§ 13. The distribution of profits. At least twenty-five plans, with hundreds of variations in details, have been in operation for the distribution of profits. The essential features are, however, these. Periodically, usually every six months, is ascertained the amount of the gross earnings, which, under this plan, consist almost entirely of interest paid on loans. From this amount are deducted expenses (and in some states 5 per cent of the total is placed in a "loss fund" to meet possible losses), and the rest is divided in proportion to the amount standing to the credit of each member, being credited to the account of running stock, increasing its "book value," and paid in cash to holders of paid-up stock. The dues frequently are 25 cents a week per share, in other cases $1 per month. Take, for example, the latter case, when the maturing value of a share is $200. If all of the capital paid in is lent out continuously at 6 per cent, the profits will be equal to about 6 per cent compound interest, and the shares will mature in about 11 1/2 years (the average experience has been 138 months). A non-borrower will then be paid $200, of which $138 has been paid as dues over the period and $62 is the accumulated profit of each share. A borrower of $3000 (on this plan) must take at least fifteen shares, and would pay $30 each month, $15 as dues and $15 as interest. If he keeps up his regular payments, he will at the maturity of his shares have a capital just sufficient to pay off the whole debt. In most cases a prudent tenant can become the owner of a house while paying no more than the rent would be. As the active investor he becomes his own rent-collector, and uses the house with less need of repairs, thus dispensing with services and costs that are included in contractual rents.10

§ 14. Possible developments of savings institutions. The social importance of increasing and improving the agencies of savings for the masses is being more fully recognized, but much more might be done in these directions. Some possible changes have been suggested above, and a few words more may be added.

Probably the greatest developments in the near future will be through the savings departments of commercial banks (favored by the reserve rules of the Federal Reserve Act) rather than by the increase in the number of special banks for savings. The initial expense and risk of starting a savings bank is considerable, and outside of cities of some size this is prohibitive; whereas a savings department, with its funds and reserves separated, can be easily and cheaply operated in connection with a general bank. It is much to be desired, however, that a larger measure of popular cooperation might be made possible to the depositors, both for its educational value and to reduce the real evil of the autocratic or the plutocratic centralization of the money power in the small communities. Savings banks usually limit the amount of an account to $3000. It is desirable that depositors should be able easily to convert their savings-bank deposits over certain amounts into good bonds, bearing a higher rate of interest (after the method of the issue of postal savings bonds). There is need of a central market in each community where bonds can be bought and sold at any time; and banks ought, as they increasingly do, to buy and sell for their customers in this way in the larger bond market. This would be of benefit also to the states and municipalities that issue bonds for such purposes as schools, roads, and public utilities, by creating a more open and regular market to small investors than now is provided for such securities. This might somewhat reduce the rate of interest, and there would be a gain divided between taxpayers and lenders. The large amounts of Liberty bonds now are especially suitable for the small investor.

10 On these economies, see Vol. I, p. 298.

The general plan and principles of local building and loan associations was extended in 1916 to groups of rural co-operators in the joint-stock land banks, enabling them to make loans to their members11; and it might well be extended to groups of small investors, permitting them to hold real-estate mortgages and bonds and stocks of corporations, free from taxation other than that paid on the wealth itself. Members of such organizations could get a higher income on their investments than a savings bank could pay, and with greater security than if each attempted to save and invest by himself.

Savings institutions are necessarily also lending institutions. In this chapter they have been looked at mainly from the saver's (the lender's) standpoint, though their service to the borrower is of coordinate importance. In the case of building and loan associations this feature is most apparent. Later, the problem of the agricultural borrower will receive further consideration.

11 See ch. 27, below.

References

Chamberlain, Laurence, Principles of bond investment. 4th ed., N. Y. Holt. 1911. The work of the bond house. 1913.

Devine, H. C., Peoples cooperative bank for workers in towns, and small holders, allotment cultivators, and others in country districts. N. Y. Cassell. 1908.

Dexter, Seymour, A treatise on cooperative savings and loan associations. N. Y. Appleton. 1894.

Hamilton, J. H., Savings and savings institutions. N. Y. Mac-millan. 1902.

Kemmerer, E. W., Postal savings. P. 176. Princeton. Princeton University Press. 1917. (A historical and critical study of the postal savings system of the U. S.)

Kniffin, W. H., The savings bank and its practical work. N. Y. Bankers Pub. 1912.

Phillips, C. A., Readings in money and banking. N. Y. Macmillan. 1916. Ch. XVI.

Wolf, H. W., A cooperative bank handbook. Lond. King. 1909. Cooperative banking. Lond. King. 1907. People's banks. 3d ed. N. Y. Longmans. 1910.