§ 1. #The nature of saving.# The motives actuating the different classes of lenders may, for our present purpose, be reduced to two: to postpone the consumption of income, and to obtain a net income from wealth (or investment). Saving always is relative to a particular period and is for more or less distant ends. The child saves its pennies to go to the circus next week, the working girl saves her dimes for a new hat next spring, the earnest high school pupil saves to go to college next year, and the provident man saves for his family's future needs and for his own old age. But always, to constitute saving, there must be for the time a net result: the excess of income over consumptive outgo in that period. This is easily distinguishable from various forms of pseudo-saving of which many persons that are really spending all their incomes are very proud. Such forms are: planning to buy a particular thing and then deciding not to do so, but buying something else; finding the price less than was expected, and thereupon using this so-called saving for another purpose; spending less than some one else for a particular purpose, such as food, but off-setting this by larger outlay for another purpose, such as clothing; spending all one's own income but less than some one else with a larger income. We may define saving as the conversion, into expenditure for consumptive use, of less than one's net income within a given income period.
Saving goes on in a natural economy both by accumulation of indirect agents and by elaboration so as to improve their quality.[1] It goes on to-day by the replacement of perishable by durative agents, as in replacing a wooden house by one of stone or concrete, and by producing wealth without consuming it, as in increasing the number of cattle on one's farm. But saving has come to be increasingly made in the form of money (or of monetary funds), and in this chapter we shall consider some of the ways in which this can now be done.
§ 2. #Economic limit of saving#. There is an economic limit to saving, as judged from the standpoint of each individual.[2] The ultimate purpose of every act of saving is the provision of future incomes, either as total sums to be used later or as new (net) incomes to be received at successive periods. The economic limit of saving in each case is dependent upon the person's present needs in relation to present income and conditions, as compared with the prospect of his future needs in relation to his future income and conditions. Each free economic subject must form a judgment and make his choice as best he can and in the light of experience. There is no absolute and infallible standard of judgment that can be applied by outsiders to each case. Yet there is occasion to deplore the improvidence that is fostered and that prevails, especially among those receiving their incomes in the form of wage or salary. Considered with reference to the possible maximum of welfare of the individuals themselves, the apportionment of their incomes in time is frequently woful. It is uneconomic for families of small income to save through buying less food than is needed to keep them in health; but it is likewise uneconomic to spend the income, when work is plentiful and wages good, for expensive foods having little nutriment and then, for lack of savings, to go badly underfed when work is slack and wages are small. There is for each class of circumstances a golden mean of saving. The saving habit may develop to irrational excess and become miserliness, but this happens rarely compared with the many cases where men in the period of their largest earnings spend up to the limit on a gay life and make no provision for any of the mischances of life—business reverses, loss of employment, accidents, temporary sickness, permanent invalidity, or unprovided old age. Despite the development of late of new agencies and opportunities for saving there is need of doing more toward popular education in thrift.[3]
§ 3. #Commercial bank deposits of an investment nature.# If a commercial bank pays no interest on demand deposits there is no motive for the depositor to keep a balance larger than he needs as current purchasing power. When his bank account increases beyond that point, it becomes available for a more or less lasting investment to yield financial income. If the sum is small or if the owner is at all uncertain as to his plans or if he is not in a position to find another attractive form of investment, the offer by the bank of a small rate of interest on special time deposits (2 to 3 per cent is not an unusual rate in such cases) will suffice to cause him to leave such funds in the bank. Since about 1900 the practice has been greatly extended of paying interest even on "current balances" of regular checking accounts (demand deposits). If the new 5 per cent rule[4] as to reserves against time deposits operates to cause commercial banks generally to pay a rate ranging from 2-1/2 to 3-1/2 per cent on time deposits, their amount will doubtless increase greatly. But still, in the future as in the past, those depositors having funds that can be invested for considerable periods will seek a higher rate of interest than can be obtained from commercial banks.
In their loaning function the "commercial" banks (as the adjective indicates) serve mainly the special needs of the commercial elements of the community—business men borrowing for short terms to carry out particular transactions. Loans made on short-time commercial paper (quick assets) are very suitable to the needs of a bank that has its liabilities largely in the form of demand deposits. Time deposits can be more safely loaned on the security of real estate and for longer periods.
Despite their limitations in this respect, the commercial banks must be recognized as of growing importance in the work of encouraging and collecting small savings, which in many cases are better invested in other ways. In 1916, the centenary of the beginning of savings banks in this country, a nation-wide propaganda was undertaken by the American Bankers' Association for the encouragement of savings.
§ 4. #Investment banking#. Enormous amounts of securities issued by governments or by corporations (railroad or industrial) are now on the market and to be bought conveniently by private investors. Through special bond houses some bonds are to be had in denominations as small as $100 and $500. The regular brokers on the stock exchanges buy and sell, for a small commission, the regular bonds and investment stocks. Several large statistical and financial expert agencies[5] in return for an annual subscription, offer advice to investors regarding general market conditions and special securities.
For a large number of investors the personal examination and selection of sound securities is too difficult a task. To serve their needs many bonds and trust companies have of late developed special departments for investment banking. Through these agencies the banks are constantly placing as relatively permanent investments securities which they have bought or have aided "to float" or which they handle only as commission agents. In any case the real investment banker is bringing to his task special training and a high sense of his professional obligations, and is employing the services of statisticians, financial experts, and of practical engineers to determine exactly the fundamental conditions of each investment. Investment banking promises to increase steadily in amount and importance.
§ 5. #Savings banks in the United States.# For the increasing number of wage-earners, salaried employees, and persons following professions, investment as active capitalists is impossible.[6] Their savings must take the form of passive investments. But there are few good opportunities for lending money in small amounts, without great risk, and the requirement of skill, time, and labor to look after the loans and to collect the interest is prohibitive to a small lender. To provide a place where small sums could be kept with safety and so as to yield a moderate rate of income, the first modern savings bank in the United States was instituted in New York in 1816 after a plan already developed in England.
In form these banks are mutual, having no capital stock on which dividends are to be paid. The boards of trustees are self-perpetuating and receive only fees for attending meetings. In their legal aspect these banks have a philanthropic character. Their investments are limited by law to specified, conservative classes of securities and loans on real estate. The total increase from investments is, after paying the expenses of operation and setting aside a surplus, distributable to the depositors at regular periods. In the United States the number of such institutions reported in 1914 was 2100.[7] They have over 11,000,000 depositors, deposits to the amount of $5,000,000,000, an average deposit of $444 per depositor, or of $50 per capita of the whole population. These figures are very unequally distributed geographically, the divisions ranking as to total deposits in the following order: the Eastern Middle, New England, Middle Western, Pacific, Southern, and Western divisions. The first two of these groups of states have about 75 per cent of all the deposits, the Southern states hardly 2 per cent, and the Western (North Dakota to Oklahoma) only 1/4 of 1 per cent.