This section is from the "Practical Banking" book, by Albert S. Bolles.
We shall close this part of our work by giving some rules relating to Savings banks' investments. The Legislatures of the several States have adopted regulations on this subject, thus lightening the responsibility of Savings bank directors. These regulations are the outcome of a conservative spirit, and should be observed. Nevertheless, a wide latitude exists, which cannot be completely traversed by Legislative regulation. To a very important degree the directors must exercise their own wisdom in making investments. The following remarks on this subject were made by Mr. Washington B. Williams at the annual meeting of the American Bankers' Association in 1882. They are worthy the attentive study of those who are entrusted with the duty of investing the funds of these institutions.
Safety is the first consideration, and profit is secondary. Again, Savings banks are not confined to investments which are readily convertible. Here, also, safety comes first; convertibility is of minor importance.
Mortgages on real estate, being less readily convertible than some other securities, bear higher interest. At the same time, no property is more stable in value, and none less likely to depreciate, than real estate. Neither the recent general depression from former inflated values, nor any special instances of loss, affect the truth of this general proposition.
Mortgages on real estate, accordingly, have always been a favorite kind of investment for Savings banks. They have other advantages, in not being readily subject to theft or misappropriation; and the laws of the several States, as well as the general rules by which courts govern and control trustees, declare this mode of investment to be the most desirable.
Taxes are high in this country, are thrown heavily on real estate, and are generally paramount to mortgages. To secure prompt payment of interest and taxes, the property mortgaged ought generally to be improved and productive of rent.
The Savings bank law of New York allows the investment of not over 60 per cent. of the deposits in such mortgages. That of New Jersey allows 70 per cent., and these serve to indicate the general rule.
By examining the reports as to the Savings banks of the several States it will, however, be found that the Savings banks of New England invest not over 35 per cent, of their trust funds in mortgages, and those of New York City a less proportion.
The best conducted Savings bank in Jersey City, N. J., which has passed safely all the depressions and panics of thirty years, has generally maintained, and still maintains, its mortgage investments at over 65 per cent., of a deposit line of over $5,000,000.
These different usages, though they doubtless result from more than one cause, yet point with sufficient clearness to this important rule: Taxation should be so adjusted as in no wise to deter Savings banks from freely investing on mortgages on real estate. It is a most unwise policy as to the interests of the industrial classes to drive Savings banks out of this mode of investment. It is the mode which is at once solid in basis, understood by and acceptable to the depositors, and beneficial to them and the community where the savings arise, by redistributing the savings in the form of loans. Such investments ought not to be taxed, even if it should become necessary to accord a special preference in this respect to Savings banks. These institutions represent the industry and frugality of the masses, and every effort should be made to put them on the soundest footing. In my belief, nothing can so surely do this, and so certainly retain confidence, as to encourage, facilitate and require the investment of the savings deposits in mortgages properly secured on the farms, the shops, and the homes of the people. If these are not real values, what are? How can mere promises to pay by the same people, either individually or collectively, be any better?
It is, then, to be regarded as a prime duty of legislators to so regulate taxation as to encourage, not deter, investments by Savings banks in loans on real estate.
A trustee should take no risks that can be avoided. If he acts on this rule, he is discharging his full duty. If he violates it, although from good motives, if he allows his confidence in his own skill in choosing among the many ordinary investments in the market to lead him to transcend it, he would be restrained by injunction by any court having jurisdiction of trusts, even if the particular investment were a successful one. High rates of interest are quite a secondary matter.
In order to avoid, then, as far as possible, all temptation to do more than one's duty, as trustee, or to manifest special financial skill, or to make the earning of interest paramount to absolute safety, we would adopt certain rules.
Large deposits, which do not come from savings, but which are the capital of persons who have acquired wealth, should be rejected. They can invest their own funds, and they are likely to withdraw their deposits suddenly and in large sums.