SAVINGS BANKS These were first suggested by Daniel Defoe in 1697, but nearly a century was to elapse before they were actually established. The first was founded in Brunswick in i 765, and others rapidly fol lowed upon the Continent. In 1799, following a suggestion of Jeremy Bentham, the Rev. Joseph Smith founded the first British Savings Bank at Wendover. The movement once started, spread in England as on the Continent and by 1817 had become suffi ciently important to demand legislation.
The guiding principle laid down in the Acts of that year was that the local management of each bank should be in the hands of trustees who gave their services gratuitously, but that these should make periodical returns to the Government and also invest all the bank's funds in Government stock. Depositors were to receive interest at 3d. per day or 14 us. 3d.% per annum. This was above the current yield on Government stock, and was designed to act as a bonus upon thrift. To minimize the losses to the Government, who had to bear the difference, and also to prevent abuse of the principle, a limit was placed to the total amount an individual could deposit. Even so, the Government rapidly found that they had shouldered a bigger burden than they could bear, and successive reductions were made in the rate of interest. Finally in 1888, the rate allowable to bank trustees was fixed at 3%, and that to depositors at 24%, the margin rep resenting the requirements of the trustees for management and other necessary expenses.
In 1863, which was possibly the hey-day of the independent savings bank, there were 622 of such institutions in existence. In that year, the Post Office entered the field, and inexorably encroached upon the domain of the private bank. By 1889 the number of banks had fallen to 380, and by i 9os to 224. The Post Office commanded a greater degree of public confidence, and pro vided more convenient facilities, while the decline of the private bank was hastened by such events as the break-up of the Cardiff Bank in 1886. The famous "penny banks," such as the Yorkshire Penny Bank and the National Penny Bank, held their own, but in general forces were at work to reduce the number of private banks.
Even as late as in the 'nineties, the customer of a joint-stock bank was expected to maintain a balance of some £ 200. By 192 5, banking accounts were no longer the prerogative of the rich, but belonged to the middle-classes as well. By 1960, they may well be in universal use. In 1927 we find the "big five" prepared to receive sums as low as Li on deposit ; one such bank has supple mented this with a system of "home-safes." From 1900, the private savings bank developed weakness within. By its rules, it was bound to invest its customers' funds in gilt-edged stock, mainly consols. When the pre-war slump in consols occur red, the defect of this rule appeared, and the fall in prices brought many savings banks face to face with difficulty, and in some cases led to enforced liquidation. Directors and trustees could not be blamed for what was only carrying out the rules, but this did not minimize the seriousness of the loss.
Finally, the war inflicted on all savings banks, including the Post Office, a new and formidable competitor. This was the War (afterwards National) Savings Certificates. Even at its present price of i 6s. per L t certificate, it offers a yield greater than any savings bank can afford, while it is readily encashed, and in every way has a greater popular appeal than the Trustee savings bank. The latter's usefulness is far from extinct and in fact has made progress during post-war years, but it no longer has the field to itself.
A fuller account of the developments which have taken place in the savings bank movement since the World War is given in the article SAVINGS BANKS (q.v.).
Banking in most countries is conducted by a small number of large banks operating numerous branches, and failures are infre quent. In the United States, in striking contrast, banking is con ducted (1939) by more than 15,00o banks; charters have been freely granted to new banks and many failures have been an in variable incident of successive periods of business depression. In spite of evident drawbacks, this American system of independent unit banking, as it is commonly styled, has persisted, supported in general by public opinion and sheltered in most of the States by legislation which either narrowly restricts or entirely prohibits the establishment of branches. The functioning of this decentralized system of banking organization has given rise to many special problems, and it is with the handling of these problems that American banking history is in large measure concerned.
Throughout almost the entire course of the history of banking in the United States two conflicting tendencies or objectives are manifest. The maintenance of safety and the development of a smoothly working credit mechanism have been beset with diffi culties, owing to the potent influence in the management of the banks of desire to stimulate and further to the utmost the rapid exploitation of the country. In a purely local bank the wishes of borrowers are apt to overshadow the interests of the noteholder and the depositor, particularly in communities which are ambitious for rapid development.
But, from about the beginning of the 19th century, the tempo of American economic life became more and more rapid. Rich op portunities for the development of natural resources, manufactures and transportation furnished a demand for capital which exceeded the available supply, and any means that seemed to meet the de ficiency found hearty support in wide circles, and, at times, throughout entire sections of the country. Among these substitutes for actual capital, bank-credit dispensed by a multiplicity of banks was freely and continuously employed. Special charters were granted more readily and in one State after another general laws were passed permitting the organization of banks under conditions that were commonly by no means of an exacting character.
Upon the closing of the Bank of the United States, the Federal Government set up the so-called independent Treasury system, handling its own receipts and payments without utilizing banking facilities and, indeed, refusing to receive the notes issued by the State banks, insisting that payment be made in specie. Under this system the Government withdrew money from use whenever its receipts for any reason exceeded its current expenditures. During years of peace the operations of the independent Treasury were a matter of minor consequence, but serious difficulties were immediately experienced upon the outbreak of the Civil War. The banks of the country patriotically made liberal advances to the Government which felt compelled at once to withdraw the funds from the subscribing banks. A monetary crisis was inevitable. Specie payments were suspended and soon thereafter the Govern ment resorted to successive issues of inconvertible and depre ciated paper money. It is by no means improbable that the Civil War could have been financed on a gold basis if the Second Bank of the United States had then been in operation. It was impossible to do so without that co-ordinating agency.
From 1837 until the establishment of the national banking sys tem in 1863, banking in the United States was handled exclusively by banks organized under the laws of the various States, and the number of these institutions had increased to more than 1,600 at the time of the outbreak of the Civil War in 1861. Experience with the working of these banks disclosed three defects of major consequence—the presence of many weak and badly managed banks, excessive credit expansion during periods of business activity, and, finally, inability to cope with situations of severe financial strain manifested in the suspension of specie payments and the general dislocation of the credit mechanism.
Although the use of cheques was steadily becoming more gen eral, bank-notes, which all banks were permitted to issue, were still the principal means of extending bank credit. When issued by hundreds of banks scattered over a wide territory, bank-notes lend themselves far more readily to unwise use than deposit credit, against which cheques are drawn, because the note is less certain than the cheque to be speedily presented for payment. The wide diffusion of losses among the scattered holders of the notes of failed banks and the impossibility of intelligently discriminating between the strong and the weak banks brought home to the public the importance of securing greater safety in banking. With this objective in view, one State after another developed elaborate banking codes covering virtually every banking activity and sub jected the banks to Government supervision and examination. These codes included provisions relating to the amount and pay ment of capital, restrictions on loans, the maintenance of re quired reserves, and, above all, a wide diversity of arrangements designed to provide special security for the bank-note. In addi tion to the limitation of note issue to the capital of the several banks, the safeguard most generally adopted by the States was the requirement of the deposit of approved securities of sufficient value presumably to protect the outstanding notes of failed banks.
The importance still attached to note issue and, even more, the high yield to be secured from Government bonds induced most of the State banks to become national banks soon after the system was established. But, within less than 20 years, the organization of banking institutions under State laws had become once more attractive. The requirements of State laws with regard to the minimum of capital, to loans (notably those secured by real estate) and as to required reserves, were less exacting and, finally, State laws permitted chartered institutions, known as trust com panies, to undertake fiduciary functions of many kinds in addi tion to regular banking operations, a field of business that was not open to national banks. , In 18 7o there were but 325 State banks as against 1,612 in the national system, but, by 1924, the number of State banks and trust companies had increased to more than 19,000, and there were 8,085 national banks in operation. Within recent years, however, the relative attractiveness of Fed eral and State charters has approached more nearly to equality, partly through the strengthening of State laws, and in part through a general widening of the powers enjoyed by the national banks.
Returning now to the period following the closing of the Second Bank of the United States in 1836, it is noteworthy that for more than 7o years thereafter all efforts to improve the banking system of the country were concentrated upon measures designed to strengthen the individual bank. But, even had these efforts been more completely successful in maintaining all banks in a solvent condition, that alone would not have provided the country with a satisfactory banking system. There is at all times a close inter relation between banks through the huge mass of cheques and other items in process of collection. If regular settlements between banks are delayed, or the possibility of their continuance is questioned, the machinery for making payments instantly becomes dislocated and trade is seriously obstructed. Again, the payment of bank loans at any time depends in large measure upon the ability to secure anticipated accommodation from banks by those who are indebted in the ordinary course of business to present bor rowers. In the United States, as elsewhere, repeated experience has clearly shown that in the absence of some co-ordinating agency banks in periods of financial strain are prone to adopt policies which are almost certain to bring about the dislocation of the pay ment machinery, and also affect unfavourably the ability of bor rowers to liquidate their loans. Such was American experience in 1837 and in 1857 before, and in 1873, 1893 and i 90 7 after the establishment of the national banking system. In each instance the resources of all of the banks were fully employed before the out break of the crisis and each bank endeavoured to strengthen itself by an immediate reduction of loans and the husbanding of its reserve of cash. Limited co-operative arrangements were indeed employed during each crisis after that of 1857, but these arrange ments did not extend beyond the groups of banks associated in the clearing house of particular cities. In all of these instances, payments between banks in different sections of the country were interrupted and the business community was subjected to unnec essary loss as a consequence of the frantic and largely unavailing efforts of the banks to contract loans in wholesale fashion.