98. THE KIRBY PRIVATE BANK FAILURE

The Kirby Savings Bank, at 5019 South Ashland Ave., was closed when its proprietor, Dr. William P. Kirby, was adjudged insane by the county court. The assets discovered amounted to $856, of which $206 is cash; liabilities totaled $150,000. Possession of the defunct bank was effected by the receiver only with the assistance of the police, a woman reported to be the owner of the building endeavoring to prevent its seizure by means of a double-barreled shotgun. The cashier of that bank, who is a relative of Dr. Kirby, is but seventeen years old. He was arrested on a charge of passing a worthless check for $1,000, as agent for Dr. Kirby.

The Kirby Savings Bank was a private institution. It was conducted by a physician, who may or may not have had some knowledge of banking methods. Regardless of his fitness or unfitness to run a bank, he was free to put up a sign and invite deposits, no supervision or inspection of any kind being applied to the concern by the public authorities.

99. THE POSITION OF PRIVATE BANK DEPOSITORS

A private banker never having become incorporated or subjected to supervision or control of either the national, state, or municipal government occupies exactly the same position in the eyes of the law as does a private citizen. The assets and liabilities of his business are a part of his personal estate and are included with those of his private ventures. Consequently when he dies the debts of not only his banking business, but of all of his private enterprises as well, are liens against his estate, which, like that of any other individual, must go through the probate court for settlement. The depositors of the bank share pro rata with the other creditors of the estate, for it has been held by the courts that the relation existing between a bank and a depositor is simply that of debtor and creditor, which does not entitle the latter to a preference in the distribution of the assets.

While the banking business conducted by a private individual may be perfectly solvent, the liabilities of his other private ventures may be of such magnitude as to render his estate as a whole insolvent. In other words, the depositors in his bank are obliged to stand the losses suffered by him in businesses absolutely foreign to that of banking. Only the other day we read of a saloonkeeper who died while

I

1 Quoted from the Chicago Banker, November 9, 1912, p. 15.

2

* From an editorial in the Chicago Banker, December 21, 1912, pp. 16-17.

running a private bank as a side line; he also conducted a barber shop and a steamship agency. If any of these prove to be a failure, it is more than probable that the depositors will be very much disappointed when the estate is wound up. The same situation would prevail should the insolvent decide to avail himself of the emergency defense of insanity.

One does not have much sympathy for educated people so careless as to place their funds in unstable banking institutions; he cannot, however, help but feel for the ignorant foreigners who have come to this "land of promise" with the hope and expectation of accumulating a little something as a provision for the proverbial "rainy day." To them the word "bank" has a certain trust-inspiring significance, creating a feeling of the utmost faith and confidence. They do not know that there is any distinction between state, national, or private banks; they place all banks in one class-as a place where they can deposit their savings and withdraw them any time they so desire. They do not know anything about the probate court nor of other creditors. Is it any wonder, then, that they sometimes resort to attempted acts of violence when the savings gleaned as a result of years of toil are denied them?

The argument has been advanced on behalf of the private bankers opposing supervision in Illinois that because conditions are "rotten" in Chicago it does not necessarily follow that they are in the rest of the state-all of which will be conceded; but why should a private banker on a perfectly solvent basis and who is conducting his business honestly oppose an opportunity to show to his clients the exact status of his bank and the manner in which the money of its depositors is being used, thereby taking them into his confidence? The answer is that he doesn't. It is the crafty, hard-hearted, dishonest man who is willing to allow a lot of simple, uneducated people to contribute to his support with money earned by the sweat of their brows, while he in return gives them nothing but the "honor and prestige" of being depositors of his "bank." There is a vast difference, too, between "personal" and bank taxes.

100.

THE NATURE OF GOVERNMENT SUPERVISION OF
NATIONAL BANKS

"There shall be established in the Treasury Department a separate Bureau, which shall be charged with the execution of all laws passed by Congress relating to the issue and regulation of national currency secured

by United States bonds and, under the general supervision of the Federal Reserve Board, of all Federal Reserve notes, the chief officer of which Bureau shall be called the Comptroller of the Currency and shall perform his duties under the general directions of the Secretary of the Treasury.” (National Bank Act of June 3, 1864, as amended by the Federal Reserve Act of December 23, 1915.)

"The Comptroller of the Currency, with the approval of the Secretary of the Treasury, shall appoint examiners who shall examine every member bank at least twice each calendar year and oftener if considered necessary. The examiner making the examination of any national bank, or of any other member bank, shall have power to make a thorough examination of all the affairs of the bank and in doing so he shall have power to administer oaths and to examine any of the officers and agents thereof under oath." (Federal Reserve Act, December 23, 1913.)

"It is the duty of the Comptroller to make an annual report to Congress, giving a summary of the condition of every national bank together with such special information as may be regarded of importance, whether in connection with national or state banks." (National Bank Act of June 3, 1864.)

"Every association shall make to the Comptroller of the Currency not less than five reports during each and every year, . . . . which reports shall exhibit, in detail and under appropriate heads, the resources and liabilities of the association at the close of business on any past day to be by him specified, and shall transmit such reports to the Comptroller within five days after the receipt of a request or requisition therefor from him. And the Comptroller shall have power to call for special reports from any particular association whenever in his judgment the same shall be necessary. Any association failing to make and transmit any such report shall be subject to a penalty of one hundred dollars for each day after five days that such bank shall delay to make and transmit any report." (National Bank Act, as amended March 3, 1869.)

"A Federal Reserve Board is hereby created which shall consist of seven members, including the Secretary of the Treasury and the Comptroller of the Currency, who shall be members ex officio, and five members appointed by the President of the United States by and with the advice and consent of the Senate." (Federal Reserve Act, December 23, 1913.)

The Federal Reserve Board has very broad powers, the chief of which are as follows:

a) To examine at its discretion the accounts, books, and affairs of each Federal reserve bank and of each member bank and to require such statements and reports as it may deem necessary. The said board shall publish once each week a statement showing the condition of each Federal reserve bank and a consolidated statement for all Federal reserve banks.

b) To permit, or, on the affirmative vote of at least five members of the Reserve Board, to require Federal reserve banks to rediscount the discounted paper of other Federal reserve banks at rates of interest to be determined by the Federal Reserve Board.

c) To suspend for a certain limited period any reserve requirements specified in this Act: Provided, That it shall establish a graduated tax upon the amounts by which the reserve requirements of the Act may be permitted to fall below the level specified.

d) To regulate through the Bureau under the charge of the Comptroller of the Currency the issue and retirement of Federal reserve notes. e) To exercise general supervision over said Federal reserve banks. (Adapted from Federal Reserve Act, December 23, 1913.)1

ΙΟΙ. THE MENACE IN GOVERNMENT CONTROL OF BANKING2 BY ELMER H. YOUNGMAN

The banking bill introduced in the Senate on June 26, 1913, is in my judgment one of the most dangerous and unsound measures ever introduced in the American Congress.

It virtually proposes to concentrate fifteen or twenty billions of banking credit under the control of a Federal Reserve Board, thus making possible what is now impossible under our system of numerous small banks with their system of ownership and management widely scattered, namely, the complete domination of credit by political bosses or by the financial powers to whom such bosses are subservient.

What a rich prize that would be as a bone of contention between rival political bosses and rival financial interests-the power to control credit and fix the rate of discount in every corner of the country. Outside the Russian Empire, where the Imperial Bank is a department of the State Treasury, no such politico-financial despotism exists.

This country does not need and will not tolerate a central bank (even if called a National Reserve Association) dominated by big bankers and those whom they control.

Nor does it need nor will it tolerate a political bank (even if called a Federal Reserve Board) controlled by the ruling political party. The founders of this Government sought to avoid placing the purse and the sword in the same hands. The Secretary of the Treasury and the Comptroller of the Treasury make their reports to the Speaker of the House of Representatives, not to the President. But

For full treatment of Federal Reserve System see chapter vii.

2 Adapted from an editorial in the Bankers' Magazine, (New York, LXXXVII, 1915), 138-40.

here is a proposal to place in the hands of the President the power to give or to withhold credit, which has been aptly defined as the lifeblood of commerce.

Such a power is too great to be placed in the hands of any man, and its exercise by him, even through his appointees, might become a source of grave danger.

Neither should this power be entrusted to a central bank (or National Reserve Association, so-called) nor to any other board of any kind whatsoever and howsoever composed; for no board-whoever its members may be can sit at Washington or any other place and determine justly or accurately the amount of credit, the kind of credit, or the rate that should be paid for such credit.

Nor can these matters possibly be determined by Congress, nor by any department of the Government.

The only one who has sure knowledge of the needs of currency and credit is the man or the community that wants it.

The only sure means of testing the demand for currency and credit is the bank, which has its finger on the business pulse of individuals and the community. Banks are the scales that weigh the credit of communities and individuals, and are therefore the only instruments that can properly gauge and supply the demand for credit and currency.

When I take my note to a bank, and lay it down, I buy credit from the bank, just as when I go to the fish-dealer and lay down my money I buy fish. For the bank to dictate to me (and whether this is done by the Government, a board, or any other agency whatever, it comes to the same thing), what I should get in exchange for my note that is, the kind of credit or money I should have, whether bank notes, coin, paper certificates, or checks-would be just as impertinent as for the fish-dealer to try to give me codfish when I asked for mackerel.

Whether I shall obtain credit at all is a matter between me and my banker, because he is the only man in the community who has the machinery for testing my ability to pay.

What kind of credit (or currency) I shall swap my own credit for, that is my affair purely.

All that the Government ought to do is to see that the notes are properly engraved so as to render counterfeiting difficult, and to see that the banks provide the coin and the machinery for promptly paying their notes.