§ 1. The nature of saving. § 2. Economic limit of saving. § 3. Commercial bank deposits of an investment nature. § 4. Investment banking and bond houses. § 5. Savings banks in the United States. § 6. Security for thrift. § 7. Postal savings plan. § 8. Advantages and limitations of postal savings. § 9. Collection of savings and education in thrift. § 10. Building and loan associations. § 11. The main features. § 12. The continuous plan. § 13. The distribution of profits. § 14. Possible developments of savings institutions.

§ 1. The nature of saving. The motives actuating different classes of lenders may, for our present purpose, be reduced to two: to postpone the expenditure of income, and to obtain a net income from wealth (or investment). Saving always is relative to a particular period and is for more or less distant ends. The child saves its pennies to go to the circus next week, the working girl saves her dimes for a new hat next spring, the earnest high-school pupil saves to go to college next year, and the provident man saves for his family's future needs and for his own old age. But always, to constitute saving, there must be for the time a net result : the excess of income over consumptive outgo in that period. This is easily distinguishable from various forms of pseudo-saving of which many persons who are really spending all their incomes are very proud. Such forms are: planning to buy a particular thing and then deciding not to do so, but buying something else; finding the price less than was expected, and thereupon using this so-called saving for another purpose; spending less than some one else for a particular purpose, such as food, but offsetting this by larger outlay for another purpose, such as clothing; spending all one's own income, but less than some one else with a larger income. We may define saving as the conversion, into expenditure for enjoyable use, of less than one's net income within a given income period.

Saving goes on in a natural economy both by accumulation of indirect agents and by elaboration so as to improve their quality.1 It goes on to-day by the replacement of perishable by durative agents, as in replacing a wooden bridge by one of stone or concrete, and by producing wealth without consuming it, as in increasing the number of cattle on one's farm. But saving has come to be increasingly made in the form of money (or of monetary funds), and in this chapter we shall consider some of the ways in which this can now be done.

§ 2. Economic limit of saving. There is an economic limit to saving, as judged from the standpoint of each individual.2 The ultimate purpose of every act of saving is the provision of future incomes, either as total sums to be used later, or as new (net) incomes to be received at successive periods. The economic limit of saving in each case is dependent upon the person's present needs in relation to present income and conditions, as compared with the prospect of his future needs in relation to his future income and conditions. Each free economic subject must form a judgment and make his choice as best he can and in the light of experience. There is no absolute and infallible standard of judgment that can be applied by outsiders to each case. Yet there is occasion to deplore the improvidence that is fostered and that prevails, especially among those receiving their incomes in the form of wage or salary. Considered with reference to the possible maximum of welfare of the individuals themselves, the apportionment of their incomes in time is frequently woful. It is uneconomic for families of small income to save through buying less food than is needed to keep them in health; but it is likewise uneconomic to spend the income, when work is plentiful and wages good, for expensive foods having little nutriment, and then, for lack of savings, to go badly underfed when work is slack and wages are small. There is for each class of circumstances a golden mean of saving. The saving habit may develop to irrational excess and become miserliness but this happens rarely compared with the many cases where men in the period of their largest earnings spend up to the limit on a gay life and make no provision for any of the mischances of life - business reverses, loss of employment, accidents, temporary sickness, permanent invalidity, or unprovided old age. Despite the development of late of new agencies and opportunities for saving, there is need of doing more toward popular education in thrift.3

1 See Vol. I, chs. 9 and 10.

2 See Vol. I, pp. 285-290, for the analysis of saving from the individual standpoint; and pp. 482-499 for its relation to general economic conditions.

It has been estimated that the net annual investment fund of the United States is on the average about fifteen per cent of net incomes. The annual savings in the years just preceding 1914 were probably three billion dollars, and in 1919, an especially prosperous year, about ten billion dollars. Of course, as the amounts are expressed in terms of dollars, changes in the totals must be interpreted in connection with the changing price levels.

§ 3. Commercial bank deposits of an investment nature. If a commercial bank pays no interest on demand deposits there is no motive for the depositor to keep a balance larger than he needs as current purchasing power. When his bank account increases beyond that point, it becomes available for a more or less lasting investment to yield financial income. If the sum is small, or if the owner is at all uncertain as to his plans, or if he is not in a position to find another attractive form of investment, the offer by the bank of a small rate of interest on special time deposits (2 or 3 per cent is not an unusual rate in such cases) will suffice to cause him to leave such funds in the bank. Since about 1900 the practice has been greatly extended of paying interest even on "current balances" of regular checking accounts (demand deposits). If the 3 per cent rule 4 as to reserves against time deposits operates to cause commercial banks generally to pay a rate ranging from 2 1/2 to 3 1/2 per cent on time deposits, their amount will greatly increase. But still, in the future as in the past, those depositors having funds that can be invested for considerable periods will seek a higher rate of interest than can be obtained from commercial banks.

» See Vol. I, p. 484.

In their lending function the "commercial" banks (as the adjective indicates) serve mainly the special needs of the commercial elements of the community - business men borrowing for short terms to carry out particular transactions. Loans made on short-time commercial paper (quick assets) are very suitable to the needs of a bank that has its liabilities largely in the form of demand deposits. Time deposits can be more safely lent on the security of real estate and for longer periods. Despite their limitations in this respect, the commercial banks must be recognized as of growing importance in the work of encouraging and collecting small savings, which in many cases are better invested in other ways. In 1916, the centenary of the beginning of savings banks in this country, a nation-wide propaganda was undertaken by the American Bankers' Association for the encouragement of savings.

In 1920 the national banks alone had more than 9,000,000 deposit accounts (nearly one half of all their accounts) on which interest was allowed. Like information is not available regarding state banks (and trust companies) doing a commercial business, but probably the number is as great, if not greater. If so, there is one interest-bearing banking account, outside of regular savings banks, on the average, for every family in the United States. Evidently, in many families there are two or more such accounts.

4 See ch. 9, § 7.