FINANCE AND BUSINESS NOTES ON APPLIED ECONOMICS OF THE MONTH. THE RED-FLANNEL SAVINGS BANK ONE day last month a hard-working States. woman, the wife of a New York tailor in a small way, went out to market. In her hurry she left the apartment door ajar. Moreover, she forgot to replace, under the mattress, the red-flannel bag in which she and her husband kept their sav ings of fifteen years,—some diamonds, a gold watch, and $1400 cash. Only a quarter of an hour later she came back, but the red-flannel savings bank was gone. At last reports, the police detectives had not recovered the money. The pity of such a loss is more than personal. It is a national calamity. The vague distrust of all banks follows the popular ignorance of the difference in nature between a business man's bank and a true sav ings bank. Ignorance was the root of this small tragedy, and it is also the root of the national phenomenon of extravagance, now in wide notice of the newspapers. Let us eat and drink, for to-morrow the bank may fail,—that reckless spirit of rich and poor is one cause of the Congressional investigations into the high cost of living. Several other legislative bodies are likewise getting evidence on the relation between American wages and the higher cost of eggs, and meat, and milk, and so on, and of tariff-protected manufactures. Meanwhile the good old maxim holds true, that the real prosperity of a nation is the citizen's margin for saving. As long as stories like the above continue to be typical, in the experience of financial editors and bankers, it will continue a leading duty of the public-spirited to learn where sums like that $1400 can be placed with profit and safety. Such savings banks are called "mutual." There are about 640 of them in the United In them is deposited more than $3,100,000,000,-of which nearly one-third is in the savings banks of New York City and Brooklyn alone. Half as much again is in ten other cities,Boston, Albany, Philadelphia, Pittsburg, Baltimore, Cleveland, Milwaukee, Minneapolis, St. Paul, and San Francisco. For Mutual" here means co-operative. savings banks earned last year the deposiinstance, out of every $10 the New York tors got more than $9. Compare the interthe dividends its stockholders get. est your local bank pays its depositors with stockholders. Supervision is by trustees who In mutual savings banks there are not serve without pay. The depositors' money may legally be put only into gilt-edge first mortgages on real estate, railroad bonds, and the like. Interest paid varied last year from 31⁄2 to 4 per cent. The average was 3.85. Country dwellers, outside of New York, New Jersey, and New England, will find few mutual savings banks at hand. Indeed, they will find few savings banks of any kind. Even if one includes the 1061 "stock" savings banks, which are operated for the profit of the shareholders, like any other private business enterprise, the number of institutions is utterly inadequate in some sections. Here are the figures for a few States, comprising stock banks and mutual banks, too.— 1703 in all: Delaware That shows why only one American savings bank deposit in every five is outside New England and the six "Eastern" States. And in half a dozen States there are no savings banks at all. A UNITED STATES SAVINGS BANK? ADI DD to the scarcity of savings banks throughout great sections of the United States, the entire absence of any banks whatever in 22,000 villages, towns, and cities, -and a void appears, to fill which a postal savings bank has been recommended by the Republican party. It is being urged by the present Administration. Excepting Germany, America is now the only great country without a postal savings bank. No less than thirty-four nations have such systems, in which $2,000,000,000 have been deposited by 40,000,000 thrifty citizens. The hot contest in the Senate last month, over Senator Carter's bill, brought out a lot of information, personally and financially valuable. Bankers don't like the plan, even if the Government is to pay only 2 per cent. interest, is to limit single deposits to $500, and is to act mostly as collecting agent, returning every dollar possible to some bank of the locality where that dollar was saved. Half a million circulars were sent out early in February by the American Bankers' Association. They foretold trouble if the bill were passed,-dangers of robbers in the case of remote post-offices, expenses in installing 40,000 burglar-proof safes, opportunities for theft among thousands of extra clerks, new openings for the shifty debtor to evade his creditors and the tax collector, since a postal savings deposit could not be subject to attachment or to tax. Perhaps the framers of the bill can meet these objections. They have already met others, which at first sounded serious. For example: The first idea was that money handed in at a given office should find its way back again to the nearest National bank. But National banks are not allowed to lend money on real estate. Therefore State banks were added to the classes of Government depositaries for these postal funds. Thus the plan would work the transformation of millions of hoarded money into capital, money that works and serves the people. From the red-flannel bag, or the legendary stocking, or the hole under the loose hearth-brick, the dollars will flow to the local postmaster behind whom stands the majestic "Government guarantee," from him to Washington, and thence back to the banks nearest the original savers. These banks will then proceed to lend the money, receiving as security perhaps a mortgage on the very house of the loose hearth-brick, or the promissory note of the very merchant who sold the red flannel or the stocking. WHAT A "SAVINGS DEPARTMENT" MAY MEAN "WE have no savings banks in our neighborhood, but there is a National bank, a State bank, and a trust company,-and each has a 'savings department.' Isn't that good enough?" The Middle-Westerner who wrote thus last month was confused, and naturally. Was his money any safer if put in at the third window on the left, where the sign read "Savings Department," than it would be at the second window on the right, for commercial deposits? The answer is not found in the publicity matter of the American Bankers' Association, although it emphasizes departments as evidence that postal savings banks are not needed. For every savings bank in the United States there are nearly ten savings departments. The money saved through the latter adds about one and three-quarter billions to the nearly four billions saved through the former. But, is money in the savings department of a business man's bank (a State bank or trust company) any safer than in any other department? The answer is No, with the exception of eight States,-Michigan, New Hampshire, Connecticut, Massachusetts, Rhode Island, Ohio, Texas, and California. These States have protected the wageearner, who saves dollar by dollar, through laws which require savings department money to be invested quite differently from the business man's money, which, of course, is usually loaned out again to other busi A bank can be no safer than the character of its assets, which in turn are determined by the character of the two or three men who really manage that bank. trouble than it is worth is debatable. But denial of the clerk and the mechanic, the if the postal savings bank bill is held up milliner and the housemaid,-every savthrough the opposition of the American ings department" will present a personal Bankers' Association, a much heavier re- problem. sponsibility will rest upon that body in its efforts, already undertaken, to secure laws in all States similar to those of the eight named,-laws which will render the word savings" used in connection with any department of any institution, anywhere in the United States, equal to the words "trust funds," as they have been interpreted by the courts of the most conservative States. SAVINGS IN THE NATIONAL BANKS LAST month the biggest of all banks that hold a federal charter, the "National City," of New York, reported in its circular a matter of great moment. "There is practically not a National bank in all the United States at the present time whose condition is regarded as unsatisfactory." MINUS A BILLION DOLLARS "AWFUL crash in the stock market!" Day after day, as January closed and February began, the little newsboys called this out as they scurried around with their "early afternoon editions." By the second week of February the newspapers were figuring out that sixty typical properties were worth" one billion less than a few months before. We were to have a panic, declared Mr. James M. Beck, the renowned corporation lawyer, compared to which the so-called "Roosevelt panic panic" would be a mere zephyr. Now about half of these 7000 banks have "savings departments." More than $375,000,000 is thus held. But unless the banker in the case is philanthropic by choice no one At such signs and portents the great body. of these 3515 savings-banks-within-national- of citizens of these United States have been banks is treating these hardly accumulated dollars any differently from its regular commercial deposits. Thus, from the salary- and wage-earner's point of view, it is not enough to hear that the National banks have improved greatly over a year ago, when several hundred were said to be improperly managed, or that we owe the change to highly efficient supervision from Washington, such as the new Credit Bureau, which keeps tabs on the big borrowers, and the new co-operation of the National Examiners with the State and Clearing House Examiners. All this executive efficiency cannot affect the law which now forbids National banks from lending on real estate mortgages. These are the foundation of investment of trust funds and of savings. For instance, the best State laws for savings banks prescribe about two-thirds of real estate mortgages to one-third of more quickly salable things, such as gilt-edge railroad bonds. A change in the law has been recommended by the American Bankers' Association. It is before the National Monetary Commission. Until, therefore, State and federal laws recognize the difference between trading money and savings, between business funds and the slow dollars that mean the self marveling. They "want to know,"-even though they have not been buying stocks at inflated prices, though they are in the class of representative men and women from every section who have written to this magazine, comprehending and approving the simple rule of caution for investors indicated so often during the last few months in these pages,—to divide the dividend by the purchase price. For instance: The New York Central is a great and gilt-edged railroad, but its stock pays only $5 per share a year. Plainly, the investor who has access to a safe 4 per cent. savings bank ceases to be interested in "Central" when it rises above $125 a share. Last fall this stock reached $147. From this eminence it dropped some $30,-and thereby again become worthy of consideration by people with money to invest, not speculate with. Yet the reappearance of Wall Street' in newspaper headlines has aroused keen interest. What caused the slump? What part did speculation play? Will there be another panic,—another twinge of the money hunger that gives pain to the nation at large? And what remedies are our currency reformers preparing? HOW THE BRAKES WORKED LONDON, October 21.-The Bank of England to-day raised its minimum rate of discount from 4 per cent. to 5. THAT brief announcement arrived just in time to be printed in these columns for November, 1909. Attention was called to the probability that before "very many months" the explanation of the news would arrive and would be unpleasant. It appeared that an abnormal amount of millions had been borrowed in London by American bankers and speculators, to help push up the price of American stocks. The governors of the Bank of England are really world bankers. They see far. When they put the price for their money, which means for world money, up to 5 per cent. from 4, whither it had only recently been raised from 22, gold began to flow into England, and away from American stocks. American stocks began to flow back to America. "We can do our own financing without London's help," a banking leader irritably declared. But figures speak louder than words. The big New York banks that lend millions on stocks from day to day began to show swelling in that "loan" item. Enormous loans, too, were shifted to out-of-town banks, anxious to profit by the high "call money," which reached 14 per cent. In the November article already referred to, it was said that the price of stocks of certain large industries particularly had discounted and anticipated a whole lot of prosperity that had not yet arrived. By last month the shares in the profits of the great Steel Corporation had been marked down nearly $90,000,000; of Amalgamated Copper, about $32,000,000; of American Sugar, about $8,000,000, and so on in proportion. Exchange governors become "active in preventing wrong-doing," as they were pected to become last June, by the Hughes" investigating committee, which added to this report: "If, however, wrong-doing recurs, and the Exchange has been derelict in exerting it should appear to the public at large that its powers and authority to prevent it, we believe that the public will insist upon the incorporation of the Exchange and its subjection to State authority and supervision." Improvement seems probable. Such recent scandals as the Hocking collapse, together with the previous insane rise and fall within twelve minutes of $31 per share in the price of another stock, indefinite in value, Rock Island common,-will not bear repetition. There is wider newspaper and magazine protest, and it is more universally read and understood by all classes. NO PANIC FOR THE PRESENT And on the tenth the Bank of England PANIC prophets were busy last month rate came down again to 3 per cent. while stocks were falling in price. Yet those anxious merchants and investors who dug down to underlying facts found them pretty solid. Far different was it three years ago, when the American financier, Jacob H. Schiff, with the brilliant French economist, LeroyBeaulieu, predicted the trouble of 1907 with such extraordinary accuracy. For instance, just preceding the 1907 decline in everything, the representative American banks had loaned, against every $100 that the public had deposited in them, no less than $106. At the present time they are loaning only $98. They are on the safe, All the National and State laws require a side. certain percentage of cash to be kept in the Again: In the autumn of 1906 the banks. In time of panic it cannot be rebanks, against every $100 of loans (repre- leased. sented by pieces of paper bearing business men's signatures, often without "quick" security), could show "specie,"-gold and silver, only to the amount of $16. Now they can show more than $22. Then there was reckless endless-chaining of banks by speculators like Morse, Heinze, and Thomas. It is not believed that any group as daring has yet taken the place of those eliminated figures. Business is not going as fast. By that very fact there is less drain on credit; nor has slackening yet reached a point where careful students can foresee any lowering of the present dividends paid by the strong railroads and manufacturing companies. WANTED: A WAY TO GET MONEY WHEN IT IS NEEDED MR. LESLIE M. SHAW'S home is in Iowa. About banking matters he feels as his lifetime neighbors do, though he himself, after being Secretary of the Treasury, is now a banker in a financial center of the East. Mr. Edward B. Vreeland, on the other hand, is a Congressman from New York, and as chairman of the House Committee on Banking and Currency he represents that body's understood wish for a more tralized banking system as the cure for all our financial ills. cen Consequently many sparks flew, casting much light on both sides of the "Central Bank " question, when Messrs. Vreeland and Shaw got into an impromptu debate before the Republican Club of New York on the 5th of last month. Our system of 24,000 separate and distinct State and National banks simply "falls apart," Mr. Vreeland remarked, when under stress. Every great commercial nation abroad is united as to the reserves its banks hold and the notes they are allowed to issue. Why not adapt the principles that others have found so successful? Because, Mr. Shaw replied, we are too big. To give our currency enough elasticity would take an unprecedented note issue. Our double line of banks,-State and National,-would complicate its handling. Dramatic was Mr. Vreeland's illustration of the absurd American "reserve system." "We are in the position in which the country would be if war were declared with Canada and every State were required to keep its troops upon its own frontier, where they could be cut to pieces, a few at a time, by an invading army. We must therefore have to some extent centralization of reserves, $200,000,000 to $400,000,000, where they can be used when occasion requires." Hence the cry for a commanding-general bank, able to throw reserves to any outpost where they would do the most good. A little farther on, however, Mr. Shaw mentioned that in his own town there is a private bank, a State bank, and a National bank. In 1907 each had money in New York and Chicago, but knew it could get nothing but Clearing House certificates. "So," related Mr. Shaw, "we decided to stand together and pool our surplus cash for the benefit of all, and then we adjourned and went home." Then, one may ask, one's neighbor in Iowa may be trusted, but not one's central banker in New York? It is precisely this standing together and pooling" surplus cash that a central bank signifies in every civilized nation,-except the United States. |