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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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org 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: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org 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
