EXTENSION OF TEMPORARY PLAN FOR DEPOSIT

INSURANCE

TUESDAY, MAY 1, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.

The committee met at 10:50 a.m., Hon. Henry B. Steagall (chairman) presiding.

The CHAIRMAN. Gentlemen, we have with us Mr. Thomas B. Love of Texas, who was formerly Assistant Secretary of the Treasury and at one time banking and insurance commissioner for the State of Texas. Mr. Love wishes to make a statement regarding Senate bill 3025.

STATEMENT OF THOMAS B. LOVE, LAWYER, DALLAS, TEX.

Mr. Love. Mr. Chairman and gentlemen of the committee, I want to express my gratitude for the privilege of being allowed to say a word on this subject; and in order that you may understand the background, I will say first that I am a farmer, live on and operate a 400-acre farm, and have for 15 years, and practice law in order to make the money to keep my farm. I am a bank depositor whose deposit is less than $2,500, and I am here on my own initiative and my own mission, speaking for myself and all others similarly situated.

I have, as commissioner of insurance and banking in the State of Texas, in 1907-when we had the panic in 1907-had the supervision of 700 State banks, all of which were piloted through that panic. Although none of them and no other bank in Texas paid over $10 on any check to any one depoistor in any one day, for several weeks, they were piloted through without the loss of a dime to any depositor or to any stockholder-not by my efforts, but, incidentally, under my leadership.

I have been a student of this subject of insurance and banking, and of bank supervision since that time. I wrote and secured the aid of the Governor of Texas, as Mr. Cross will tell you, in passing, in 1909, a bank guarantee law for the State of Texas, guaranteeing all the unsecured and noninterest-bearing deposits of the banks of that State. Under that system, for 16 years, until it was dissolved and emasculated by the legislature, every dime due to every depositor was paid 100 percent on the dollar, and when it was wound up by the courts there was a million dollars left to divide among the banks. I have here the proof of that statement in the shape of a statement based upon certified statements of the Department of Banking of Texas, which was printed in the Congressional Record last year, showing exactly the condition. It not only shows every

deposit paid but that the State banks drew in deposits more largely than the national banks which were operating along with them without the guaranty of deposits, and that they made more earnings for their stockholders.

The reason that it was emasculated and terminated was not because it failed but because it succeeded. The national banks brought enough pressure to bear upon the State banks to induce them to go before the State legislature and secure the passage of a law, which is peculiarly like this one in one respect-it enabled any one bank within the system to withdraw, and whenever you do that you end the finality and safety of an insurance proposition like this, Because, one bank withdrawing after another, they put on a campaign of withdrawals, and in about a year the whole thing voluntarily got out and terminated the system. But they paid every depositor, an average of over 800 banks for 16 years, every dime of deposits and had a million dollars left at the end of the period.

Now there has been a great deal of misapprehension about the history of this thing in the various States, and to this day, in this very room. A former Comptroller of the Treasury testified-I have no doubt he thought he was testifying accurately-there was a deficit in the State of Texas of $17,000,000 in the fund. Seventeen million dollars happens to be the sum paid to depositors in closed banks first and last in a 16-year period, in 900 banks. There was not a deficit, as the record shows, but a surplus of a million dollars. Mr. HOLLISTER. $16,000,000 had been paid out, and $17,000,000 had been paid in by the banks?

Mr. LOVE. They had collected of the banks 15,000,000. It cost them but fifty-one hundredths of 1 percent of the deposits for a 16-year period, or about $800 average for each bank in a year, which was less than they paid out for advertising, lead pencils, and things of that sort. The average cost was negligible-certainly it was negligible as compared with what they have had to go through with since.

Now I have been an earnest advocate of this thing ever since. As you gentlemen know, when the Federal Reserve Bank Act passed in 1913, as it passed the Senate it contained a provision providing for the guarantee of bank deposits, and that was eliminated in the conference upon the agreement that it would be postponed until the regular session of the Congress that fall, when a better-considered bill on the subject would be introduced. And it undoubtedly would have been passed but for the intervention of the World War, which took everybody's attention away from that sort of thing. But I collaborated with the then Comptroller of the Currency, Mr. John Skelton Williams, who was a very dear friend of mine, in preparing a bill on that subject which Senator Owens introduced in the fall of 1913. I have been for this measure ever since, and I have hailed with great joy the advocacy of the measure by the distinguished chairman of this committee since he came to Congress and urged its enactment before the 4th of March last year, to the best of my ability.

Yesterday Mr. Bennett, the chairman of the insurance corporation, stated that there was something in the banking situation which made it dangerous to pass this bill. I want to give you a cornfield opinion on that subject, and my experience in studying banking and insurance matters and supervising banks for many years teaches me, if I may

say so, that the outside opinion is better than the inside opinion. I think the history shows that men who are in the banking business not only do not understand how to regulate and supervise banks, but they are peculiarly adept in devising ways of how not to do it, and they will adopt the wrong and unfortunate position.

I think banking conditions in America today are better than they have ever been in the history of the country. I base that upon the fact that for the 4 months ending today there has not been a banking failure in the United States. I know there has been one bank that has been closed over here, of small liabilities, in Pittsburgh-one.. But just think what that means, gentlemen. I have here the figures showing the number of bank failures for the past 10 years, and they average 304 banks for the first 4 months of the year. In other words, in the 10 years preceding 1933-and I leave out 1933, because all of the banks closed last year; the President of the United States had to do it, and that would not be a fair year to include but from 1923 to 1933 there were 3,041 banks closed in the first 4 months of the year. The first 4 months of this year there has been no bank closed.

These 3,041 banks had deposits of a billion ninety-seven million. Now that does not represent the loss that came from those banks. The statistics show that about 65 percent of the deposits in closed banks is saved ordinarily or may be saved-fron 50 to 65 percent. But certainly there was a very great loss in money every year during these first 4 months of the year, as well as humiliation and mortification and embarrassment caused to innocent people, men, women, and children.

Now what has been the effect of this law that took effect January I of this year, upon deposits? We have the deposits of all of the banks of the United States as of December 31, last year. I have been unable to get any tabulation of all the deposits for any period since that time, but I do know that in the city of Dallas-I have here a statement showing the deposits of banks of the city of Dallas, a city of 350,000 people, which shows that there was an increase of about 25 percent in about 60 days between those two calls in the banks of that city. I know that there was an increase in the city of Fort Worth of practically the same amount, and I know, as Mr. Bennett stated here yesterday, that the increase in bank deposits during these 4 months in the country is much larger than it is in the large cities. So I think there can be no doubt that there has been an increase of not less than 20 percent in bank deposits throughout the country.

Here is the statement of the increase in the bank deposits in the city of Dallas between December 30, 1933, and March 5, 1934. On December 30, the deposits were $160,505,960.08. On March 5, 2 months and 5 days later, they were $193,641,083.77. That was an increase in the deposits of those banks of 33 millions of dollars. Now, of course, some people say that that did not result from the intervention of the guaranty of bank deposits. It is precisely what we have all been saying would result if you enacted a law providing for guaranteeing bank deposits. The guaranty of bank deposits became effective and it has ensued.

In that connection, I want to call attention to a statement which is published by the chairman and president of the Texas banker:

association-my State-and the president of a country bank at Victoria, down in southwest Texas. He is a good man, but it shows the atmosphere and the attitude of the bankers generally, where they are subject to pressure that is being brought to bear to discredit and emasculate this law. In a recent statement just put out, Mr. Blackburn says:

The new banking laws of the Nation, including the corporation which insures deposits up to 25 hundred dollars, undoubtedly has had a stable effect on the public mind toward banking. Most sound-thinking bankers of Texas agree that this is a fact. They state further, however, that as far as increased deposits are concerned there is no indication that the Federal Deposit Insurance Corporation has done so. Very few banks can trace any increase in deposits to the new law. It is true that banks have more actual money, and many of them had a peak in deposits. * * *

Banks in the city of Dallas, Fort Worth, Houston, have all got more money on deposit than ever before in the history of the State. The statement continues:

* * *This is accounted for by the fact that the Government is financing everybody, from the farmer up. * * *

And the Government was financing everybody from the farmer up before the bank holiday in Texas-was making the only loans to farmers that were made and making substantially the only loans that were made to anybody else. And then this chairman of the bankers' association follows with this remarkable statement:

* * * The bankers are keeping their investments liquid, and there is no general demand for money.

I spend half of my time in my law office and I have a heavy practice and am a busy man, if I do say so-but I spend half of my time talking to distressed men and women who are endeavoring to borrow money to save their homes, to save their business, and to save themselves from destruction. Yet the chairman of the bankers' association glibly says there is no demand for money!

The last thing that happened before I took the train to come to Washington was my neighbor, the best farmer in Dallas County, and who lives on about the best farm in Dallas County, 160 acres, had a loan of $10,000 that was maturing and was going to be foreclosed if he did not get the money, and he asked me to intervene and see what I could do to get him the money. That was a little large proportion of the value; the farm was probably worth, at present prices, not over $15,000, but there could not be a better risk, so far as loaning is concerned.

Now what was the condition of affairs before this bank-guaranty law was passed? Here is the result in the 12 years from 1921 to 1932, inclusive. There were a total of 376 banks in the United States having deposits of $4,756,000. The estimated loss to depositors of those closed banks in that 12-year period was $1,629,000,000. Now this development of bank failures in the United States has had its large fruition and growth in recent years. This was more than 4 times the number suspended in the 29 years preceding this period. And to show you that this accelerated growth of bank failures in the United States was keeping up to date, in 1930 there were 1,292 banks that closed, as compared with an average of 602 for the previous 9 years. And for 1931, the following year, the number closed was 2,217, or 10% percent of all of the banks in operation that year in

the United States, or 1 bank failure for each 10 banks. And the next year, 1932, there were 1,453 banks failed, or over 8 percent of the banks in operation, or 1 failed bank for about each 12 banks in operation that year. Those are the conditions that the Congress sought to meet by the passage of the Glass-Steagall bill last year, and they met them.

Out of a study of this subject for 20 years and out of a study of the insurance phases of it and the banking phases of it, for what it may be worth, I say to you that there cannot be any bank failures which will result in loss to depositors so long as this bank-deposit-insurance law remains in effect. It is a simple thing. No insurance plan ever failed in the history of the world, except for one cause and that was an inadequate rate. They point to the failure of the State bankguaranty systems in the various States of the Union. That failure was very much like Mark Twain's death. Mark Twain's death was "very much exaggerated." As I pointed out to you, there was no failure in Texas; but the records in the Treasury down here show they have made a study, the Federal Reserve bank has, of that very question, and their records disclose that the depositors in those banks, wherever there was any failure in those eight States during that period, received 68 percent of their claims, whereas the depositors in the national banks of the United States, during the same period, received only 49 percent. They paid many millions of dollars to the depositors in those closed banks, which would not have been paid to them but for the law. The only failure was that it did not pay 100 percent, instead of 25 or 30 percent more than they would otherwise have gotten, and that failure resulted only from one fact, namely, an inadequate rate.

When I was urging the passage of the Texas law, I was met with this same opposition about an inadequate rate. I was told there was only one way to have an adequate rate and that was to have an unlimited liability. And there is nothing unsound in that. All of that talk is specious. The safest and best insurance companies in the world today are those that have the unlimited right of assessment among the risk holders-the cotton-mill mutuals, factory mutuals, millers mutuals, and all the rest of them. There is nothing unsound in that, because they are controlled there by the insured themselves, or for their benefit. And I agreed in Texas finally, reluctantly, on a limitation of 3 percent in 1 year-that the assessments in one year should not exceed 3 percent. As a matter of fact, the records disclose that the average cost per year was fifty-three hundredths of 1 percent.

Now there can be no objection to this unlimited rate for two reasons. One is that the rate ought to be unquestionably such as will adequately protect the depositors and the other is that the proof is evident, that, under the worst things that can happen with an unlimited. rate, there cannot be any great damage done to the banks.

I hold in my hand Bulletin No. 3, issued by the Association of Reserve City Banks, entitled "The Guarantee of Bank Deposits and, on page 14 it carries a table showing what the cost would have been under this scheme for each year from 1921 to 1932, inclusive, and it shows that in the year 1931, which was the peak year of all years, a year in which twice as many banks failed in the United States as any other year before or afterwards, 1,669 banks failed,.