Legislation in this country has also concerned itself with the duties of bank directors and the enforcement of their performance, and with the relations of bank officers to their banks, particularly those involved in borrowing for their own uses or for firms or corporations in which they are interested.
A recent legislative experiment along quite a new line has been undertaken in this country in the form of laws providing for the mutual insurance of depositors. Oklahoma started this experiment, and her example has been followed by other states. The essence of the experiment consists in the provision of a fund out of which is paid to the depositors of failed banks that portion of their claims which cannot be met from the liquidation of the assets of the defunct banks, such fund to be contributed by the other banks belonging to the system.
The protection of depositors against loss is a commendable aim of legislation, but this method of attaining this aim is open to the serious objection that it removes from depositors all concern regarding the proper management of the bank with which they do business, and thus gives the unscrupulous, dishonest, and plunging banker an advantage. Attraction of depositors is the chief field in which competition between banks is carried on, and when the power of good management in this direction is removed, high rates on deposits, high lines of credit, low or no rates of exchange, extravagance in equipment, etc., remain the only attractions, and in the offer of these the unscrupulous and plunging banker will always outdo the conservative.
It is impossible to overcome this objection by public supervision, and more frequent and rigid examinations. No public officer can equip himself to pass judgment on the relations of a bank with each customer, or to detect secret contracts and unwritten understandings, or to keep unscrupulous people out of the banking business. There can be no doubt that a reputation for conservatism, good judgment, strict integrity, and careful management is, at the present time, the most valuable asset a banker can have, because customers know that they are in danger to the extent that these qualities are lacking. To substitute for the present basis of competition between banks that established by mutual insurance laws is to undermine the foundations of our credit system and to invite disaster and ruin.
5. Adequacy and Economy of Service
From the point of view of adequacy and economy of service, two types of banking systems require attention; namely, that characterized by a large number of relatively small local independent banks, chartered under general laws, and exemplified in this country; and that characterized by a relatively small number of large banks endowed with the privilege of establishing branches, and exemplified in the other leading nations of the world.
Under our system each community is encouraged to look after its own banking needs. Local initiative in the establishment of new institutions is given free play and local capital and local talent is attracted. Outside promoters and outside capital are not excluded, but, if they come, they do so as colonists expecting to cast in their lot with the community and to become identified with it. The managers of our banks for the most part are local men who are the real heads of the institutions they manage and whose careers and prosperity depend on the success of these institutions.
The localism which characterizes this system contributes elements both of strength and of weakness. It develops local talent, and promotes mutual understanding and cooperation between the banks and the business enterprises of the community, and conformity of organization and methods to local needs. Its weakness consists in the financial isolation and the narrowness of vision and training which are its natural accompaniments. Under this system capital does not easily and quickly move from place to place and readily distribute itself according to the relative needs of different communities. In consequence, rates of interest are apt to vary widely, some communities to be under- and others over-capitalized, and the capital of the nation as a whole to be inefficiently employed. Under this system the opportunity of bankers for training is meager, since the broader and more fundamental aspects of the business are rarely brought to their attention, and in the smaller towns and country districts they are apt to be recruited from people of mediocre ability and often from those not well fitted by nature and education for this branch of commercial enterprise.
The system of branch banking, almost universally employed elsewhere, is strong where our system is weak, but it has weaknesses of its own. It promotes distribution of capital according to relative needs, and consequently efficiency in the application of a nation's capital as a whole, and it offers a wide field of training for the people engaged in the business, and draws its recruits from every quarter. It can readily supply banking facilities to communities too small or too poor to provide for an independent bank, and more readily than our system can adjust itself to rapidly growing communities.
Its chief weakness consists in the lack of independence of the managers of the branches and the consequent danger that local needs may not be fully satisfied. The manager of a branch is usually granted freedom of action only in routine matters. Any business out of the usual order must be referred to higher authorities connected or associated with the main office; and, even with the advice of the manager, who alone is familiar with local conditions, the decision cannot be made with that intimacy of knowledge of and sympathy with the business and aspirations of the individual or firm under consideration that full justice to him and his town may require. In the matter of adequacy and character of service, therefore, the city in which the main office is located has an advantage over those in which the branches are located.