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L

Banks For All Reasons
If you're like a lot of people, you
probably chose your bank for its
convenient location. Perhaps it's
only a short distance from where
you live or a few blocks from where
you work.
Of course, you might also have
based your decision on your bank's
reputation for service. A friend or
relative may have recommended a
certain bank, so you decided to
open an account there, too.
Then again, maybe you chose
your bank because it offers free
checking or because it pays an
attractive rate of return on your
money. You may even have decided
to bank there because it is part of a
nationwide automated teller (ATM)
network. In short, you could have
chosen your bank for any of a number of reasons.
Most people, however, seem to
give little thought to whether their
bank is a commercial bank, a mutual
savings bank, a cooperative bank, or
a savings and loan association
(S&L). Many, in fact, don't seem to
know the difference between one
type of depository institution and
another.
At one time, each type of depository institution served a distinct
function, and government regulations limited the kinds of services
that each type of institution could
offer its customers. During the
1970s, however, the distinctions
began to blur as the trend toward
banking deregulation accelerated. A
1975 Maine law, for example, authorized Maine's state-chartered thrift
institutions to make commercial
loans and accept demand deposits,

Courtesy, Federal Reserve Bank of New York

and a 1983 Massachusetts law
granted full commercial banking
powers to Massachusetts statechartered savings banks and cooperative banks.
Yet, deregulation notwithstanding, it is still possible to distinguish
between different types of depository institutions. A commercial
bank isn't the same as a thrift; a

state-chartered S&L isn't the same
as a federally-chartered credit
union; and a stock cooperative bank
isn't the same as a mutual savings
bank. The remainder of this article
will take a look at how the various
types of New England depository
institutions evolved, and it will
examine some of the differences
that still exist between one type of
institution and another.

Federal Reserve Bank of Boston Vol. 12, No. 3 - November 1986

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Broadly speaking, it is possible to
classify all of New England's depository institutions as either banks or
thrifts. Commercial banks have traditionally served the credit and
deposit needs of business, whereas
thrifts have concentrated on savings
deposits, residential mortgages,
and consumer credit.
During the 19th and early 20th
centuries, banks placed very little
emphasis on individual deposit and
credit needs, partly because the
public neither expected nor
demanded such services . Even
today, residential mortgages
account for less than 10 percent of
the total assets of New England's
commercial banks.
In many respects, thrift institutions - savings banks, savings and
loan associations, cooperative
banks, and credit unions - were an
outgrowth of the Industrial Revolution. The rise of industry and the
resulting migration from farm to
city created a growing number of
wage earners, salaried workers, and
middle class professionals - all of
whom began to look at money and
credit in a new light. Their financial
needs differed from those of
farmers, artisans, craftsmen, and
apprentices; some required secure
depositories for their savings, while
others needed to finance the purchase of houses and consumer
goods. Thrift institutions began to
appear after most traditional banks
showed little inclination to meet
these needs.
The bank/thrift distinction persists to this day. Banks still lag
behind thrifts in the percentage of
assets devoted to residential mortgage lending, while thrifts have
generally been slow to take advantage of regulatory changes that permit them to engage in commercial
banking activities.
Another way to classify depository institutions is by the type of
charter they hold. All depository
institutions must obtain either a federal charter or a state charter before
opening for business.
Banking commissioners in the
individual states have chartering
and regulatory authority for statechartered commercial banks and
state-chartered thrifts. Federal charters, on the other hand, are issued
by various authorities: the Office of

page2


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Federal Reserve Bank of St. Louis

Residential Mortgages as a Percent of Total Assets
New England Depository Institutions
PERCENT
100

90

.....

80

SAVINGS AND LOANS

""'"·-.- ,-·:::-·:i ::·: :T . . ..[. ,,<:--) ~::_-t:,\

70

60

~MASS.CO-OP.
BANKS,
'
I
I

J

I

!

50

I

!

···)

· ...

•.. -.

-··

~-~- - -

-

/

I'--

SAVINGS BANKS 1/
40

30

20

COMMERCIAL BANKS
10

I

0

II
66

68

70

-

I

I

I

72

74

76

1

78

80

82

84

Cou rtesy, Federal Home Loan Bank of Boston

the Comptroller of the Currency
charters national banks (all those
banks that used to be known as
" First National Bank of ... " until
they opted for trendier-sounding
names); the Federal Home Loan
Bank Board charters federal savings
banks and fed e ral S&Ls; the
National Credit Union Administration charters federal credit unions.
Form of ownership is yet another
way to differentiate between depository institutions . Mutually-owned
institutions belong to their depositors; stock banks and thrifts belong
to their stockholders. A mutuallyowned institution pays dividends
(commonly referred to as interest) to
depositors only; a stock bank or
thrift pays interest to depositors and
dividends to stockholders. In short,
a stock bank or thrift is purely a
profit-making, business proposition, whereas mutual banks and
thrifts were originally founded as
philanthropic institutions.

MUTUAL SAVINGS BANKS

In 1810, the Reverend Henry Duncan of Ruthwell, Scotland established the world's first mutual savings
bank - the Savings and Friendly
Society - for the benefit of his
parishoners. Six years later, Reverend Duncan's idea took hold in the
United States when the Philadelphia Savings Fund Society and the
Provident Institution for Savings
(Boston) began to accept deposits.
These early mutal savings banks
were " thrift" institutions in the truest sense. Their main goal was to
give working class people a secure
place to save money for "a rainy
day."
The mutual savings bank movement had definite moral underpinnings. Most mutual savings banks
were founded and managed by people with a mission - public-spirited
citizens of means who understood
the ways of finance and were eager
to help the "lower classes."

"The greatest good," wrote the
Secretary of the Provident Institution for Savings, "is in affording the
humble journeymen, coachmen,
chamber-maids, and all kinds of
domestic servants, and inferior artisans, who constitute two-thirds of
our population, a secure disposal of
their little earnings, which would
otherwise be squandered."
Few, if any, mutual savings banks
were in business to make a profit;
many even refused to accept large
deposits. An officer of the Savings
Bank of Baltimore proudly noted
that his bank did not "take over $500
at any time, for any person .... We
have several instances of women,
who, during the summer, deposited
a dollar per week. This is the most
desirable kind of depositor, for all
this is saved from luxury and
dress."
Those who managed mutal savings banks invested the combined
savings to earn a dividend for their
depositors. The size of the dividend,
however, was almost always secondary to the concern over the
safety and soundness of the investments. As a 20th-century savings
banker would later note, "The savings bank deposit is not of the same
nature as a business account. It carries with it the toil of years, the selfdenials of life, the hope of the
future . ... It is thereby a sacred
trust, because of what it represents .
It should not be subject to the vicissitudes of business. It should not be
risked."
Deposit figures indicate that the
mutual savings bank philosophy
appealed to quite a few people during the the first half of the 19th century. In Massachusetts, for example,
the figures for 1820 show that three
mutual savings banks held $400,000
worth of savings deposits in 2,962
open accounts. By 1860, 89 Massachusetts mutual savings banks held
over $45 million worth of savings
deposits in more than 230,000 open
accounts.
But mutual savings banks were
not equally popular in every region
of the United States . In fact, the idea
never quite caught on outside the
Northeast.
Professor Weldon Welfling offered
the following explanation for their
limited geographic appeal:


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As the West was being settled there
was no pre-existing class of gentlemen with the sense of civic responsibilities that was held by the
wealthier merchants of Philadelphia, Boston, Baltimore, and New
York. The influence of gentlemen
Quakers and Puritans was not predominant in the pioneer settlements, nor indeed was there a
"lower class" dependent upon the
wealthier for employment or for
assistance when the employment
was lacking.
Even in areas of the country
where mutual savings banks were
popular, success and the passage of
time brought many changes. Business considerations began to overshadow philanthropy when the
second generation of managers and
directors assumed control. By the
1860s, mutual savings banks were
sometimes being started for profit or
prestige.
Another major change took place
during the 1920s when an influx of
funds prompted savings bankers to
seek new investment opportunities.
The relative safety and profitability
of residential mortgages proved particularly attractive, and mutual savings banks increased their mortgage
lending by nearly 150 percent. But
mortgage portfolios deteriorated
after the stock market crash of 1929.
Many lenders were forced to reschedule mortgage debt, and, all too
often, houses were auctioned or
sold for back taxes.
Nevertheless, mutual savings
banks weathered the Depression
years comparatively well. From 1929
to 1934, only eight failed; whereas
the number of commercial banks fell
from 24,970 to 15,348 during the
same period.
Real estate recovered after World
War II, and mutual savings banks
continued to play a major role in the
mortgage market. Their total share
of the residential lending market
declined .s omewhat during the
1970s and early 1980s, but they still
figure prominently among New
England's mortgage lenders.
By the end of 1984; mutual savings banks in the six-state area held
approximately $28 billion worth of
residential mortgages. Mutual savings banks in Connecticut and Massachusetts accounted for 51 percent

and 46 percent respectively of the
total residential mortgages held by
depository institutions in those
states . Moreover, New England's
mutual savings banks hold a large
share of that region's savings
deposits, including 37 percent of the
passbook and money market
deposit accounts .
SAVINGS AND LOAN
ASSOCIATIONS

America's predominant type of
thrift institution is the savings and
loan association (S&L). In New
England, however, there are relatively few.
Originally known as "building
and loan" associations, the first
S&Ls were founded during the 19th
century to help wage earners
become home owners. People
formed an association and regularly
deposited their savings. Then, as
the pool of savings grew, the association's members bid for mortgage
funds .
Members of the early S&Ls usually shared a common affiliation;
often they worked at the same occupation or lived in the same neighborhood. For example, most
members of America's first S&L, the
Oxford Provident Society (1831),
worked in the textile trades of
Frankford, Pennsylvania.
The Oxford Provident Society was
founded out of necessity.
Frankford's textile workers wanted
to build or buy their own houses,
but few of them would have been
able to borrow money from a conventional bank because the banks
were primarily interested in commercial customers .
With no place else to turn, the textile workers and a few civic-minded
citizens devised a system to create
their own source of mortgage funding. Each member paid an initial fee
of $5.00 and deposited $3.00 a
month thereafter. Any member who
missed 12 consecutive monthly payments could be expelled from the
Society. (The 13 trustees who ran
the Society were also subject to certain penalties: 25Q: for missing a
scheduled meeting and 25Q: for
attending a meeting in a state of
intoxication.)
As the pool of savings grew, members of the Society were allowed to

page 3

bid for mortgage funds. Records
show that the Oxford Provident
Society's first homebuilding loan
went to Mr. Comly Rich, who borrowed $375 and paid a $10 premium
for the loan . (The premium took the
place of interest.)
Of course, things have changed
since then . Today, a borrower no
longer needs to be a member of a
savings and loan association in
order to take out a mortgage. Each
year, thousands of S&Ls lend billions of dollars to America's homebuyers, and in most cases the
borrower doesn't even hold a savings account at the lending
institution.
As mentioned before, New
England has comparatively few
savings and loan associations (30
state-chartered and 37 federallychartered) . But many of the region's
cooperative banks are very much
like the state-chartered S&Ls in
other parts of the country.
COOPERATIVE BANKS

Throughout New England, a
number of thrift institutions carry
the word "cooperative" on their
signs. Most are simply statechartered savings and loan associations that are si milar to
state-chartered S&Ls in other parts
of the country.
The cooperative banks of Massachusetts, however, constitute a
unique component of New
England's thrift industry. Although
they bear a certain resemblance to
other types of depository institutions, they are in a category all their
own.
Their origins, for example, reflect
the same concern for the public
good that characterized the early
years of the mutual savings bank
movement; philanthropy took precedence over profit. But the philanthropists who founded mutual
savings banks sought to encourage
thrift, while the philanthropists
who founded Massachusetts cooperative banks hoped to foster home
ownership .
The history of Massachusetts
cooperative banking dates back
to 1875, when Josiah Quincy and
several other influential citizens
petitioned the Massachusetts
legislature to pass an act authorizing

page 4


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the establishment of "building and
loan associations." Their first
attempt failed, but in 1877 they tried
again and succeeded - after making a strong effort to publicize their
cause . The following excerpt from
tJ:ie January 31, 1877 edition of The
Boston Herald attests to their success
in mustering editorial support:
The petition of Honorable Josiah
Quincy and others for a law authorizing loan and building associations . . . ranks among the most
important of the current legislative
session. It aims to render the middle classes of Boston a houseowning,
instead
of
a
house-renting, people. A man of
humble means has almost no
chance, as things are now, to
become the possessor of his own
home. He is born in another man's
house and he dies under a landlord's roof . ...
Every year the rich men of the State
ask the legislature for laws beneficial to themselves, and they rarely
fail to obtain what they ask for.
Now it is the great industrious middle class which asks for the simple
favor of being allowed to own its
own homes. The bill asked for
ought to become a law.

Later in 1877, the Massachusetts
legislature indeed passed a bill that
provided for the creation of ten
cooperative banks. And on August
6, 1877, the first such institution Pioneer Cooperative Bank of Boston
- opened its doors for business.
The earliest cooperative banks
were characterized by their "nofrills" approach to banking. Many
were located in real estate or insurance offices, hay and grain or drv
goods stores, jewelery stores, drug
stores, and in other banks. Moreover, the directors and presidents of
early cooperative banks seldom
drew salaries.
Today, of course, things are different. One hundred cooperative
banks now do business in Massachusetts . They occupy their own
buildings, their employees draw salaries, and philanthropy no longer
counts for much . Furthermore,
Massachusetts cooperative banks
(and Massachusetts state-chartered
savings banks) gained full commercial banking powers in 1983.
But even with all the changes,
Massachusetts cooperatives are still

primarily involved in residential
mortgage lending. As of October
1986, approximately 70 percent of
assets were devoted to residential
mortgages.
CREDIT UNIONS

The credit union movement began
during the mid-19th century when
desperate German farmers banded
together to address their credit
needs. The concept was simple:
Farmers purchased shares in a
cooperative, and the cooperative
used the funds to loan money to the
farmers at reasonable rates.
Rural credit unions and farmers'
cooperatives enjoyed modest success. But the focus of the credit
union movement ultimately shifted
from the farms of Germany to the
industrial centers of America where
working class and middle class people lacked access to mainstream
banks. (At that time, banks were
mainly interested in providing
credit to business and industry.)
During the 19th and early 20th
centuries, factory hands and salaried workers were generally
expected to pay cash for what they
needed - even in an emergency.
Consequently, loan sharks and
other unscrupulous lenders were
often the only sources of personal
credit.
Against this background, the
credit union concept gained
momentum. In cities and mill towns
across the country, Americans
pooled their resources and created
alternative sources of credit - credit
unions. Most credit unions were
founded by people who shared a
common workplace, but many were
also started by people who lived in
the same neighborhood or belonged
to the same house of worship. (The
concept of "common bond" was
incorporated into the Federal Credit
Union Act and credit union legislation passed by various states.)
The American credit union movement has strong ties to New
England. In 1908, the first credit
union in the United States began
operating in New Hampshire. Massachusetts adopted credit union legislation the following year.
Boston department store owner
Edward A. Filene was an early proponent of credit unions . He took the
position that credit unions bene-

fited employer as well as employee
"because instead of having his
workmen harassed by loan agents,
the employer gets workmen, who, if
they have to borrow in some emergency, borrow among the men with
whom they are working and who
help them get on their feet and get
steady."
Another early supporter of credit
unions was Massachusetts governor
David I. Walsh. In 1915, Walsh
observed that " credit unions would
be of more benefit to the masses of
people than even the savings banks
and the cooperative societies, for
every banking door in the Commmonwealth is barred to the man
who wants to borrow $25 without
security. That's the greatest thing
about this movement, it reaches a
class the banks cannot reach. It will
help all."
Over the years, credit unions have
become mainstream financial institutions - with one major difference. In order to become a member
of a credit union a rerson must be
within its field o membership .
About 78 percent of America's credit
unions are occupational-based; 17
percent serve members of associations, churches, and fraternal
organizations; and 4 percent are
community-based.
Today, credit unions are still popular with New Englanders. As of
June 1986, the six-state region had
567 state-chartered credit unions
and 672 federally-chartered credit
unions. The federal credit unions
alone held more than $5.2 billion
worth of deposits.
GUARANTY SAVINGS BANKS

Not all of New England's thrifts
are mutual institutions. Until 1983,
however, New Hampshire's guaranty savings banks were the only
stockholder-owned savings banks
in New England .
At first glance, guaranty savings
banks seem to differ from conventional stockholder-owned banks,
because instead of issuing capital
stock, they hold special deposits .
But for all practical purposes, New
Hampshire's eleven guaranty savings banks are considered stock savings banks.
A guaranty savings bank pays a
certain rate of interest to its general
depositors. Any surplus of earnings
above this dividend is available for
dividends payable to the holders of
special deposits.

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Guaranty savings banks derived
their name from the fact that their
special deposits acted as a guaranty
fund for the general depositors . In
the days before federal deposit
insurance, guaranty funds helped
to defray the general depositors'
losses in cases of default or
mismanagement.
Guaranty savings banks are no
longer unique among New England
depository institutions. Since 1983,
more than a few mutual institutions
have converted to stock ownership.
Some have issued stock simply to
raise additional capital. Others,
however, are looking to the future
and converting to stock ownership
in order to make themselves potential takeover targets.
All signs seem to point to
increased takeover activity. Certain
states have already formed compacts to allow interstate banking on
a regional basis, and recent federal
legislation has enabled bank holding companies to move across state
lines in order to acquire troubled
thrifts. Many bankers feel that full
interstate banking may soon be a
reality.
As a result, the directors of many
mutual thrifts are seeking to convert
their institutions to stock ownership
so as to be ready should someone
decide to make an attractive
takeover bid. Such changes are necessary, because mutual institutions
are owned by their depositors and,
therefore, cannot be acquired by
outside investors.
Of course, no one is sure when, or
if, full interstate banking will
become a reality. But one thing is
certain, banking is changing, and
the pace of change is accelerating.
Institutions that once provided a
limited range of services to a certain
segment of the public, are now looking for ways to meet today 's
challenges.
SOURCES

Annual Report of the National Credit
Union Administration 1985, NCUA,
1986.
Bennett, Frank P., The Story of Mutual
Savings Banks, 1924.
Campbell, Dorcas Elizabeth, The
First Hundred Years. The Chronicle of a
Mutual Savings Bank, 1949.

New England Thrift Industry Fact Boak
1984, Federal Home Loan Bank of
Boston, 1985.
Tucker, Oreb M ., Three Score and Ten
Years of Cooperative Banking in Massachusetts, 1948.
Welfling, Weldon, Mutual Savings
Banks; the Evolution of a Financial Intermediary, 1968.

FED UPDATE
PAST LIVES OF
THE U.S. DOLLAR

The Pub1ic Services Department
of the Federal Reserve Bank of Boston has developed a new economic
education program entitled Past
Lives of the U.S . Dollar. Designed for
high school and general adult audiences, the 45-minute lecture/slide
presentation traces the evolution of
U.S . paper money from its earliest
days, through the era of state and
national bank notes, to the present.
A speaker from the Public Services Department can either present
the program when your group
comes to the Bank for a tour, or you
can arrange to have a speaker
present the program at your group's
meeting place. (In either case,
please be sure to reserve your dates
early.) For more information on Past
Lives of the U.S. Dollar, or any of the
Bank's other economic education
programs, please call (617) 973-3451.
MONEY FUN FOR EVERYONE

The Federal Reserve Bank of Boston will again host a free program
for families. Dates are Monday,
December 29 and Tuesday, December 30 from 9:30 to 11:30 a .m .
The programs will feature a puppet show about money for the younger children, a slide show on
genuine and counterfeit currency
for the older children, a tour of the
Bank's Money Department, a view
of Boston from the Bank's 31st floor,
and light refreshments. Children of
all ages are welcome, but each child
must be accompanied by an adult.
Participants must register for the
programs in advance as space is limited. For reservations please call
(617) 973-3452, Monday through Friday, 9:00 a.m. to 4:00 p .m.

Kniffin, William Henry, The Savings
Bank and Its Practical Work, 1928.
pages

MULTI-MEDIA
CATALOG

A newly-revised edition of the
Federal Reserve Bank of Boston's
public information catalog is now
available. Nearly all of the publications, audiovisual materials, and
other economic education materials
it lists are offered to the public at no
charge.
For a free copy of the catalog,
please write to: Publications, Public
Services Department, T-3, Federal
Reserve Bank of Boston, Boston,
MA 02106; or phone (617) 973-3459.
One change came through after
the catalog went to press. RHR
Filmedia no longer supplies audiovisual materials for the Bank.
Requests for films, filmstrips, and
videocassettes should now be sent
to:
West Glen Communications
1430 Broadway
New York, NY 10018

Plastic Fraud, pamphlet, published
by the Federal Reserve Bank of
Philadelphia.

sumer Affairs, Federal Reserve Bank
of Philadelphia, P.O. Box 66, Philadelphia , PA 19105 ; phone
(215) 574-6115 .
The Senior Economist, newsletter,
published by the Joint Council on
Economic Education, biannual,
$10.00 annual subscription fee.

In the spring of 1986, the Joint
Council on Economic Education
OCEE) introduced The Senior Economist, a newsletter intended for use
by secondary school teachers. The
new publication will provide teachers of grades 10-12 with a convenient way to trade ideas about
teaching strategies and stay abreast
of current economic issues.
The inaugural edition of The Senior
Economist stresses economic concepts related to the federal budget
deficit. A lead article, "The Federal
Budget Deficit: Challenges and
Opportunities for Policymakers,"
explains what the deficit is, where it
came from, and how it got so large.
It also considers the implications of
a large budget deficit and discusses
what can be done to bring the deficit
under control.
The article's co-authors are Walter Heller and Bruce Dalgaard. Mr.
Heller is Regents' Professor of Economics at the University of Minnesota and former Chairman of the
Council of Economic Advisers
under Presidents Kennedy and
Johnson. Mr. Dalgaard is Associate
Professor and Director of the Center
for Economic Education at the University of Minnesota.

If you've ever worried that
some shadowy figure might use
your credit card or debit card to
finance an unauthorized trip to the
French Riviera, then you should
read Plastic Fraud, an informative
new pamphlet from the Federal
Reserve Bank of Philadelphia. Plastic
Fraud reveals some common card
fraud schemes and offers tips to
help you avoid them. It also
explains the difference between a
credit card and a debit card.
For a free copy of Plastic Fraud,
please contact: Department of Conpage6


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Federal Reserve Bank of St. Louis

Other articles in the newsletter's
inaugural issue suggest teaching
activities and ideas for teachers of
economics, U.S. history, government, and world history. Topics
include "Confronting the Deficit:
lrade-offs and Hard Choices" and
"The Federal Deficit and the Local
Community."

Each edition of The Senior Economist will have the same basic format.
A noted leader in economics will be
invited to comment on a vital economic issue, and teachers will be
invited to share teaching
approaches. Also included will be
announcements about new teaching materials.
The second issue of The Senior
Economist will focus on the economics of the U.S. Constitution.
Do~glas North will write the lead
article.

The Senior Economist will be published twice a year - fall and spring.
A one year subscription costs
$10.00. For more information please
contact the Joint Council on Economic Education, 2 Park Avenue,
New York, NY 10016; phone
(212) 685-5499.
Wishes & Rainbows (1/2" and 3/4"
videocassette, 14 minutes, color)

You've read the book, now see the
video! The Federal Reserve Bank of
Boston 's popular publication ,
Wish es & Rainbows, has been
adapted for television by the South
Carolina Department of Education
and the South Carolina Educational
Television Network as part of their
kindergarten/first grade instructional television series entitled It's a
Rainbow World.
Originally published as a
comic-book children's fable, Wishes
& Rainbows was designed to introduce young students to the economic concepts of scarcity and
allocation of limited resources. It
looks at how the discovery of colorful flowers leads to some difficult
choices in a land where no color had
previously existed.
The Wishes & Rainbows video is
available on a free-loan basis to
teachers in the First Federal Reserve
District (all of New England except
Fairfield County, Connecticut) .
Please contact: West Glen Communications, 1430 Broadway, New
York, NY 10018.
In all other Federal Reserve Districts, teachers who would like to
use the Wishes & Rainbows video
should contact either Peg Foley,
Southeastern Communications
Association, (803) 799-5517; or
Stephen Lenzer, Great Plains
National, (800) 228-4630.
The Wishes & Rainbows video
may not be duplicated.

the

LEDGER
Editor: Robert Jabaily
Graphics Arts Designer: Ernie Norville