Savings banks are institutions established by public authority, or by private persons, in order to encourage habits of saving by affording special security to owners of deposits, and by the payment of interest to the full extent of the net earnings, less whatever reserve the management may deem expedient for a safety fund; and in furtherance of this purpose bank offices are located at places where they are calculated to encourage savings among those persons who most need such encouragement.
[A] Pages 161 and 162.
Professor Hamilton classifies these institutions as trustee, cooperative, municipal, and postal savings banks. In the first group he places institutions managed by boards of philanthropically inclined persons who serve without pay; in the second, those managed cooperatively by the people who make use of them; in the third, those established and administered by municipalities; and in the fourth, those connected with the post-office departments of governments. The strength of trustee savings banks lies in the comparatively low costs of their administration and in the fact that in their investments they are likely to enjoy the advantages of the judgment and enthusiasm of people skilled in the investment business; that of cooperative savings banks, in their adaptability to the special needs of their constituents and in the education which cooperative administration involves; and that of municipal, and especially of postal savings banks, in their capacity to place their services within the easy reach of all who need them and in the confidence which their public character inspires.
In the investment of the funds intrusted to savings banks, safety and as large returns as are consistent with it, rather than ease of liquidation, are the prime considerations, and hence they usually take the form of high grade investment securities rather than of commercial paper. Their deposits are usually subject to withdrawal only after due notice, and, being savings deposits, their withdrawal usually follows only after the lapse of a considerable period of time.
The purpose of their withdrawal is frequently investment and this is sometimes made through the agency of the bank which held the deposit and may involve merely a transfer of securities.
Outside of the New England and middle states, savings banks were rare in this country previous to the inauguration of our postal savings bank system in 1911. The explanation of this condition is doubtless to be found chiefly in the wide extension of private, state, and national banks, and trust companies, practically all of which conduct savings departments and solicit the patronage of savers. These institutions have coveted this field and have not encouraged the establishment of savings banks. There is reason to believe, however, that they have not worked the field as thoroughly as savings banks would have done and that, on account of the dominance of their other interests, they are not as well fitted as savings banks to work the field thoroughly. Moreover it is probable that they are not able to pay as high a rate on deposits as well conducted savings banks would be able to pay. There seems, therefore, to be room, and probably need, here for the development of savings banks of some at least, if not all, of the types above described.
2. Trust Companies
Within a comparatively short period of time the trust company has developed into an institution of prime importance in the United States. In the beginning of its history it was, as its name implies, simply an institution for the administration of trusts of various kinds, such as the execution of wills, the guardianship of minors and other dependent persons, the administration of the estates of persons either unable or unwilling to administer them for themselves, and trusteeship under corporate mortgages, especially those of railroads. In the latter capacity they became mortgagees in trust for bondholders, registering the bonds, collecting the interest as it became due, paying the bonds at maturity, and in case of default taking the legal steps which were necessary for the protection of the bondholders.
The execution of these trusts involved in most cases the custody and investment of funds, so that investment banking became a part of their business almost from the beginning, and, in time, in states in which the laws passed for their regulation did not prevent, they added commercial banking to their other functions. In some cases they have also become promoters of enterprises, taking the initiative in the organization of corporations for various industrial and commercial purposes. In New York City, and in individual cases in some other large cities, the commercial end of the business has become the dominant one; in the former case on account of the ability of these companies, unrestricted by certain laws applying to state and national banks, to offer to commercial customers better terms than their competitors. In most states, however, especially in the large cities in which they chiefly flourish, trust companies have become primarily investment banking institutions, their other functions being carried on as side lines and assuming, of course, in some cases greater importance than in others.
Since they are still in the early stages of their development, the status of trust companies in the banking system of the United States is not yet definitely determined. Legislation concerning them varies considerably in different states, as do also their relations with other banking institutions. The competitive character of these relations has resulted in some cases in legislation which has aimed to differentiate and define the various functions which all these institutions perform, and to prescribe the conditions under which each one or each group must be performed, regardless of the way in which they are combined, and in others, in their practical consolidation with national or state banks, or both, through community of stock ownership, interlocking directorates, etc.