RAPID EXPANSION IN THE NINETEENTH CENTURY

Early savings banks were immediately popular. During their first twenty years of development in the United States, savings bank deposits grew to some $11 million. The popularity of savings banks resulted in part from their reputation for safety. They avoided runs by enforcing by laws that restricted payments to depositors for up to sixty days. As a result of these provisions, no savings banks failed in the panic of 1819. Around nine hundred commercial banks failed in the panic of 1837, but only a handful of savings banks met that fate.

Most savings banks also survived the subsequent panics of the nineteenth century. In the panic of 1873, some eighteen out of more than five hundred savings banks in existence suspended operations nationwide. Losses to savings bank depositors are thought to have been relatively insignificant across most of the nineteenth century. Between 1819 and 1854 no savings banks failed in the state of New York. Between 1816 and 1874, a period that includes the panic of 1873, total losses to savings bank customers in Massachusetts totaled only $75,000 on a savings bank deposit base of $750 million. As a result of their safety, savings banks' popularity surged and by 1890, 4.3 million depositors held $1.5 billion in savings banks across the nation.

The panic of 1893, however, slowed savings bank growth. Through the latter half of the nineteenth century, the class of acceptable investments for savings banks was broadened. By 1890, savings banks were invested in a wide array of assets, including government and state securities and corporate equities and bonds. Moreover, some savings banks began establishing themselves as joint-stock rather than mutual institutions. The combination of these two developments began to blur the distinction between investments of savings banks and commercial banks. Again, in 1893 most savings banks avoided failure by enforcing by laws that restricted payments to depositors. But consumer and business confidence was low and the economic disruption long. As a result, savings bank growth fell off considerably during and after the 1893 panic, although they soon recovered.

Competition, Federal Regulation, and the Democratization of Credit

In 1903 the comptroller of the currency ruled that national banks could hold savings balances. Hence, following the panic of 1907 concern for depositor safety grew in all sectors of the financial services industry. This concern, along with substantial heterogeneity in savings institutions in general and savings bank investments and operations in particular, led to the establishment of the postal savings system in 1910 as a direct competitor to existing savings institutions.

The postal savings system provided a safe haven for commercial bank depositors during the Great Depression. However, savings bank depositors experienced far fewer losses than commercial bank depositors during this period because of their diversification and their by laws allowing the restriction of payments.

New Deal legislation contained many provisions for depositor safety, including an expansion of federal authority over savings banks and building and loan associations. Prior to the 1930s, all savings banks were chartered and regulated by the states in which they operated. The New Deal established federal authority under the Federal Home Loan Bank Board for chartering and regulating savings banks and savings and loans. The creation of the Federal Deposit Insurance Corporation (FDIC) in 1933 and the expansion of the network of savings institutions are undoubtedly related to the demise of the postal savings system in the 1950s.

Savings banks and related institutions are thought to have contributed substantially to the democratization of credit in the United States during the twentieth century. Mortgage lending by these institutions led to widespread home and property ownership. Moreover, nonmortgage savings bank lending was the basis for the development of Morris Plan lending, an early form of consumer finance. Pioneered by Morris Plan Company in 1914, small, short-term (less than one year) loans were made to individuals who repaid them in fifty weekly installments. The loans became extremely popular, and by 1917 Morris Plan loans totaled more than $14.5 million to over 115,000 borrowers.

Although savings banks and savings and loans (and their predecessors, building and loan associations) were cooperative credit institutions, historically the institutions differed in some important ways. Savings and loans (and building and loan associations) concentrated primarily on residential mortgages, while savings banks operated as more diversified institutions. In the twenty years following World War II mortgages were favorable investments, so the difference between savings bank and savings and loan operations was insignificant. However, during late 1966 and 1967 savings banks were able to invest in corporate securities in the absence of mortgage loan demand, while savings and loans were not.

DECLINE AND RESURGENCE

Many savings banks converted from mutual to joint-stock ownership during the 1980s. Facing new profit pressures from shareholders, the newly converted savings banks adopted portfolios similar to those of savings and loans. When sharply increased interest rates and the fundamental maturity mismatch between short-term deposits and long-term mortgages led to protracted difficulties in the savings and loan industry, many of these newly converted savings banks failed. Although lax supervision led to the replacement of the regulator of both savings and loans and savings banks (the Federal Home Loan Bank Board) with a completely new regulator (the Office of Thrift Supervision), savings bank deposits were insured by the FDIC and thus were not affected by the failure of the Federal Savings and Loan Insurance Corporation.

Although the popularity of savings institutions (including savings banks) waned in comparison with commercial banks following the crisis of the 1980s, savings institutions experienced a resurgence during the 1990s because of competitive loan and deposit rates, their mutual ownership structure and resulting tax advantages, and the broad array of financial services they may offer under contemporary banking law.

Bibliography

Alter, George, Claudia Goldin, and Elyce Rotella. "The Savings of Ordinary Americans: The Philadelphia Saving Fund Society in the Mid-Nineteenth Century." Journal of Economic History 54 (1994): 753–767.

Davis, Lance Edwin, and Peter Lester Payne. "From Benevolence to Business: The Story of Two Savings Banks." Business History Review 32 (1958): 386–406.

Olmstead, Alan L. "Investment Constraints and New York City Mutual Savings Bank Financing of Antebellum Development." Journal of Economic History 32 (1972): 811–840.

Sherman, Franklin J. Modern Story of Mutual Savings Banks: A Narrative of Their Growth and Development from the Inception to the Present Day. New York: J. J. Little and Ives, 1934.

Welfling, Weldon. Mutual Savings Banks: The Evolution of a Financial Intermediary. Cleveland, Ohio: Press of Case Western Reserve University, 1968.

White, Lawrence J. The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation. New York: Oxford University Press, 1991.

Bibliography

Cable, John Ray. The Bank of the State of Missouri. New York: Columbia University, 1923.

Hammond, Bray. Banks and Politics in America, from the Revolution to the Civil War. Princeton, N.J.: Princeton University Press, 1957.

Helderman, Leonard C. National and State Banks: A Study of Their Origins. Boston: Houghton Mifflin, 1931.

Sylla, Richard, John B. Legler, and John Joseph Wallis. "Banks and State Public Finance in the New Republic: The United States, 1790–1860." Journal of Economic History (June 1987): 391–403.

TYPES OF BANKS

Banks have traditionally been distinguished according to their primary functions. Commercial banks, which include national- and state-chartered banks, trust companies, stock savings banks, and industrial banks, have traditionally rendered a wide range of services in addition to their primary functions of making loans and investments and handling demand as well as savings and other time deposits. Mutual savings banks, until recently, accepted only savings and other time deposits, and offered limited types of loans and services. The fact that commercial banks were able to expand or contract their loans and investments in accordance with changes in reserves and reserve requirements further differentiated them from mutual savings banks, where the volume of loans and investments was governed by changes in customers' deposits. Membership in the Federal Deposit Insurance Corporation is compulsory for all Federal Reserve member banks but optional for other banks.

OTHER FINANCIAL INSTITUTIONS

Types of financial institutions that have not traditionally been subject to the supervision of state or federal banking authorities but that perform one or more of the traditional banking functions are savings and loan associations, mortgage companies, finance companies, insurance companies, credit agencies owned in whole or in part by the federal government, credit unions, brokers and dealers in securities, and investment bankers. Savings and loan associations, which are state institutions, provide home-building loans to their members out of funds obtained from savings deposits and from the sale of shares to members. Finance companies make small loans with funds obtained from invested capital, surplus, and borrowings. Credit unions, which are institutions owned cooperatively by groups of persons having a common business, fraternal, or other interest, make small loans to their members out of funds derived from the sale of shares to members. The primary functions of investment bankers are to act as advisers to governments and corporations seeking to raise funds, and to act as intermediaries between these issuers of securities, on the one hand, and institutional and individual investors, on the othe

INTERNATIONAL BANKS

The International Bank for Reconstruction and Development (World Bank) was organized (1945) to make loans both to governments and to private investors. The discharge of debts between nations has been simplified and facilitated through the International Monetary Fund (IMF), which also provides members with technical assistance in international banking. The former European Monetary Agreement also made possible the rapid discharge of debts and balance of payments obligations between nations. The European Central Bank (see European Monetary System) was established in 1998 to help formulate the joint monetary policy of those European Union nations adopting a single currency.

FURTHER LEGISLATION

Since the establishment of the Federal Reserve system, federal banking legislation has been limited largely to detailed amendments to the National Bank and Federal Reserve acts. The Glass-Steagall Act of 1932 and the Banking Act of 1933 together formed an extensive reform measure designed to correct the abuses that had led to numerous bank crises in the years following the stock market crash of 1929. The Glass-Steagall Act prohibited commercial banks from involvement in the securities and insurance businesses. The Banking Act strengthened the powers of supervisory authorities, increased controls over the volume and use of credit, and provided for the insurance of bank deposits under the Federal Deposit Insurance Corporation (FDIC). The Banking Act of 1935 strengthened the powers of the Federal Reserve Board of Governors in the field of credit management, tightened existing restrictions on banks engaging in certain activities, and enlarged the supervisory powers of the FDIC.

DEREGULATION, BANK FAILURES, AND NEW TECHNOLOGY

Several deregulatory moves made by the federal government in the 1980s diminished the distinctions among various financial institutions in the United States. Two major changes were the Depository Institutions Deregulation and Monetary Control Act (1980) and the Depository Institutions Act (1982), which allowed savings and loan associations to engage in often-risky commercial loans and real estate investments, and to receive checking deposits. By 1984, banks had federal support in buying discount brokerage firms, and commercial banks were beginning to acquire failed savings banks; in 1985 interstate banking was declared constitutional.

Such deregulation was blamed for the unprecedented number of bank failures among savings and loan associations, with over 500 such institutions closing between 1980 and 1988. The Federal Savings and Loan Insurance Corporation (FSLIC), until it became insolvent in 1989, insured deposits in all federally chartered-and in many state-chartered-savings and loan associations. Its outstanding insurance obligations in connection with savings and loan failures, over $100 billion, were transferred (1989) to the FDIC.

Further deregulation occurred in 1999, when Congress overhauled the entire U.S. financial system. Among other actions, the legislation repealed the Glass-Steagall Act, thus allowing banks to enter the insurance and securities businesses. Supporters predicted that the measure would permit U.S. banks to diversify and compete more effectively on an international scale. Opponents warned that this deregulation could lead to failures of many financial institutions, as had occurred with the savings and loans.

In the last decades of the 20th cent., computer technology transformed the banking industry. The wide distribution of automated teller machines (ATMs) by the mid-1980s gave customers 24-hour access to cash and account information. On-line banking through the Internet and banking through automated phone systems now allow for electronic payment of bills, money transfers, and loan applications without entering a bank branch.