ABA Banking Journal 5/08 - (Page 12) briefing Then & Now 100th Anniversary 1908-2008 When deposit insurance was verboten T he 1930s were a time of increasing government involvement in banking. Some of what developed has long since gone away. A good example was covered in the Journal’s September 1933 cover story, “Banking by Code: Fair Competition in the Public Interest Has Long Been the Aim of American Banking.” ABA President Francis Marion Law, president of Houston’s First National Bank, traced steps that the industry itself had taken over time to promote fair competition. The occasion of this defense was passage of the National Recovery Act, part of the emergency legislation created to get the U.S. back on its feet. Later in the year, as published in the Journal’s November edition, ABA negotiated a “Bankers Code of Fair Competition.” Managing Editor William R. Kuhns, wrote: “…the Code is the greatest opportunity banks have ever had to superintend their own business, to put into effect rules and practices that will make banking strong and to maintain banking service on a high plane. The result should be very helpful to recovery.” Probably the code’s “greatest use and import,” he noted, was in connection with the start of operations of the Federal Deposit Insurance Corporation on Jan. 1, 1934. ABA and many bankers had opposed the foundation of federal deposit insurance, which some states had tried on their own. Kuhns summarized this longstanding opposition: “Bankers have objected to the idea because it is not fair to depositors. Money deposited in a bank is not an insurable risk, any more than individual success is insurable, or the loans and investments of an individual are insurable against loss.” Kuhns predicted that deposit insurance would “remove the brakes on unsound management,” and declared that the Code would provide “management insurance for deposit insurance.” “The proper working of the Code,” Kuhns wrote, “is the only thing that will enable the insurance truck to stay on the road for any length of time. The guaranty of deposits is an urgent invitation to risk-taking while the Code confers on bankers themselves the power to see that sound management is also guaranteed.” Times change and predictions founder. The Code is long gone, and deposit insurance remains, much evolved. FDIC insurance started in 1934, and since then, no depositor has lost a cent of insured money as a result of a bank failure. Deposit insurance is considered a bedrock of modern banking, and bankers have long thought of the Bank Insurance Fund, and now the merged Deposit Insurance Fund, as “their money”—as indeed industry funds built it. While worries about “moral hazard” and others have been voiced during the current subprime and related problems, FDIC coverage continues to support the banking industry. —Steve Cocheo, executive editor a November 1933 Journal ☞ Inaviation, it was noted that:article about “Banks are known to be among the largest users of airmail facilities, and it seems that they are making good use as well of the air express. The time saving element involved in dispatching checks, drafts and notes and in saving interest charges on funds in transit, as well as for special correspondence, has brought this about. … It must be realized, however, that the potential hazard of destruction in case of smash-up and fire is still a big factor.” C-Notes February 1934 Journal, ☞ In thejournalist and man of letters H.L. renowned Mencken’s work appeared. In “The Justice of Service Charges,” reprinted from Baltimore’s Evening Sun. He opened his defense of fees, in the context of the banking code mentioned in Then and Now, in this way: “If anyone can think of a sound reason why the local banks and trust companies should not lay a service charge on checks drawn against small accounts, I’ll be very glad to spread it upon the present minutes. So far, the only criticism of the proposal that I have heard has been idle abuse, all of it, apparently, grounded on the theory that bankers are now feræ naturæ [literally, wild animals], and have no rights left in either law or equity. But that is simply nonsense. The majority of bankers in practice in this town are competent and careful men who run their business honestly, and have been ready to pay off their depositors at all times.” 12 MAY 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.ababj.com
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