Economics Volume II: Modern Economic Problems

by Frank A. Fetter

Additional funds are obtained when needed by issuing paid-up stock to non-borrowers. This is convenient at the beginning of an association and when the movement in building is more active than usual. But if an association has funds that cannot be loaned, outstanding paid-up stock may be called in. In practice a large part of the paid-up stock as well as of the running stock is subscribed for and held not by large capitalists but by persons of small means, especially "the more frugal element in the working classes." Non-borrowing members desiring to withdraw may do so at any time under certain conditions; but to safeguard the association, the laws usually require that thirty days' notice of intention to withdraw shall be given, that not more than one half of the funds received in any one month shall be paid on withdrawals, and that withdrawing shareholders shall be paid in the order of the notices of intention to withdraw.

The most intelligent and prudent workers were formerly deterred from subscribing by the fear that sickness, unemployment, or other mishap might make it impossible to keep up regular payments. Now, however, fines for late payment have been almost entirely done away with. On the other hand, extra payments may be made at any time by borrowing members, to hasten the date when their shares mature and their debt be discharged. These privileges are possible because of the method of distributing earnings which will now be described.

§ 13. #The distribution of earnings.# Every six months is ascertained the amount of the gross earnings which, under this plan, consist almost entirely of interest paid on loans. From this amount are deducted expenses (and in some states 5 per cent of the total is placed in a "loss fund" to meet possible losses) and the rest is divided in proportion to the amount standing to the credit of each member, being credited to the account of running stock and paid in cash to holders of paid-up stock.

The payment of dues is correspondingly simple. The dues at twenty-five cents a week amount to $13 a year per share of $100. This is the whole bill; there are no extras. The interest at 6 per cent (the usual rate) is $6, and the rest, $7, is credited upon the stock. Thus at the end of the first six months the member has $3.50 to his credit, and is entitled to his share of the net earnings on that amount. Thus his share of the earnings is steadily increased by compound interest, and if he keeps up his regular payments the shares mature in about sixteen years. This means in most cases that a prudent tenant can become the owner of a house in sixteen years while paying no more than the rent would be. As the active investor he becomes his own rent collector and uses the house with less need of repairs, thus dispensing with services and costs which are included in contractual rents.[13]

These associations are properly made subject to supervision and examination by state officials, in the manner of that exercised over banks. They have been favored by exempting the shares of members and the mortgages held by the associations from all state and municipal taxation. As the houses built or paid for are taxed, this is of course but just, but it is an exception to the rule of the illogical general property tax.[14]

§ 14. #Possible developments of savings institutions.# The social importance of increasing and improving the agencies of savings for the masses is being more fully recognized, but much more might be done in these directions. Some possible changes have been suggested above, and a few words more may be added.

Probably the greatest developments in the near future will be through the savings departments of commercial banks (favored by the reserve rules of the Federal Reserve Act) rather than by the increase in the number of special banks for savings. The initial expense and risk of starting a savings bank is considerable, and outside of cities of some size this is prohibitive. Whereas a savings department, with its funds and reserves separated, can be easily and cheaply operated in connection with a general bank. It is much to be desired, however, that a larger measure of popular coöperation might be made possible to the depositors, both for its educational value and to reduce the real evil of the autocratic or the plutocratic centralization of the money power in the small communities.

Savings banks usually limit the amount of an account to $3000. It is desirable that depositors should be able easily to convert their savings-bank deposits over certain amounts into good bonds, bearing a higher rate of interest (after the method of the issue of postal savings bonds). There is need of a central market in each community where such bonds can be bought and sold at any time; and the savings banks might easily serve to buy and sell for their customers in this way in the larger bond market. This would be of benefit also to the states and municipalities which issue bonds for such purposes as schools, roads, and public utilities, by creating a more open and regular market to small investors than now is provided for such securities. This might somewhat reduce the rate of interest and there would be a gain divided between taxpayers and lenders.

The general plan and principles of local building and loan associations might well be extended to groups of rural coöperators, enabling them to make loans to their members; and to groups of small investors, permitting them to hold real estate mortgages and bonds and stocks of corporations, free from taxation other than that paid on the wealth itself. Members of such organizations could get a higher income on their investments than a savings bank could pay, and with greater security than if each attempted to save and invest by himself.[15]

Savings institutions are necessarily also lending institutions. In this chapter they have been looked at mainly from the saver's (the lender's) standpoint, though their service to the borrower is of coördinate importance. In the case of building and loan associations this feature is most apparent. Later, the problem of the agricultural borrower will receive further consideration.