CHAPTER XVIII

THE FUNCTIONS OF SAVINGS INSTITUTIONS

The savings bank was indicated, in the charts on pages 134 and 136, as a financial intermediary in the raising of capital for business enterprises. It should be understood, however, that savings institutions also assist in the raising of funds required by governments-federal, state, and local; in the furnishing of capital for agricultural purposes; and in the financing of urban real estate operations, particularly in the construction of apartment buildings.

There are several different types of savings institutions, which may be classified as: (1) mutual or trustee; (2) stock; (3) postal; and (4) co-operative. The mutual and stock savings banks are by far the most important, and it is through them that the bulk of savings in the United States has been ⚫ effected. Postal savings institutions, which are designed to encourage and facilitate the making of savings by people in very moderate circumstances, have been in existence in the United States for about ten years only. Co-operative savings banks are institutions organized mainly for the purpose of promoting thrift, through co-operative action, among special groups of individuals. They include building and loan associations, fraternal societies, credit unions, etc.; consideration of these institutions will be reserved for the chapter on cooperative credit."

I. STOCK SAVINGS BANKS

If one is clearly to understand the work that is performed by savings institutions, he must be able to interpret the accounts that are shown on the balance sheet, or financial statement. The following financial statement shows the combined resources

1 See chart on p. 650.

2 See chap. xxviii.

and liabilities of 1,194 stock savings banks in the United States, which reported to the Comptroller of the Currency in the year 1918.1

The purpose of a balance sheet is to show at a glance the financial condition of the institution. All of the debts, or obligations, of the bank are arrayed under the heading "liabilities," and all of the property of the bank, together with the debts and obligations owing to it, are grouped under "resources" or "assets." The liabilities of a stock savings bank are of

Report of the Comptroller of the Currency, I (1918), 88–94.

two classes: those to the stockholders, and those to the creditors, or customers, of the institution. The stockholders' liabilities are classified under three headings: capital, surplus, and undivided profits. These items, taken together, represent the difference between the total amount of resources and the liabilities to the creditors; they thus represent the net worth of the business what is owned by the proprietors.

Many accountants refer to these items as "proprietorship items," and do not list them among the liabilities; but since the financial statements of banks always include them as liabilities, we shall here follow the latter practice. The reason for classifying them as shareholders' liabilities may be understood, if one conceives of the banking corporation as a business entity to which the stockholders have intrusted their funds in the capacity of investors. Capital, surplus, etc., are thus owned, not by the bank, but by the individuals who have bought its certificates of stock. The stockholders have the shares as evidence of the obligation of the bank to them; and in turn the bank must enter on its books a statement of the amount of capital it owes to shareholders.

The origin and nature of the remaining items on the balance sheet may best be made clear if we proceed to organize a bank and work out by the use of entries on the balance sheet the nature of its operations as a going concern. Suppose we organize a bank with a capital of $100,000, to be derived from the sale of 1,000 shares of stock at $100 per share. The two original entries would be as follows:

Many persons confuse the capital of a bank with its cash. The making of this balance sheet reveals at once the difference between them. Capital stock is a statement on the books of the bank of the amount that has been contributed by shareholders; and the entry of $100,000 under cash on the resources side is a declaration that the bank has $100,000 of cash in its vaults.

The meaning of surplus and undivided profits may also be made clear at this place. Let us assume that the stock, whose par value was $100 per share, was actually sold at $110 per share. The statement would then stand:

The surplus is thus a statement that the stockholders have contributed more than the par value of the stock. The surplus may, however, also be increased from year to year through a policy of not disbursing all the earnings among the stockholders in the form of dividends. If, for instance, at the end of the year the directors of the bank should decide that $10,000 of net earnings should be retained in the business, the surplus would be increased by $10,000. This additional $10,000 would be represented on the resources side by cash or investments.

The undivided-profits item states the amount of accumulated earnings, aside from the surplus; and, like the other items, it is represented on the resources side by cash, or other assets. When dividends are declared and paid, the undivided-profits account is lessened by the amount of the dividend payment and cash is reduced by the same amount.

To return to the statement as it stands above, it is obvious that before we can engage in the banking business it will be necessary for us to have a building. Let us assume that we buy a building properly furnished and equipped for the purpose in hand at a cost of $35,000. A new statement of the bank's financial position would then read as follows:

We now open the doors of the bank for business and make public announcement of the fact that we are ready to receive. deposits; and in the course of a few weeks we receive $50,000

from individuals for deposit. The accounts would then stand as follows:

In the course of time the following transactions are also concluded: (1) $10,000 is deposited by our bank in a large commercial bank in a nearby city, on which we are to receive 2 per cent interest; (2) the local post-office deposits with us $10,000 of postal savings; (3) $10,000 of United States bonds, $6,000 of state, county, and municipal bonds, $10,000 of railroad bonds, $10,000 of other public service bonds, and $24,000 of unclassified bonds and securities are purchased; (4) $20,000 of loans are made on real estate security; (5) $15,000 of loans are made on other collateral, mainly stocks and bonds; (6) $30,000 of other loans (unclassified) are made, mainly on the promissory notes of individuals; and (7) $5,000 is borrowed from another bank.

A financial statement of the bank's affairs would then stand as follows: