Valuable aid is also rendered by investment houses to the borrowing corporations, in time of reorganization and failure, especially when due to causes over which their management has no control. Investment banks are then the only sources for new capital, as the public is unwilling to buy the securities of a corporation in default, and only those banks which are able to investigate the entire situation and appreciate the true value of the corporation's assets are willing to provide new funds.

An investment bank of standing aims to sell its clients securities of reasonable yield and safety only. At times, the selection is not always justified by economic events, and its policy is then to advise customers to sell these securities if the yield has become unsatisfactory and the value speculative. In order to maintain its reputation, an investment bank will sometimes go to the extent of paying interest to holders of bonds on which the issuing corporation has defaulted.

CHAPTER XX

SAVINGS INSTITUTIONS

I. THE SAVINGS BANK AS COMPARED WITH COMMERCIAL AND INVESTMENT BANKS.

BEFORE describing the various classes of financial institutions for the accumulation of savings, it is well to consider first the general meaning of savings banking as compared with commercial banking, especially as relating to deposits and loans. While the depositors of commercial banks are usually business men, the clients of savings banks are mainly working people who desire a secure depository for their savings. The deposits of the former result largely from the granting of loans and contain a relatively small proportion of cash, which, on the other hand, constitutes the main element in savings deposits.

The funds of savings banks possess many of the features of time deposits of commercial banks, since both are lodged with the banks for the purpose of obtaining an interest yield. This return can be granted by the banks, because both savings and time deposits are generally inactive, and, moreover, may not be withdrawn immediately upon demand, but only upon due notice of from thirty to sixty days in advance. A characteristic of the savings deposit is the insistence by the bank that the customer produce his pass book before making any withdrawal.

As the savings bank thus deals in long rather than in short term credit, it partakes of the nature of an investment institution. The savings bank and the investment house are similar in that they both act as intermediary agents between investors and borrowers. The difference lies in the fact that the investment bank sells securities directly to the lenders, while the savings bank operates indirectly by re

Jceiving deposits and placing them in investments. In the first case, investors secure their returns in the form of dividends or interest from the borrowers, while depositors receive their return from the bank.

Since a savings bank is not required to pay out deposits on demand, it is able to make loans for a longer period of time, as compared with the commercial bank, because the latter holds, for the most part, deposits payable on demand, and so can extend only short advances. The savings bank invests largely in real-estate mortgages, railroad and government bonds. The bank is not entirely free in selecting these investments, for they are more or less prescribed by state law. Such legislation is due to the general belief that savings deposits are entitled to additional protection and should therefore be placed only in special investments which offer adequate security. An individual possessing surplus funds has the choice of investing them in securities directly, or in securities indirectly by depositing in a savings bank. By following the former policy, the saver gains the advantage of a higher yield, but at the same time labors under certain disadvantages. For instance, he does not possess sufficient knowledge of the investment field to judge relative values and to discriminate between high-grade and lowgrade securities. His savings are usually accumulated in amounts too small for their immediate placement in stocks and bonds, which are seldom issued in denominations of less than $100 each. To some extent this objection to direct investment of small savings is overcome by the plan of certain brokerage houses of accepting partial payments on securities purchased, and of certain companies in issuing real-estate mortgage bonds in amounts as low as $100. Even if the saver were in position to find investments which are safe and of small denomination, he would still be unable to diversify the risk. The soundest investments are subject to fluctuations in value, and losses can be overcome only by a proper distribution of funds. This is impossible for the individual with limited capital, and thus he cannot avoid loss if the investment in which he has placed his savings depreciates in value. The problem of marketability

also remains, and a contingency may arise in which the individual needs cash immediately and he may then be forced to sell his investment at a sacrifice.

These disadvantages encountered by the man of moderate means who follows the method of direct investment are overcome to a large extent by creating a savings account. In the first place, the bank has a better understanding of investments, for it is continually placing funds on a large scale and is therefore able to secure expert advice. Secondly, no saving is too small to be accepted, for some banks take a single deposit as low as ten cents. It must be remembered that the savings bank is receiving numerous deposits, small in their separate amounts but large enough in the aggregate to enable the bank to spread its investments over various fields of business interests. This very diversity brings security, for a loss on one investment is compensated by a gain on another. Lastly, the savings bank gives the depositor the assurance that his funds are available practically on demand and with no loss excepting possibly an amount of interest which has accrued between the dates of deposit and of withdrawal. For these reasons the savings bank performs a distinct service to the individual, who is thus encouraged to practice thrift and to lay aside funds for later use.

The savings bank meets a social need in furnishing capital for the use of borrowers. The savings of the community are accumulated and made available for the building of houses, the construction of railroads, and the undertaking of other sound enterprises.

II. THE ORGANIZATION OF A MUTUAL SAVINGS BANK.

In the above description of the nature of the savings bank, it has been conceived as a single institution, but it is organized in various forms, of which the most important is the mutual savings bank.

The mutual type was the original bank for savings and the first was organized in England in 1810. During the early half of the nineteenth century similar banks were established in New England and New York, but the move

ment has not extended beyond the Northeastern states. In this area on June 30, 1924, the total deposits of mutual savings banks amounted to $6,693,395,000. These resources have a special significance in finance, since they represent not extensions of credit by banks, but deposits of actual funds by customers.

The purpose in organizing a mutual savings bank has been philanthropic rather than commercial. Originally these institutions were established for the purpose of encouraging thrift among the poorer class and of improving their welfare. The founders were actuated by charitable motives and were not expected to derive any profit from the undertaking. This theory is still applied in the case of the mutual savings bank, for it is organized and operated by a group of persons known as trustees, who are forbidden by law to receive any compensation for their services. In fact, the organizers must contribute to an initial fund to meet the expenses of starting the new bank and to operate it until earnings render it self-supporting, at which time the contributions are returned.

The mutual savings bank is not operated through capital derived from the sale of stocks, for the business is conducted through funds left by depositors, who are the real owners of the bank. Thus the income which they receive is technically called a dividend, but because of its certainty of payment and stability of rate it is popularly regarded as interest. Although they are in a sense the owners of the mutual banks, the dépositors exercise neither control over the management nor choice in the selection of the trustees. The first trustees are appointed by the original organizers and later additional trustees are elected by the board itself, thus constituting it a self-perpetuating body.

The trustees of a large mutual savings bank are divided into committees with duties similar to those of directors of a commercial bank. The finance committee passes upon all applications for loans on mortgages and approves all purchases of securities. In New York State, a trustee may not receive a loan from the bank. An auditing committee examines the books of the institution and verifies all receipts