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.
