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From Benevolence to Business: The Story of Two Savings Banks*

Published online by Cambridge University Press:  24 July 2012

Lance Edwin Davis  and
Peter Lester Payne
Lance Edwin Davis
Affiliation:
Assistant Professor of Economics at Purdue University
Peter Lester Payne
Affiliation:
Visiting Lecturer and Research Fellow in the Department of Political Economy at the Johns Hopkins University
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Abstract

This comparative study deals with objectives, administration, and portfolio policies of two banks that were among the earliest institutional lenders in America. Founded to assist the “frugal poor,” both banks faced the handicaps of provincialism, capital immobility, and regulation in their efforts to enlarge their services to the community. Both contributed much to a growing public understanding of banks and banking.

Type
Articles
Information
Business History Review , Volume 32 , Issue 4 , Winter 1958 , pp. 386 - 406
Copyright
Copyright © The President and Fellows of Harvard College 1958

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References

1 Keyes, Emerson W., A History of Savings Banks in the United States (2 vols.; New York, 1876), Vol. I, pp. 114–115.Google Scholar (Hereafter cited as Keyes, Savings Banks.)

2 Payne, P. L. and Davis, Lance E., The Savings Bank of Baltimore, 1818–1866: A Historical and Analytical Study (Baltimore, 1956), p. 21.Google Scholar

3 For example, Bennett, F. P. Jr, The Story of Mutual Savings Banks (Boston, 1924)Google Scholar; Knowles, Charles E., History of the Bank for Savings in the City of New York, 1819–1929 (New York, 1929)Google Scholar, hereafter cited as Knowles, New York; Thon, R. W., Mutual Savings Banks in Baltimore (Baltimore, 1935)Google Scholar; Welfling, Weldon, Savings Banks in New York State (Princeton, New Jersey, 1938)Google Scholar; Willcox, J. M., A History of the Philadelphia Savings Fund Society, 1816–1916 (Philadelphia [c. 1916]).Google Scholar (Hereafter cited as Wilcox, Philadelphia.)

4 Davis, Lance E., “United States Financial Intermediaries in the Early Nineteenth Century: Four Case Studies” (Ph.D. thesis, Johns Hopkins University, 1956).Google Scholar

5 Both the 1820 and the 1860 censuses rank Baltimore third and Boston fourth among American cities. In 1820 Baltimore had 62,700 residents and Boston 43,300. Forty years later, the populations were 212,400 and 177,800 respectively. DeBow, J. D. B., Statistical View of the United States: A Compendium of the Seventh Census (Washington: Beverly Tucker, 1854), p. 192Google Scholar; United States Department of the Interior, Eighth Census of the United States: Miscellaneous Statistics (Washington, D. C: G. P. O.), p. xviii.

6 Compare, for example, the following typical statements by directors of the two institutions:

There are on the books of the Institution some pleasing instances of the rapid increase in small sums regularly deposited by persons who, persevering in economy and sobriety, are enabled weekly to save a part of their earnings, and thus secure for themselves and their families a resource in sickness and old age. How different must be the hopes and future prospects of the poor wretches who spend a like proportion of their earnings in grog shops to the utter ruin of themselves, and the misery of their families; besides forfeiting all claims to the mercy of an offended Diety.

Savings Bank of Baltimore, “Minutes and Proceedings of the Board of Directors,” Jan. 14, 1819.

… it was the original and sole design of the institution to foster and encourage among those classes of society whose education and actual situation exposes them to the dangers of improvidence and loss of the earnings of their industry, habits of economy and a spirit of frugality and savings; and to take care to preserve, and put at reasonable interest the savings of this description of persons….

Provident Institution for Savings, “Records of the Board of Trustees,” Dec. 26, 1821.

7 Both the Savings Fund Society (Philadelphia) and the Bank for Savings (New York) also set off by soliciting deposits from all, but they too soon began to discourage wealthy depositors. Willcox, Philadelphia, pp. 45–46; Knowles, New York, p. 91.

8 In Boston the directors limited weekly deposits to $100 throughout the ante-bellum period, though an exception was made in the case of merchant seamen who, because of the irregularity with which they were paid, were permitted to deposit their entire wage. In Baltimore, although the limit was subject to wide fluctuations, it was always at a much lower level. The limit was originally set at $20 a week and it remained at that level until 1831, when it was raised to $30, but within a year it was reduced to $10. After only a few months the limit was again raised to $50 where it remained until 1839. In that year the limit was reduced to $20, no further changes being made before 1860. Similar limits were also adopted by the Philadelphia Savings Fund Society. There the limit was in the form of an annual limitation ($500 before Feb., 1828, and $200 thereafter). Willcox, Philadelphia, pp. 49–50.

9 Originally, the limit had been set at $100, but soon this figure was increased to $500 and then in Feb., 1819, to $1,000. However, the higher limit induced many wealthy persons to open accounts, and, as a result, in Dec., 1821, the limit was again reduced to $500, at which level it remained throughout the rest of the period.

10 In 1828 the deposits returned amounted to about 8 per cent of the total deposits; in 1839, to about 12 per cent; and in 1854 to about 2 per cent.

11 The first actuary of the Hospital Life, Dr. Bowditch, N., “on one occasion [1824] referred to the company as ‘a species of Savings Bank for the rich and middle class of Society.’” White, Gerald, The Massachusetts Hospital Life Insurance Company (Cambridge, 1955), p. 34.Google Scholar

12 The New York Bank for Savings appears to have adopted the same policy as the Savings Bank of Baltimore. A letter from the Bank's directors to Senator Van Schank (Feb., 1836) says: “the general instructions given to the Accountant and Attending Committee [are] not to receive deposits from any persons who in their judgment are capable of investing for themselves. This fact becomes apparent from the annual reports in which the description and occupations of the depositors are set forth.” Knowles, New York, p. 91.

13 See Table I.

14 For example, in 1827, the Savings Bank of Baltimore declared three extra dividend rates: one applicable to deposits which had been on the books for over twelve months but under two years (3 per cent), one to deposits on the books for over two but under three years (4 per cent), and one to deposits that had been on the books for three years and longer (6 per cent).

15 The actual averages are 6.4 per cent for the Provident Institution and 5.9 per cent for the Savings Bank of Baltimore.

16 See Table II.

17 Both banks paid extra dividends only on those deposits on the books at the date of declaration. Thus any sum withdrawn prior to the dividend date did not qualify for any payment.

18 Instead of declaring extra dividends, the directors of the New York Bank for Savings originally allowed undistributed earnings to accumulate in a surplus account. It was not until 1852, when the state legislature limited surplus accounts to 5 per cent of deposits, that the directors, faced with confiscation, declared their first extra dividend. Once begun, the practice was continued and additional dividends were declared in 1855, 1856, and 1858. Knowles, New York, pp. 113 and 121.

19 The only differences were in the names and size of the governing bodies. In Baltimore the board of directors was made up of 25 members (24 directors and a president elected by the directors) and in Boston the board of trustees was made up of 24 trustees, 12 vice presidents, and a president elected by the trustees and vice presidents.

20 A similar shift can be seen in the history of the New York Bank for Savings, although in that institution the evolution proceeded much more slowly. In New York the “Committee of the Month” did not cede all of its administrative functions until the bank's administrative reorganization in 1877. Knowles, New York, pp. 131–132.

21 It is interesting to note that the New York Bank for Savings also established an investment committee in 1820. Knowles, New York, p. 66.

22 Only once between 1826 and 1860 did the committee seek the board's approval before making a loan and this was on property outside the city.

23 Provident Institution, “Records of the Board of Investment,” Feb. 8, 1840.

24 Provident Institution, “Records of the Board of Investment,” Aug. 24, 1832, and “Trustees Records,” Aug. 24, 1832.

25 The limit was first set at $200,000, then raised to $400,000, and finally removed altogether. Provident Institution, “Trustees Records,” Nov. 10, 1818; July 18, 1820; Dec. 20, 1820.

26 Provident Institution, “Trustees Records,” March 25, 1829, and July 16, 1859.

27 A similar evolution marks the early history of the New York Bank for Savings. In that institution the directors continued to play an important role both in policy-making and administration until 1877. Knowles, New York, pp. 131–132.

28 The evidence indicates that most other savings banks also aimed at safety rather than yield in their investment policies. In their report of 1861, the Massachusetts Bank Commissioners reported that the investment goals of savings banks should be (1) safety, (2) convertibility, and, only then, (3) yield. Keyes, Savings Banks, Vol. 1, pp. 78–83.

29 See Table III.

30 The savings banks received their deposits in relatively small blocks and needed investments that could absorb these small amounts. At the same time bank shares were highly liquid since a fairly well-organized equity market existed in both cities.

31 For example, between April, 1839, and March, 1842, the prices of the bank shares that the Savings Bank of Baltimore held as assets fell by the following percentages: Bank of Baltimore, 20.5; Mechanics Bank, 13.3; Merchants Bank, 15; Western Bank, 25; Farmers and Planters Bank, 25; Union Bank, 25; and Franklin Bank, 70 (Savings Bank of Baltimore, “Minutes of the Investment Committee,” April, 1839, through March, 1842); and it may be presumed that the Savings Bank invested only in the stock of the soundest banks. It is impossible to discover the average prices of the stocks of the 25 Boston banks in existence from 1839 to 1842, but even if the most unfavorable situation is taken, and an average of the highest 1839 prices of those stocks is compared with an average of the lowest 1842 prices, a fall of only 14% took place. (Martin, Joseph, Seventy-Three Years History of the Boston Stock Market [Boston: published by the author, 1871], p. 43.Google Scholar) The stocks of Boston banks appear, therefore, to have maintained their values far better than did those of the Baltimore banks.

32 In acquiring such assets the Baltimore Bank had adopted a policy that was at variance with the investment policy of most conservative savings banks. The behavior of state governments during the crisis of 1840–1842 had caused general concern over the safety of their bond issues. In Philadelphia, for example, the Savings Fund Society did not invest in non-Pennsylvanian issues until 1870. Willcox, Philadelphia, p. 167.

33 The exceptions to this were confined to loans to commercial banks and a short-lived discount business.

34 For the ten years 1828 through 1837 Boston commercial bank stock yielded on the average 5.7 per cent. Martin, Boston Stock Market, pp. 45–56. Although the Massachusetts Hospital Life invested heavily in real estate mortgages throughout the '20's and '30's, it is significant that until the late '30's almost all of these investments were in mortgages on farms in Western Massachusetts yielding 6 per cent (the legal maximum). If 6 per cent mortgages had been available in Boston it appears likely that the Massachusetts directors would have preferred the closer investments.

35 Although Huse's figures on Boston real estate prices are not strictly comparable between years, they do indicate that Boston real estate values were not seriously depressed by the depression of 1840–1842.

Huse, Charles Philip, The Financial History of Boston (Cambridge, 1916), p. 380.Google Scholar

36 Only once was a borrowing firm (the Bay State Mills) unable to repay a loan, and, even in this case, the Provident was able to avoid having to call on the guarantors by waiting for reorganization to be carried out.

37 Keyes, Savings Banks, Vol. I, pp. 78–83; Willcox, Philadelphia, passim.

38 At one time the Provident even purchased an annuity with the Massachusetts Hospital Life Insurance Company.

39 Railroad companies that received loans from the Provident were the Boston and Lowell, the Boston and Worcester, the Old Colony, the Webster, and the Western. Of the five, the Western received by far the most. Its outstanding loans between 1840 and 1860 were never less than $250,000 and at one time reached $700,000.

40 The Savings Bank of Baltimore loaned only to residents of Baltimore City until the mid-'fifties when the area was extended to include Baltimore County. The Provident restricted its real estate loans to Boston property; its formal security and bank loans to residents of the Boston metropolitan area; and its personal security loans (with only a few exceptions) to Massachusetts firms. Even in the case of the exceptions (to New Hampshire firms) the loans were made through officers of the firms who were Massachusetts residents. Even after the mid-'fifties the Provident did not hold non-New England funds.

41 For a detailed study of the role of the Savings Bank of Baltimore in providing capital for the early industrial development of this city, see Payne and Davis, op. cit., pp. 114–137.