The Online Library of Liberty

A project of Liberty Fund, Inc.

• A History of Banking In Great Britain;
• Chapter I.: Banking In England.
• Section I.: A Record of Beginnings.
• Section II.: Foundation of the Bank of England.
• Section III.: An Era of National Development.
• Section IV.: State of the Irish Currency.
• Section V.: Failure of Currency Reform—inflation and Reaction.
• Section VI.: The Committee On Banking of 1840.
• Section VII.: On the Bank Acts of 1844 and 1845.
• Section VIII.: Commercial Crises.
• Section IX.: Monetary Panics.
• Section X.: General Conclusion.
• Chapter II.: Banking In Scotland.
• Chapter III.: The Theory and Mechanism of Banking.
• Chapter IV.: Definitions of Economic Terms.
• Chapter V.: The Theory of Value.
• Section I.
• Section II.
• Section III.
• Chapter VI.: The Theory of Credit.
• Section I.
• Section II.
• Banking In Russia.
• Chapter I.: The Early Stages of Money and Credit.
• Section I.: Prefatory.
• Section II.: Introduction of Paper Money.
• Section III.: Financial Reconstruction Under Alexander II. And the Founding of the State Bank.
• Chapter II.: Methods and Operations of the State Bank.
• Chapter III.: Banking Vicissitudes From 1862 to 1875.
• Chapter IV.: The Eastern War Period.
• Chapter V.: Private Banks.
• Chapter VI.: The Bourse.
• Chapter VII.: The Precious Metals.
• Chapter VIII.: Foreign Exchanges.
• Chapter IX.: The Debt and Finances of Russia.
• History of Savings-banks In the United States.
• I.
• II.
• III.
• IV.
• V.

V.

DECREASE OF DIVIDENDS AND INCREASE OF DEPOSITS.

On account of the cheapness of money, the returns on savings-bank investments have decreased in the past fourteen years, so that the average dividend paid to depositors has diminished from four and five per cent. in 1880 to three and one-half and four per cent. in 1894; but the deposits to the credit of individuals have increased owing to the accumulation of capital by the plain people, induced and fostered by opportunities furnished through the savings-banks, so that while in 1880 the average was $341.25 on each open account, it was in 1894, $367.39, and the number of open accounts increased from 2,416,280 to 4,296,133. The total deposits increased from $824,515,162 to $1,578,352,728. The surplus fund grew from $62,567.049 to $149,073,165. Investments in bonds and mortgages nearly trebled, increasing from $269,021,908 to $662,002,440. Because of the decreased income from United States bonds, investments in and loans on the same fell off from $199,675,922 to $130,425,578. The total assets were increased from $891,666,424 to $1,733,227,013. The number of banks increased but little; in 1880 there were 594, and in 1894 there were 626 savings-banks. The teachings of the savings-bank system have extended, as will be seen, for there are now a much larger number of people using them, the number of open accounts having increased by 1,879,853, and they are continuing in the same direction. This increase in the number of people who are able to deposit funds in savings-banks seems to contradict the theory that the “poor are getting poorer.” On account of the concentration of deposits in the older and larger savings-banks, the percentage of the expense of management to the total deposits does not increase. In the State of New York nearly one-half the deposits in savings-banks are in New York City, where are located twenty-five banks, and of these twenty-five, four banks have about one-half of the total deposits of the city.

In the State of New York there has been organized among its 125 savings-banks an association for mutual benefit, and delegates from every bank have elected an executive committee, which considers matters of benefit to all. Bills offered in the Legislature affecting savings-banks are considered by the executive committee of this association, and recommended or opposed according to their respective merits. The quality of securities proposed to be authorized by law for investment are discussed; and the safeguards attending the issue of bonds or other evidences of indebtedness issued by cities, counties, municipalities, etc., have lately attracted the attention of this association, and on account of the present lack of system regarding the issue of them, it has been recommended that the validity and genuineness of each and every such issue shall be certified to by a responsible trust company, in order to give proper guarantees of their validity. Bonds engraved by a responsible bank-note company have been recommended as another means of guarding against counterfeiting, to which printed and lithographed bonds are liable. In instituting such reforms as the foregoing, the association secures protection for officials who are responsible for savings-bank funds, as well as security for the investors, as a low rate of interest on valuable property is preferable to higher rates under questionable conditions.

UTILITY OF LARGE SURPLUS FUNDS.

Recently there have been some criticisms of the large surpluses held by some of the more successful savings-banks, and it has been suggested that this surplus money should be divided among the depositors. The framers of the law of the State of New York seem to have foreseen the possibility of such criticism, and to have wisely anticipated it by providing in Article III., Section 123, of the savings-bank law the following: “The trustees of any such corporation whose surplus amounts to fifteen per cent. of its deposits, at least once in three years, shall divide equitably the accumulation beyond such authorized surplus as an extra dividend to depositors, in excess of the regular dividends authorized.” The critics seemed to have overlooked both this law and the fact that no bank in the State at the present time has a surplus large enough for distribution under the law. A good-sized surplus in a savings-bank is not only a very desirable feature in itself, but is also valuable in its advantages and its influence. As a monument to the success of the institution, it gives confidence to depositors and encourages others to enroll themselves upon the bank’s ledgers. In case of sudden financial depression or of any unforeseen disturbance which might cause a run upon the banks, a surplus becomes a source of strength both to the bank and to the community. Moreover, in the year by year operations of the bank, the surplus plays a most important part. To-day the banks that pay the highest rate of interest, even paying four per cent., are the banks that have the surplus, because they could not take the moneys deposited with them now and invest them properly, and secure at the utmost more than 3¾ per cent. on the average. They are enabled to pay to depositors after all expenses of the bank are deducted, a higher rate of interest, simply because they have a surplus which earns interest for their benefit. Another reason that makes a surplus requisite is that it is needed to meet contingent losses in the depreciation of the value of securities. Hence the wisdom of the law which permits its accumulation to the extent of fifteen per cent. of total deposits.

SOUND CURRENCY.

The number of savings-bank depositors in the eleven States in which those institutions are located is equal to one-fifth of the total population; and the localities in which each of these institutions is located are freer from pauperism and crime than in other less favored communities; and to lessen the confidence of depositors in their places of financial trust by unwise legislation like the passage of a free coinage law by Congress, which would lessen the value of the dollar, would be a blunder on the part of law-makers which would tend to undermine a system which it has taken eighty years to build up. After the legal-tender act of 1862 was passed, deposits in savings-banks decreased largely, whilst after the resumption of specie payments in 1879, the percentage of increase was even greater than the withdrawals of seventeen years before. Confidence is a thing of slow growth; and in educating, it is necessary to show by example the teacher’s faith in the principles striven to be inculcated, viz., that honesty and thrift are the best policy; and as these lie at the foundation of savings-banks, the depositor must be made to feel that his self-denial will be rewarded by a return, of the full amount at least, of the money which he has denied himself the pleasure of spending in temporary gratifications; but if he finds that, owing to a depreciation of the currency, a fraction of its value only is given back when he calls for it, because the law has stepped in and confiscated for the benefit of a few any part of his savings, the fruit of the good principles inculcated will be blasted in a moment. The first effects would probably be a run on the bank, followed by extravagance and riotous living with the money withdrawn, which would end by lowering the moral tone amongst the class of people who up to that time had been so largely benefited.

WHAT SHOULD BE THE RATE OF DIVIDEND?

As has been said, the average gross income which a savings-bank can earn on new deposits to-day does not exceed three and three-quarters per cent., and from this the expense of management must be deducted, say one-third to one-half per cent., leaving the net income for depositors about three and a quarter per cent. If more than this is paid, it is out of the earnings of the surplus fund which has accumulated on the undivided earnings of older deposits. Most of the banks have a surplus, and because of it they do pay an average of three and one-half per cent. dividends; but this cannot continue indefinitely, unless a larger range of investments is authorized which will pay an increased rate of interest on the money put into them. The desire to continue or increase the present dividends has induced some bank managers to favor the amendments which authorize the purchase of city bonds in certain States outside of New York. But it may be questionable if it would have been better policy to prohibit savings-banks from paying more than three per cent. interest per annum, except that if one accumulates a surplus of ten per cent. on its deposits (estimating its securities at par value if they are worth it, or the market value if they are worth less), then, once in three years, it should pay an extra dividend on the balances of all accounts which have been in bank for that length of time. Let us consider the latter course. A savings-bank is prohibited by law from receiving on deposit from any individual, or paying interest on, a greater sum than three thousand dollars. The charge is made, and is not disproved, that large sums, in many cases three thousand dollars, are deposited by one individual in each of the several banks, or he opens accounts in trust and thus gets in one bank more than the law intended. This is not prohibited by law, but it enables a well-to-do person who should make his own investments to put the burden on trustees engaged in a benevolent work, and he secures the advantage of investment in first-class securities, and obtains more interest than if he attended directly to the management of his own capital. Now, savings-banks are not designed as resorts for capitalists when prime investments pay low rates of interest elsewhere. They may be likened to kindergarten schools, where the young, the helpless, and the uninformed may learn the advantages of economy and thrift, the good results of which are shown by the increased balances which added interest exhibits each half-year, and who should learn by a study of the results secured by wise and prudent management how they themselves may care for the accumulations when their sum surpasses the limit (not a small one) fixed by statute. This was the theory of the founders, and is the theory of the present law of the States, in forbidding the payment of interest on sums over three thousand dollars. Savings-banks are practically freed from taxation, because they are engaged in a purely benevolent work, for the good of the masses, and it is an evasion of the spirit of the law for the depositors of large sums to use them. An indication that they are using them is shown by an analysis of the following statements taken from the official reports of the Superintendent of the Banking Department of the State of New York for three decennial periods.

At the first date, 1868, about twelve per cent. of the population were depositors in savings-banks; in 1878, seventeen per cent.; and in 1888, twenty-three per cent. were depositors. The average amount to the credit of each had increased in twenty years from $281 to $381, averaging a hundred dollars increase for each depositor. The returns up to January 1, 1896, show a still increasing average. Now, it will not be claimed that the wage-earners, those dependent on salaries and wages, have increased from twelve to twenty-three per cent. of the population, nor that all together have been able to lay up thirty-five per cent. more of their earnings in 1888 than in 1868. Wages, salaries, and expenses were about on the same plane at the two periods, but first-class investments outside of savings-banks paid six to ten per cent. in 1868, while in 1888 the same class of investments paid but two and three-fourths per cent., and the same money deposited in savings-banks paid the depositor three and one-half per cent.

There is in England a law which prohibits a person from having an account in more than one savings-bank, under penalty of forfeiting his deposit. There is no such law in any of our States, and therefore there is no way of preventing investors with large capital from taking advantage of the savings-banks, which were designed solely for the benefit of the poorer classes. A shrewd investor of some thousands of dollars who insists upon gilt-edged securities only, at the highest obtainable rate of interest, and who wishes to avoid the fluctuations of the market in buying or selling, and at the same time to keep his money on call, deposits in the savings-bank. There he finds all his conditions complied with, the law of the State protects his property, and holds the bank’s trustees to a strict accountability. There appears to be a growing tendency to receive deposits of considerable amount, which cannot fairly be considered savings, of the kind for which savings-banks are chartered. This tendency, if unchecked, may result in changing the nature of the banks, and induce the Legislature to tax deposits, which will lower the rate of interest paid. The evil may then be cured, of course, by the applied remedy, but the principle having been violated, the result will be disastrous to the benefit of communities, the inducement will be taken away for the poor to save, and the acquisition to the ranks of good citizenship will be diminished.

GOOD RESULTS OF THE LAW OF 1875.

Savings-banks have prospered since the general law of 1875 was enacted, because under it they have been well and conservatively managed. No failures have occurred since the old wrecks came ashore which met with disaster before the law was enacted. We have had twenty years of prosperity, and no future calamity is feared, unless a reduction of dividends might be so classed. With first-class securities this is unavoidable, the rate of interest tends downward as the country increases in wealth. It seems, therefore, preferable that the regular rate of interest or dividends paid should be reduced to three per cent., rather than to further increase the range of investments. The rule for savings-banks should be, not to pay a higher rate of interest to individual depositors than the aggregate of deposits invested in large amounts can earn when put into strictly first-class securities. The rate suggested is a sufficient inducement for people to save, and inspires a feeling of the utmost security for the safety of their principal.

In addition to the examination of the books of the savings-banks as required by law, a practice has been instituted in this country by the Bowery Savings-Bank of having its books examined at regular intervals by a firm of public accountants. The practice has been found an excellent one. It makes “assurance doubly sure.” In closing their last semi-annual reports, submitted January 9, 1896, these public accountants write as follows: “We examined all vouchers for expenses and found same in order. During the past six months we have examined in detail the ledger balances representing the amount due to individual depositors, as on October 1, 1895, and, with the adjustment of some small clerical errors in interest, found the same in order and in agreement with the general ledger. There are no overdrafts to report on at December 31, 1895. We also compared some 9500 bank pass-books with the corresponding accounts in the depositors’ ledger, and found same in agreement. In our last report we mentioned that the president had instituted some excellent changes in the general routine of the business of the bank. We are pleased to testify that these changes continue to bear good fruit, and that the work of the bank is in excellent order.”

The employment of public accountants has been in vogue in England for some years, but has never been generally adopted in this country in connection with the work of savings-banks so far as known. As the merits of the plan become clearly understood, the employment of public auditors to supplement the work of the trustees of the bank and of the State Bank Department—that is, to examine the examination—will become a general custom.

It may be said that the depositors in savings-banks are relatively the best paid investors in the community. Their security is as nearly absolute as wisdom and law can make it, and the returns from the investments are regular and certain, subject to little or no fluctuation and untouched by the many causes which bring depression to holders of railroad and manufacturing stocks. Savings-bank depositors are the real capitalists of the community. Their money it is which is largely loaned on first mortgages at 4½ per cent. and upwards on the apartment and tenement houses in which they dwell, the churches they attend, the clubs, business stores and factories, the theatres and places of amusement they frequent. It is largely their money which is loaned to the city on its bonds for the construction of public buildings and docks, the purchase and improvement of public parks, and paving streets.

In many cases a parent or relative opens an account for a child at birth, the fact being kept a secret from the beneficiary, and not developed until the death of the person who has performed the good deed. It often becomes capital for a young man to commence business with; or, in the case of a daughter, it may serve as a marriage portion. While it is running, the identity of the beneficiary of the account may be quite unknown to the savings-bank; but if legislation should be enacted to deprive him of his rights, the bank could easily find a way to apprise him of the danger of loss. The accumulations of interest on these accounts is surprising in many instances, as the following memorandum, taken from the books of a well-known bank, will prove:

It does not seem to be generally understood that there are many savings-bank accounts that have been in existence and little used for even more than twenty years; but they exist, and every bank has a large number of them. Because of the fact that they do exist, legislators have been led to suppose that such accounts had no legal claimants, and bills are offered yearly making inquiries about these old accounts. Even the Constitutional Convention in the State of New York two years ago seriously thought of putting a clause in the new constitution confiscating to the use of the State moneys which had been unclaimed for twenty years or more. The Banking Department of the State of New York, at the request of the convention, made inquiry, at the time, of each of the banks of that State; and when it was found that the number of accounts without claimants within the twenty-year limit was comparatively few, the idea was abandoned.

The secrecy which depositors wish to have observed with regard to their transactions with savings-banks does not seem to be taken into account by legislators in their eagerness to enact laws. Existing notions with regard to these accounts have caused many of the savings-banks to seek out the owners of these old accounts, and request them before the expiration of twenty years to make a deposit or a draft, so that the accounts may be revived and not become “dormant.”

CAUSE OF INCREASE IN DEPOSITS.

The increase in the average amount of individual deposits is caused by the banks’ receiving large amounts from individuals. There is no doubt that many people who formerly invested in stocks and bonds, and on bond and mortgage, have divided their funds by putting into each bank as much as would be taken, and thus swelled the aggregate of all the banks. This proceeding is unavoidable, as there is no prohibition against one person opening an account in every bank that will receive it; and one person may have the legal limit in every bank and thus have many thousands on deposit when they are aggregated, although he is prohibited from having more than $1000 to $3000 in any one bank. The limit in the United Kingdom is £300 sterling, or $1500; in France, the limit is F. 2000, or $400; and if the same person has a deposit in more than one bank the penalty is, in the United Kingdom, forfeiture of the whole deposit or benefit to the Government; in France, the deposits will be returned without interest and the depositor will be forever excluded from the savings-banks.

For the reason that, as has been said before, new deposits can only be invested here to earn from 3⅝ per cent. to 3¾ per cent. interest, it has been suggested that deposits of many years’ standing should be allowed a greater rate of interest than more recent ones, because they helped the bank to earn the surplus which enables it to pay high rates of interest; but as it would require very complex calculations, the idea has never been put in practice.

Within the past few years investments in railroad and other securities have become so precarious that many people have striven to place their accumulations in savings-banks, so good was the reputation of these institutions. Here they could secure the greatest safety as well as the highest rate of interest—the savings-banks, on account of their surplus, being able to pay depositors a higher rate of interest than their money alone could actually earn upon investments made to-day. This condition of things, however desirable in itself, gives rise to danger. People are attracted to savings-banks for whom the banks were never intended to be used. Large sums are offered to the savings-banks, and although some of the institutions consent to receive them, it is a matter of doubtful expediency. Not alone does the accommodation of such people divert the forces of the savings-bank from the true channels, but it also makes the bank liable to sudden drains upon its available money. These depositors, who use the savings-bank purely for investment, are always ready to avail themselves of a better investment if one appears, and in the case of a panic, when all securities go down in value, they come eagerly to the bank to secure their money, in order to buy securities which are selling below their value, and which must, as soon as the panic subsides, return to their higher and normal value. It is at just such times that the bank itself needs ready money. Large depositors should be discouraged, because, as a rule, they come from a class who know how to invest their own money, and they should not ask trustees who serve as benefactors to invest their money for them, nor should savings-banks, which were founded for philanthropic purposes, and which in carrying out their purpose are relieved of taxation, permit their institutions to be used for speculative purposes. This question is easy to manage when the amount of the deposit received is kept down. When only small sums are received at a time, savings-banks are, as a rule, serving the class for whose benefit they were intended—that is, those who have not sufficient knowledge of financial affairs to invest their money for themselves profitably.

During the last twenty years there have been but few important failures among the savings-banks of the East. In their rapid increase previous to the War of the Rebellion it is not surprising that many errors and abuses crept in—for which atonement has long since been made in loss and disaster. The multiplication of savings-banks in the early sixties was stimulated by the evidence of prosperity, and the competition for patronage became more and more active and demoralizing. In the management of some institutions the old landmarks of safety seemed to be altogether obliterated. The question of security seemed to be secondary, or to have been lost sight of altogether. Young institutions, conducted more in accordance with the requirements of such a trust, were feebly maintained at the expense of the trustees, or showed a deficiency of income, which enlarged from year to year. But the real conditions of weakness and premature decay were obscured by the glamour of apparent prosperity elsewhere prevalent. The shock which came just previous to the panic of 1873, and the protracted trial which followed, from which we have not yet fully emerged, have rudely dispelled the illusion with which so many were beguiled.

What more natural, what more inevitable than that this period of trial should prove disastrous to the fortunes of very many savings-banks? The wonder is, not that some score or more in New England and New York were forced into liquidation, but that any could survive the tests of this protracted season of financial depression. At the time, much intemperate speech was indulged in concerning trustees, whose only crime was that in their ignorance they had accepted a trust the responsibilities and difficulties of which they understood little, but the duties of which they had endeavored to discharge, at no small cost to themselves in time, labor, anxiety, and money. Of course, not all were so innocent and guileless. This season of trial became a judgment-day not only for institutions weak from their inception, weak from very necessity, but for those which, once strong, had been made weak by inexcusable faults in their management.

In whatever aspect viewed, the employment of industrial force in promoting public improvements and in the creation of public wealth, confers lasting benefits upon society, if integrity and economy govern in the administration of affairs. Whatever, then, facilitates this employment is a social force to be respected and honored, to be protected and surrounded by safeguards. Savings-banks, as reservoirs of capital, are this social force. They make it possible to borrow these tokens of industry offered for practical uses, and thereby to summon industry to further conquests in behalf of the good of mankind.