History, purpose, and function

In his pioneering study of mutual savings banking, Prof. John Lintner, of Harvard, wrote:

Mutual savings banks are service institutions with two essential functions. On the one hand, they have a responsibility to encourage habits of thrift and provide convenient, safe facilities to care for the community's savings. On the other hand they have a responsibility to invest those funds productively with maximum benefit to the community and economy consistent with necessary liquidity and safety, as well as a good return to their depositors.1

That savings banks have been successful in fulfilling functions. described by Professor Lintner was recognized by former Associate Justice Stanley Reed in a 1954 case before the U.S. Supreme Court:

The mutual banks have been successful in attracting a large proportion of savings deposits for over a century. They have remarkable record for soundness in finance and profitable operation for the benefit of depositors.2

These functions remain as basic to savings banking today as when the first modern savings bank was organized in Ruthwell, Scotland, in 1810. In the century and a half since its inception, mutual savings banking has spread throughout the world, operating in 34 countries in North and South America, Europe, Asia, Australia, and New Zealand. Techniques of operation, management policies, investment practices, relations with governments, do, of course, vary between institutions and areas but savings bank purposes and functions, as described by Lintner, are essentially the same the world over.

In the United States, mutual savings banking is the oldest type of thrift system, the first savings banks having been organized in Philadelphia and Boston in 1816. Indeed, it is fair to say that savings banks remain the only institutions dedicated principally to the encouragement of thrift. Other main types of financial intermediaries were organized for, and remain oriented toward, different principal objectives: savings and loan associations toward home mortgage credit; commercial banks toward short-term financing; insurance companies toward risk insurance; pension funds toward provision of retirement income.

All of these institutions encourage or require savings to serve their principal, and highly useful functions. This means, for example, that when business demands for loanable funds decline, so too, does the interest of commercial banks in savings deposits; or when outlets for home mortgage credit diminish in some areas, savings and loan associations there become less interested in promoting saving.

For mutual savings banks, however, the promotion of saving is an end in itself, pursued in the early days "for the security and improvement of persons in humble life" and broadened in today's economy to encompass individuals in all income groups. That dedicated pursuit of this singular purpose is basic to the acceleration of economic growth in the years ahead is a major thesis of this statement to be elaborated subsequently. That it was a basic factor in the Nation's well-being in earlier years has been reported by other researchers:

Because the savings banks have successfully served the thrift needs, particularly of the lower and middle income groups, they have accumulated sub

1 John Lintner, "Mutual Savings Banks in the Savings and Mortgage Markets" (Boston, Mass: Harvard University, Graduate School of Business Administration, 1948), p. 211. 2 Franklin National Bank v. New York, 347 U.S. 373, 379, 98 L. Ed. 767, 772 (1954).

stantial volumes of funds which would either not have been saved at all, or if saved, would not have been available for productive investments in the economy *** (footnote-while this point was of greater force in the 19th century when no other institutions were serving these groups than it is now, it is still of some considerable significance today) * * * as savings banks productively invested these funds, they (made) substantial contributions to the economic development of the country, which were reflected in progressively rising standards of living and higher levels of national income, employment, and production.3 Because savings banking filled a basic economic need and made a major contribution to the well-being of individuals and communities alike, the system grew in stature and strength. The success of pioneering institutions in Massachusetts and Pennsylvania was followed by the establishment of many other savings banks and by 1850 mutual savings banking was solidly entrenched throughout New England and the Middle Atlantic States. While the number of savings banks in these areas continued to increase in subsequent years, only a few were established in other regions of the Nation. The reasons for this geographic concentration in the structure of savings banking, unique among deposit-type institutions, will be discussed later.

TABLE 1.-Number of major deposit-type financial institutions, selected years,

1820-1963

1 Prior to 1900, data are as of various dates and are incomplete for commercial banks. Data are as of end of year for savings and loan associations, 1900-62; for mutual savings banks, 1930-62; and for commercial banks, 1940-62. Data are as of midyear for commercial banks, 1900-30; for mutual savings banks, 190020; and for all institutions in 1963.

2 Not available.

3 As of Sept. 1, 1963, due to the merger of 2 institutions in New York City, there were 511 savings banks.

Source: Board of Governors of the Federal Reserve System; Federal Home Loan Bank Board; John Lintner, op. cit., p. 49; National Association of Mutual Savings Banks and U.S. Department of Commerce.

As shown in table 1, the greatest growth in the number of savings banks occurred during the 19th century, from 10 in 1820 to a peak of 666 in 1875. There was little change through the turn of the century, and since then the number has declined irregularly. This decline in

3 Lintner, op. cit., p. 26.

number is hardly unique among financial institutions. In fact, the 17-percent drop between mid-1920 and mid-1963-from 618 to 512 savings banks-is considerably smaller than the 55-percent decline in the number of commercial banks during this period-from a peak of over 30,000 to less than 14,000-and the 47-percent drop in savings and loan associations from the 1930 peak of almost 12,000 to little over 6,300 today.*

Moreover, it is important to recall that the decline in number of savings banks is primarily the result of mergers; in the case of commercial banks and savings and loan associations, on the other hand, declines reflect a substantial number of failures and liquidations resulting in heavy losses to savers. Between 1920 and 1930, for example, about 7,000 commercial banks suspended operations because of insolvency, and from 1934 through 1958 over 1,400 more, net of banks reopened or succeeded, were placed in voluntary liquidation or closed because of financial difficulties."

The unique record of savings bank safety and stability has undoubtedly been a key factor in the durability and vitality of the mutual savings bank system. Safety alone would not have assured growth, however. The continuing usefulness of the basic thrift service offered by mutual savings banks has clearly been the other essential factor. Together, safety and service gained for savings banking the prestige and public confidence on which its growth has been built. As Professor Lintner summarized it:

Savings banks have generally succeeded in offering a rather extraordinary degree of safety, and their dividends have been attractive in relation both to the low risks of savings bank deposits and the returns available on comparable alternative uses for savings * * * (these factors) have contributed substantially to the growth of the system. They also reflect credit on the soundness of the organization of the system and its ability to enlist the continuing interest and support of able, public-spirited men as officers and trustees as well as the general quality of financial administration the banks have enjoyed.

Since the turn of the century, savings bank assets and deposits have increased more than twentyfold (table 2). At midyear 1963 total assets amounted to more than $48 billion and deposits to nearly $43 billion. The average size of savings banks has increased somewhat faster, as the number of banks has declined. While for the industry as a whole, bank assets averaged about $94 billion at mid-1963, compared with less than $4 million in 1900, most savings banks had assets of less than $60 million, and less than 90 of the 512 banks had assets of over $100 million.

As of Sept. 1, 1963, due to the merger of 2 institutions in New York City, there were 511 savings banks.

5 Federal Deposit Insurance Corporation, annual reports, 1934 and 1958.

• Lintner, op. cit., p. 25.

TABLE 2.-Assets and deposits of mutual savings banks, selected years, 1900–63 [In millions of dollars]

NOTE.-End of year data except for 1900-30 and 1963 which are as of midyear.

Source: Board of Governors of the Federal Reserve System and National Association of Mutual Savings Banks.

TABLE 3.-Savings deposits and share accounts, by type of financial institution, selected years, 1900-63