals approximately $9,000—an average of three percent annually on your original deposit of $100,000. This is considerably greater than your losses from closed banks. So today you could withdraw your deposits
and have a few thousand dollars more than you deposited three years ago.

     The nation's banks have not, it would appear, done so badly by you after all. You still have an amount on deposit equal to your original deposit of $100,000 and have even increased it by the net earnings from the interest the banks paid you on it. If you can think of many other ways in which you could have handled $100,000 during the past three years to keep it intact and even earn something with it, you are a good financier. You might have done it by buying United States Government bonds. You might have kept your money intact by the pernicious practice of hoarding, but in that event you would have some $7,000 or $8,000 less than you have to your credit, and furthermore you might have lost it all through fire or robbery as has happened in so many instances. You might, of course, have been so extremely shrewd or lucky as to put it into one of the comparatively few concerns which made money all through the depression—but the odds were l000 to 1 against you here. If you had put it into a cross section of almost anything else—securities, commodities, real estate, mortgages—your shrinkage in present values would be many times as great as the loss you suffered through bank closings.

     Mind you, we bankers cannot justifiably brag about our record during the depression. Theoretically no bank should ever close, no depositor should ever lose a dollar of his deposit. The four and one-half percent of this country's total bank deposits tied up in three years is just that much more than it should have been. Without going into all the details of why these banks failed, the major reasons were: A depreciation of values such as this country has never before seen; the existence of so many competing banks in some communities that they simply could not make a living; the starting of banks by people without enough banking experience to operate them successfully; runs by panic-stricken depositors who collapsed many sound banks by withdrawing their money faster than the bank could turn its assets into cash; and in a very few instances by dishonesty and betrayal of trust.

     At the same time, the banker's battle against depression conditions was at least as hard as that of the average business man. He invested his deposits in bonds which he thought were depression-proof, and they shrank materially. Borrowers who had always been good found themselves unable to repay their notes promptly, mortgages which he had always been able to sell as fast as he could get them remained in his vault and tied up his money. Coming through all of these difficulties, and in spite of them, the bankers of the United States have incurred conditions tying up only a small percentage of their depositors' money out of all the funds entrusted to them. The record could be far worse than it is and still not deserve a tenth of the criticism so loosely spread about by the uninformed.

     There is another side of the picture, of course. Although only a small ratio of all deposits have been affected by bank closings, in numbers more than this percentage of all bank depositors lost through closings since the bulk of these closings affected large numbers of small depositors. The small depositor is usually harder hit by a bank dosing than a large depositor, since he is less likely to have other resources to draw on. Consequently the damage to individuals, and the misery arising out of bank closings, cannot be accurately measured in these percentage figures. Nor does it comfort a man whose bank has failed, taking a portion of his life savings with it, to know that ninety-five and one-half percent of all bank deposits in banks are wholly unaffected.

     No intelligent banker would plead that the record of our craft has been spotless during the depression years. Banking in many instances might have been conducted better than it was. But even though the record does not deserve being bragged about, it certainly is far from discreditable. I know no important industry which has come through these troubled years at less loss to everybody concerned, including the general public.

     Banking, it seems to many of us, has done a pretty good job after all. And banking will, for many years to come, be more competently handled than it has been in the past. Though many good bankers suffered, the profession has, nevertheless, been purged of many individuals who lacked the equipment to make good bankers. There has been hammered into the mind of every banker a new realization of his responsibilities. With many unfavorable factors cleared away, other advantages will accrue to bring better banking as the clouds blow past. Bankers have been taught many valuable lessons which will persist through this generation, chief among them that a bank's primary responsibility is to protect its depositors' money and that the banker who tries to make profit through unreasonable risks at the expense of deposit liquidity is headed for trouble.

     The gravest danger to sound banking right now is that its well-wishers may kill it by kind intentions. The last session of Congress, for instance, saw introduced an unusual number of bills intended to improve banking. Few of them would have brought about real improvements; others would inevitably have cost the public great sums of money by further damaging the banking system to so great an extent that it would have taken years to recover. Fortunately the cooler heads prevailed, and Congress by good judgment rejected the unsound proposals.

     Bankers are hoping that this same policy will continue in coming sessions. For it seems to a good many of us that an industry which can come through such a storm as that which broke in 1929, and during three stormy years can conserve intact all but a small percentage of the money entrusted to it, has shown itself more than ordinarily well fitted to its task. And any organism so accurately balanced as American banking requires only a small amount of legislative meddling to upset the balance and cause untold trouble.

     Banking resembles in this respect our whole economic system and the lives of individuals. Banking in this country today has not attained perfection, but it works reasonably well—better than any other form of banking we have ever tried. Our economic system, which the socialist Karl Marx named capitalism, has its faults; still, admitting them, we have no other form of economic organization to which we can go with a demonstrated history of even a comparable success. As individuals, most of us can see ways in which we might have managed better, and plan ways in which we shall manage better in future; yet most of us hold to the belief that we can do better for ourselves and for our fellows if we are allowed to work out our own salvation without the hindrance of well-meant attempts to make life easier for us by law.

     This doctrine—which was formulated by the classical economists and has withstood the onslaughts of untold reformers ever since—is gaining converts rapidly in these days when business is still short of general prosperity. Great numbers of people have seen ambitious programs undertaken to improve their lot through schemes which are economically unsound, and after a while have seen that they were worse off than before as a result of the well-intentioned meddling. Farmers, for instance, have witnessed the government experiment in stabilizing wheat and cotton prices, and yet wheat and cotton prices went lower than for many years. Rubber growers of Malaysia saw the same results come from the British government's endeavor to help them by keeping up the price of rubber. Brazilian coffee growers, Canadian wheat growers, Cuban sugar growers—the list could be indefinitely extended. Nor does the rule apply only to agricultural products.

     We are working our, way out of the depression. Many men of dear vision and conservative tendency believe that we are started up the slope toward prosperity. If we are, and I incline to agree with them, it is not because of any of the panaceas which have been proposed and in many instances tried upon our economic body. Rather it is in spite of them.

     General prosperity can return only when enough of us succeed in balancing our budgets—that is, keeping our expenditures within our earnings or incomes—to permit us to resume normal buying. Once this occurs, we shall be out of this depression, and shall not have another until people once more succumb to the silly theory that the way to get ahead in the world is to spend all they make and get themselves head-over-heels in debt. Anything that helps the average man to balance his budget will improve business, farming, employment, banking. Anything that pulls him in the other direction will impede progress. The same statement applies to financial management, national, state, local. Public expenditures must be brought below the amounts which can be collected from the people through taxes without discouraging their productive activities—for no man is going to struggle to conduct a business and give employment to others only to see a disproportionate share of his own legitimate earnings seized by the Government to hand over to some one else, or dissipated in unnecessary or useless undertakings. That is just ordinary human nature.

     Hundreds of thousands, yes millions, of Americans have devised methods during the past three years to balance their budgets on incomes far below what they received during many years previous. The number of balanced budgets in families, in businesses and industries, in our various governmental bodies, is steadily increasing. As it increases, more buyers are able to purchase goods that they need, thereby increasing employment.

     The same thing applies to this country's banks. They are making steady progress at bettering their own situation. In the interest of everybody's welfare as well as the bankers', it will lead to a quicker recovery and a quicker restoration of general confidence if bankers are permitted to work out their own salvation.

     The experience of these years proves again that in a democracy our entire national structure—social, political, and economic—suffers just in so far as we fail as individuals to do our part in thinking, speaking, and acting intelligently. It is never a case of some leader at the top in government or business handing down something that will be good for us, but rather that the whole country is efficient, sane, and prosperous, because we in our individual lives, through study, understanding, and work, are efficient, sane, and prosperous. These things done individually bring individual welfare—done collectively, bring collective welfare. We have a nation of which we are proud and in which we are happy to the extent that our conception and realization of citizenship compels us to be upstanding, thoughtful, thrifty, just and intelligent.


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