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September 6, 1957

Address Of
Before The
University of Wisconsin

Madison, Wisconsin


6, 1957


at the
Sponsored by the Central States Conference

Basic Economic Problems
First Year
John H. Wills, Section Leader

Lecture on
Role of Deposit Insurance
H. Earl Cook, Chairman
Federal Deposit Insurance Corporation
Washington, D. C.

6, 1957

In the village of Napanoch, New York, in the Catskill Mountains,
there is an old paper mill which has not been very profitable for many years.

19k9 it was purchased by a new owner who attempted to rehabilitate it,

and in the process ran deeply into debt.

Last December it was found that he

had obtained about $900,000 from a bank in an adjacent town, The Home National
Bank of Ellenville.

This involved illegal actions and excessive risktaking

by the bank, and resulted in its closing.
Both the bank and the paper mill were relatively small enterprises
in terms of number of employees and invested capital.
ployees, the mill 34.

The bank had 30 em­

The bank had a capital investment, including surplus

built up from previous earnings, of $750,000.
into the plant and machinery of the mill.

Nearly as much had been put

It was the financial difficulties

of the mill, temporarily met in an illegal way by the bank, which precipitated
the bank’s failure.
The failure of the bank created a situation in the community de­
scribed by newspaper reporters as a crisis and a time of gloom.
"A ... bank shortage ... erupted today into a major economic disaster,
payrolls are late, installment buying is impossible, checks are
temporarily worthle ss."
"For many of the 4,500 residents of the resort village deep in a
valley of the Catskills, the holiday season was marked by fear of
economic distress--and in some cases, ruin. ... merchants reported
sales down one-third, one-half, even three-quarters below last year ...
Few people in Ellenville this year had cash for anything but daily
necessities. What occurred there early this month doesn’t happen
very often any more. But when it does, as Ellenville found out, it
can cause chaos."
"The people of Ellenville were demoralized and frightened."
" ... an air of tragedy hovered over the entire community."
As you know, the people of Ellenville were seriously disturbed by
this bank failure only temporarily.

Because of deposit insurance the crisis

in the community*s affairs was short.

Without the benefits of deposit in­

surance, the closing of the bank would indeed have been a real tragedy for
the community that would have lasted a long time.
The handling of the Ellenville bank failure is, of course, an
illustration of the role of deposit insurance, and I might go on to describe
in detail the actions of the Federal Deposit Insurance Corporation in this

However, I would prefer to discuss a more fundamental question:

is the real basic role of deposit insurance?


Let us approach this question

by supposing it had been the mill which had closed because of its financial
difficulties instead of the bank, and asking the question:
of the mill have disturbed the community to the same degree?

Would the closing
If that had

happened about the same number of employees would have been out of work and
the loss to investors would have been nearly as large.

However, the closing

of the paper mill, it seems clear, would not have resulted in most of the
other disturbances in the community.

While the employees who lost their jobs

would have had a difficult time, there would not have been the widespread
curtailment of buying at the stores.

Other business enterprises in the area

and public institutions such as the schools would not have been face-to-face
with trouble in meeting their payrolls.
Clearly there is an important difference in the impact upon a com­
munity between the failure of a bank and a failure of similar magnitude, in
terms of employment and investment, of a firm in seme other industry.


reason for this difference involves the fundamental nature of a bank.


was described by Alexander Hamilton


years ago in a definition of a bank

which it would be difficult to improve:
"For the simplest and most precise idea of a bank is," he said, "a de­
posit of coin, or of other property, as a fund for circulating a credit
upon it, which is to answer the purpose of money."



It is because the deposits of a bank are used as money or circulating medium
that when a bank fails it immediately produces disaster not only among its em­
ployees and investors, but also throughout the entire community.
It is commonplace to speak of bank deposits as the major part of the
money supply, and therefore it is appropriate to describe the role of the
Federal Deposit Insurance Corporation in terms of its function as a monetary

The specific monetary duties of the Corporation are:

first, to re­

store to a community as quickly as possible, if a bank failure occurs, all or
a very large part of the deposits of the bank which were being used by the
community as a circulating medium; second, to avert the destruction of circu­
lating medium by aiding banks in maintaining sound operations and thereby
helping to prevent them from getting into a position leading to failure.


this is the role of deposit insurance as understood and intended by the
founders of the Federal Deposit Insurance Corporation is indicated by the
statements of members of Congress who were most active in the adoption of de­
posit insurance.
Among the witnesses at the hearings in 1932 on deposit insurance
before a subcommittee of the Committee on Banking and Currency of the House
of Representatives was Robert L. Owen, a former Senator.

Senator Owen had

been a leading advocate of deposit insurance for many years, having intro­
duced bills for this purpose in 1908, 1913* 1917# 1918 and 1920.

His pro­

posal in 1913, when he was Chairman of the Banking and Currency Committee of
the Senate, was adopted by the Senate as part of the Federal Reserve Act but
did not become law because the provision was deleted in the final conference
with the House of Representatives.

In the 1932 hearings Senator Owen stated:



"The first observation I wish to make is that to provide the
people of the United States with an absolutely safe place and a
convenient place to put their savings and their deposits is
essential to the stability of banking, bank deposits and loans,
the checks which function as money, and business conditions in every
line. It is essential to the stability, therefore, of manufacturing
and distributing goods in this country through the merchants and
jobbers and wholesalers. It is essential to the maintenance of the
commodity prices in this country, including the price not only of
textiles and all manufactured goods, but also of those things which
are produced by the farmers, miners, foresters, and persons engaged
in railroads and public utilities.
It is essential to the stability of the income of the Nation,
which, of course, includes the revenues to the Government of the
United States and the revenues to the States and the counties and
the cities; but the revenues also to the railroads of this country.
It is a far greater matter than the very important end of
protecting the individual depositor or the bank from loss,"
Another witness at the 1932 hearings was Representative William W.
Hastings, also an advocate of deposit insurance for many years, who testified
as follows:
u ... I have been very deeply interested in the securing of
bank deposits for a number of years, and for the past 10 years
I have introduced in each session of the Congress a bill, and
I have reintroduced that bill the present session .,.
"It is a terrible thing to have a bank, failure in a town, as
we all know. It not only affects the bank and the shareholders,
but it affects everybody in the entire community."
Representative Henry B. Steagall, Chairman of the Committee on
Banking and Currency of the House of Representatives, opened the 1932 hear­
ings with a statement in which he said:
"We must not fail to safeguard the Nation against a repetition
of the disasters and distress resulting from bank failures during the
past 10 years. It has brought ruin to banks, suffering to depositors,
distress to the public, and destruction to business. The one sure
method of prevention is protection to depositors."
The next year, the report of the Committee on Banking and Currency
to the House of Representatives accompanying H. R. 5661, the bill which became
the Banking Act of 1933> stated:




"Experts advise us that more than 90 percent of the business
of the nation is conducted with bank credit, or check currency.
The use of bank credit has declined to the vanishing point.
... The result is curtailment of business, decline in values,
idleness, unemployment, bread lines, national depression, and
distress. We must resume the use of bank credit if we are to
find our way out of our present difficulties."
Going farther back we find the role of deposit insurance de­
scribed as a monetary function by the Supreme Court of the United States.
Nearly a half century ago several States established systems of deposit

The constitutionality of these laws in Oklahoma, Kansas, and

Nebraska was challenged and when the cases reached the United States Supreme
Court the laws were upheld.

The basic ground for this decision was stated

by the Court as follows:
" ... few would doubt that both usage and preponderant opinion
give their sanction to enforcing the primary conditions of suc­
cessful commerce. One of those conditions at the present time
is the possibility of payment of checks drawn against bank
deposits, to such an extent do checks replace currency in daily
... the primary object of the required assessment is
... to make the currency of checks secure, and by the same
stroke to make safe the almost compulsory resort of depositors
to banks as the only available means for keeping money on hand.
... the device is a familiar one, and seems never to have been
questioned until now."
There had, in fact, been several State systems of bank-obligation
insurance in an earlier period of our history.
the State of New York, was established in 1829-

The first of these, in
Mr. Joshua Forman, who

suggested the plan, described its purpose in a letter to the Governor of
the State:
"The object to be attained, is of incalculable importance to
the prosperity, happiness, and moral character of this highly com­
mercial and growing state— to secure them a sound, well regulated
James a Hamilton, a son of Alexander Hamilton, described the goals of
this legislation to be



" ... the stability of the currency of the country; and, second,
the security of the depositors and holders of the notes of the
hanks ...M
When the national hanking system was established the circulating
notes of the national hanks were guaranteed by the United States Government,
and this continued until all the national banknotes were retired in 1936.
Many people felt that deposits, because deposits are used as circulating
medium or money, should be given a similar type of protection.

In 1886 a

Representative from Wisconsin introduced into the Congress a bill pro­
viding for the insurance of deposits in national banks.
followed, and by


there had been


Other proposals

bills for the insurance or guaranty

of deposits introduced into the Congress.
Adoption by the Congress of the principle of deposit insurance
was an exercise of its sovereign power to provide and control the nation’s
circulating medium, or supply of money.

As a matter of fact, most of the

functions of State banking departments and of the Comptroller of the
Currency are also monetary functions.

That this was the intention of

Congress in the case of the Comptroller of the Currency is clearly indi­
cated by the title of the office.

It is because banks have been given

the privilege of issuing their own credit, as Alexander Hamilton said, in
a form designed for use as money, and have thus had delegated to them a
governmental prerogative, that they have been subject to more detailed
control and regulation than any other privately-owned industry in the

The purpose of this detailed regulation of banking, including

that of deposit insurance, is to make the liabilities of banks suitable
for use as circulating medium by minimizing as much as possible the risk
involved in the use of bank credit as money.

The assessment levied upon

the banks for deposit insurance, like the fees levied upon them to defray

THE HOLE OF DEPOSIT INSURANCE -the costs of examination by State banking departments and the Comptroller
of the Currency, represents merely one of the costs, relatively small,
for the special privilege of having their liabilities used as circulating
The Federal Deposit Insurance Corporation is not the only part
of the Federal Government with monetary functions.

The chief monetary

agency of the Government is the Board of Governors, together with the
Ooen-Market Committee, of the Federal Reserve System.
a duplication of functions?

Hot at all.

Does this indicate

The responsibility of the

Corporation, though monetary in character, is very specific and is different
from that of the Federal Reserve System.

The major duty of the Federal

Reserve System may be described as that of assuring the maintenance of
an appropriate quantity of money, or circulating medium, for the conduct
of the nation's business.

The Federal Reserve System does not have the

responsibility which falls upon the Corporation, namely, that of restoring
to a community and to the individuals concerned the circulating medium
that has been lost or made unusable in a bank failure.

The basic duty of

the Federal Reserve System pertains to the operations of the banking
system as a whole, whereas the basic duty of the Federal Deposit Insurance
Corporation, like that of State banking departments and that of the
Comptroller of the Currency, pertains to the operations of individual banks.
Let me turn to a few comments on the accomplishments of the
Corporation with respect to its monetary duties of restoring deposits
lost or made unusable by bank failures, and of preventing bank failures.
In more than 23 years of operation the Corporation has provided funds
so that the deposits of


closed banks could be paid to the insured

limit of $10,000 per depositor or transferred in full to another insured bank.



The closed banks had deposits of nearly $600 million, of which all hut
$3 million, or one-half of 1 percent, has been restored to the depositors.
The number of depositors in these banks was about 1,^+00,000, and less
than four thousand of these, or three-tenths of 1 percent, failed to
recover the full amount of their deposits.

In three-fourths of the closed

banks, all deposits were paid.
The most spectacular difference between the banking situation
since the Federal Deposit Insurance Corporation began operations, and
that for an equal length of time previous to its establishment is in the
number of bank failures.

Since the beginning of deposit insurance


including both insured and noninsured banks, have been closed because of
financial difficulties.

This is an average of 23 banks a year.

a period of equal length prior to

193^- nearly


sixteen thousand banks

suspended because of financial difficulties, or an average of about 6U0 a

Of course, not all of this difference is due to the influence of

deposit insurance.

Doubtless, the major part of the difference should be

credited to other developments.

Nevertheless, there can be no doubt that

the number* of bank failures since the Corporation has been in operation
has been much smaller than it would have been in the absence of deposit
The influence of the Corporation tending to reduce the frequency
of bank failures has been exerted in many ways.

Some of these can be

specifically described, others are somewhat intangible but nevertheless

About half of the insured banks, those that are not members of the

Federal Reserve System except in the District of Columbia, are examined
about once a year by the Corporation's examiners.

The fact that the

Corporation must pay the losses, or most of them, in a bank failure has



tended to keep our examiners alert to conditions likely to lead; if con­
tinued, to failure.

In addition, our examining processes and our con­

tacts with the State hanking departments and other hank-examining agencies
have helped to improve the standards of hank examination generally.


provisions of the law regarding termination of insurance of a hank that
continues to engage in unsafe or unsound practices, or in violations of
law or regulations, and the citation hy the Corporation of ITT hanks under
these provisions, have had a salutary effect on hanking practices.


Corporation’s studies of hank failures in the past and the conditions
under which they occurred have helped in the development of preventive

Finally, the vastly increased confidence of the public in the

stability of the hanks, and the assurance to depositors that their
accounts are protected, up to the insurance limit, in case of failure,
has undoubtedly averted many runs on hanks that might have led to sus­
pension even though the assets of the hanks were in good condition.