This section is from the "Practical Banking" book, by Albert S. Bolles.
Railway bonds, secured by first mortgage on the entire road,would seem a safe class of investment with the exercise of ordinary prudence, and at one time were largely taken by some Savings banks. So vast and so constantly increasing are these great internal improvements, so enormous the flow and reflow of business over them, so immense the probable development of that business in the future, that such mortgages, if they could be had at a proper rate per mile, would be among the safest of investments, assuming reasonable care in selecting those of apparently permanent value. There is difficulty in ascertaining the history, legal position and amount of such mortgages, but not so great as to be insurmountable. The great objection is to the extravagant amount per mile of the bonds issued in many cases, compelling after a while the bond-holders to take the road It is always an undesirable thing for a trustee to be compelled to enter into a current business with the trust funds.
Municipal indebtedness has attained large proportions in this country, and has long furnished a field for private and corporate investment. Experience has fully shown that we must strike out from the list of Savings bank investments all municipal bonds issued in aid of any railway undertaking. The Legislatures of several States have recognized this, and after once allowing such investments by Savings banks have very judiciously forbidden them.
Subject to this exception, the public debt of local municipalities within the State where the Savings bank is located, is a sound class of investment, assuming, of course, the exercise of due care in the investigation of the origin and aggregate amount of such debt. You have the savings of many voters in your care. If invested in apparently sound municipal obligations, there is, besides legal remedies, a great force of public opinion to sustain your claim, and to bring about proper provision for payment of interest and principal. Experience shows that such debts, when not disproportionately large, or the result of some arbitrary and unpopular scheme, have been among the safest investments we have had.
It is evident that we must look elsewhere than to Government bonds alone for interest paying securities. The directions to look in are (i) mortgages on productive real estate to a high percentage of the total investments; (2) well selected municipal obligations; (3) selected railway first mortgages.
Those to avoid are (1) real estate of merely speculative value, and unimproved; (2) capital stock of railways or manufacturing corporations; (3) personal security; (4) railway aid bonds, and municipal bonds where the debt is large in proportion to the resources, or is the result of too sanguine speculation on the future.
Call-loans on deposit of collaterals form a large part of the business of some city Savings banks. No doubt, in a large commercial center, these may be safely and quickly made. The objection to them is that they tend to throw the whole management and selection of investments into the hands of some one person. However efficient such management may be for a time, we know that most great disasters have also arisen from this. Other investments, such as mortgage loans, or the purchase of securities, are usually, in well-managed banks, passed upon by a board or committee. This old-fogy method is the safest, and so far as practicable should be followed by institutions whose paramount object is safety.*
Some New England and other Savings banks have loaned funds on mortgage on lands in other States. There is no reason why such loans on suitable and proper security should not be as good and safe in Massachusetts as in New York; but there is a great difficulty in being assured that you are getting proper security. At home your own board or your own investment committee can judge, depositors are more or less familiar with your securities, the risk of acting on other men's judgment, removed from your own responsibility, is avoided, your risk is less, your certainty of protection by the courts is greater. Prudence dictates that even in these days of easy locomotion and of assimilating business and values, you should not extend your reach too far and get beyond the range of your own vision and your own capacity to judge and act. It may be the office of a good judge to enlarge his jurisdiction, but it is not the duty of a prudent trustee.
The same reasons will apply to distant municipal and railway securities. And caution should be exercised in going beyond your own State as to any debt of local municipalities. My own view is that this should be prohibited, except, perhaps, in certain cases, such as well-known large cities whose affairs are conducted on a sound basis, and with the advantage of the best business talent. This is true of Boston, New York, Philadelphia and others, and is not affected by the fact that they have also been now and then Attacked by municipal thieves.
*A startling instance of the danger of this call-loan method has recently occurred in the Newark Savings Institution now insolvent.