This section is from the "Practical Banking" book, by Albert S. Bolles.
Bonuses and discounts on buying securities should not be sought or allowed. They tend to drive away the best-secured loans, and to introduce a speculative habit of looking at the immediate apparent gain rather than the ultimate security.
Good mortgages on improved real estate, to about half its value, should be encouraged and granted up to the highest legal limit, without fear. If necessary, the rate of interest on these should be reduced, so as to secure the very best of that class of investments.
Would this be safe in case of a run on the bank?
It would for several reasons:
First.—The remaining 35 per cent, and upwards of convertible securities would be available.
Second.—Such mortgages, though not promptly available at par, are always excellent securities to borrow on temporarily to meet such emergencies.
Third.—The mortgage-investments being to a large extent loans among the same community which affords the depositors, there is a powerful influence at work to sustain confidence in the assets of the bank.
But, as a further means of safety to all, the bank should never hesitate, in case of panic, to enforce its thirty, sixty or ninety day rule, as the case may be, or to close its doors. It is nothing but the common agent or trustee of the depositors, who, as above shown, have a common interest in its funds and investments. It has no financial reputation to keep up as a source of profit to itself or to attract deposits. Its whole duty is summed up in the one word "safety."
A trustee has neither moral nor legal right to sacrifice a part of the common assets in order to give an advantage to those of the common proprietors who first run to his door. A court having jurisdiction of trusts would restrain him by injunction from thus violating his prime duty of taking care of the common property for the common benefit. Some special charters of Savings banks expressly provide for such action. I think the power and duty of the courts plainly arises out of the nature of the trust. But to avoid all question it should be provided for by proper legislation wherever this ordinary class of Savings banks exists.
The salutary effect of such judicial action is at once apparent. The bank stands in this emergency like any other trustee who seeks the direction and protection of the courts.
They will stop any ill-advised suits, hold back every hostile hand, and open the doors again and direct payment by installments if prudence so indicates. This is the best and safest way for real savings depositors, and meets all their actual needs in the supposed case of a panic. In the meantime, the assets are producing their regular income, there are no sacrifices of securities, the ignorant and alarmed depositors are protected against loss, and none gets an advantage over the other, and the bank finally resumes without injury.
Too much unwillingness to adopt this safe and just course, if it becomes necessary, would savor of a desire to do more than the duty of a trustee; a course neither incumbent, nor, indeed, justifiable. As a corollary to this view, would come the rule of giving all due publicity to the affairs and investments of the bank, at least as to its class and kind of investments and their amounts. Inquiry was recently made of a Savings bank in the City of New York for a statement of this character, such as is made public in many banks, and is required by law once or twice a year in some States. The answer given was, that that bank made no such statements, and that the names of its trustees were sufficient guarantees to the public of its soundness and good management. I need not say that such views are contrary to the true position and office of a Savings Bank.
Investments in expensive buildings should be avoided. In many cases, the whole apparent surplus will be found to be absorbed in an unproductive banking-house.
Government bonds are the safest of convertible investments, and so are generally the bonds of the State in which the bank is situated. They may be guarded against the ordinary chances of fire and theft by well known precautions, such as registry, stamping, &c, but the low rate of interest which they must henceforth produce renders it very desirable to see if the field can be extended without losing sight of our cardinal rules.
It must be conceded that personal security of two or more names is not admissible, notwithstanding the custom of many New England Savings banks to accept such security. Not only is this usage entirely opposed to the general law of trusts as established by the experience of two centuries, but it leads to complications and temptations outside of the line of duty which directors of a Savings bank ought to confine themselves to.
Stocks of railway and manufacturing corporations must also be excluded. In fact, railway management, as to treatment of stockholders and value of stock, is now almost synonymous with deception and fraud. If there are exceptions, they serve to establish the general rule.
As to other corporations, the value of their stock depends so much on the changing market, on the course of mechanical invention, on the individual qualities of the managers, that it is too unstable for our present purpose.