Before describing the various classes of financial institutions for the accumulation of savings, it is well to consider first the general meaning of savings banking as compared with commercial banking, especially as relating to deposits and loans. While the depositors of commercial banks are usually business men, the clients of savings banks are mainly working people who desire a secure depository for their earnings. The deposits of the former result largely from the granting of loans and contain a relatively small proportion of cash, which, on the other hand, constitutes the main element in savings deposits.

The funds of savings banks possess many of the features of time deposits of commercial banks, since both are lodged with the banks for the purpose of obtaining an interest yield. This return can be granted by the banks, because both savings and time deposits are generally inactive, and, moreover, may not be withdrawn immediately upon demand, but only upon due notice of from thirty to sixty days in advance. A characteristic of the savings deposit is the insistence by the bank that the customer produce his pass book before making any withdrawal.

As the savings bank thus deals in long rather than in short term credit, it partakes of the nature of an investment institution. The savings bank and the investment house are similar in that they both act as intermediary agents between investors and borrowers. The difference lies in the fact that the investment bank sells securities directly to the lenders, while the savings bank operates indirectly by receiving deposits and placing them in investments. In the first case, investors secure their returns in the form of dividends or interest from the borrowers, while depositors receive interest from the bank.

Since a savings bank is not required to pay out deposits on demand, it is able to make loans for a longer period of time, as compared with the commercial bank, because the latter holds, for the most part, deposits payable on demand, and so can extend only short advances. The savings bank invests largely in real-estate mortgages, railroad and government bonds. The bank is not entirely free in selecting these investments, for they are more or less prescribed by state law. Such legislation is due to the general belief that savings deposits are entitled to additional protection and should therefore be placed only in special investments which offer adequate security. An individual possessing surplus funds has the choice of investing them in securities directly, or in securities indirectly by depositing in a savings bank. By following the former policy, the saver gains the advantage of a higher yield, but at the same time labors under certain disadvantages. For instance, he does not possess sufficient knowledge of the investment field to judge relative values and to discriminate between high-grade and low-grade securities. His savings are usually accumulated in amounts too small for their immediate placement in stocks and bonds, which are seldom issued in denominations of less than $100 each. To some extent this objection to direct investment of small savings is overcome by the plan of certain brokerage houses of accepting partial payments on securities purchased, and of certain companies in issuing real-estate mortgage bonds in amounts as low as $100. Even if the saver were in position to find investments which are safe and of small denomination, he would still be unable to diversify the risk. The soundest investments are subject to fluctuations in value, and losses can be overcome only by a proper distribution of funds. This is impossible for the individual with limited capital, and thus he cannot avoid loss if the investment in which he has placed his savings depreciates in value. The problem of marketability also remains, and a contingency may arise in which the individual needs cash immediately and he may then be forced to sell his investment at a sacrifice.

These disadvantages encountered by the man of moderate means who follows the method of direct investment are overcome to a large extent by creating a savings account. In the first place, the bank has a better understanding of investments, for it is continually placing funds on a large scale and is therefore able to secure expert advice. Secondly, no saving is too small to be accepted, for some banks take a single deposit as low as ten cents. It must be remembered that the savings bank is receiving numerous deposits, small in their separate amounts but large enough in the aggregate to enable the bank to spread its investments over various fields of business interests. This very diversity brings security, for a loss on one investment is compensated by a gain on another. Lastly, the savings bank gives the depositor the assurance that his funds are available practically on demand and with no loss excepting possibly an amount of interest which has accrued between the dates of deposit and of withdrawal. For these reasons the savings bank performs a distinct service to the individual, who is thus encouraged to practice thrift and to lay aside funds for later use.

The savings bank meets a social need in furnishing capital for the use of borrowers. The savings of the community are accumulated and made available for the building of homes, the construction of railroads, and the undertaking of other worthy enterprises.