Institutions for Saving and Investment 1

§ 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 in come. 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 3 See Vol. I, p. 484.

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). If the 3 per cent as to reserves against time a rate ranging from 2% to 3% 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 in vested for considerable periods will seek a higher rate of in terest than can be obtained from commercial banks.

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 bor rowing 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 import ance 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 avail able regarding state banks (and trust companies) doing a com mercial business, but probably the number is as great, if not greater. If so, there is one interest-bearing banking ac

count, outside of regular savings banks, on the average, for 4 See eh. 9, § 7.

every family in the United States. Evidently, in many families there are two or more such accounts.

§ 4. Investment banking and bond houses.

Enormous amounts of securities issued by governments or by corpora tions (railroad or industrial) are now on the market and to be bought conveniently by private investors. Some bonds are to be had in denominations as small as $100 and $500. The regular brokers on the stock exchanges buy and sell, for a small commission, the regular bonds and investment stocks. For many investors the personal examination and selection of sound securities is too difficult a task. Several large statis tical and financial in return for an annual sub scription, offer advice to investors regarding general market conditions and special securities. Many banks and trust companies have of late developed special departments for investment banking. Through these agencies the banks are constantly placing as relatively permanent investments securities which they have bought or have aided "to float" or which they handle only as commission agents. In any case the real investment banker is bringing to his task special training and a high sense of his professional obligations, and is employing the services of statisticians, financial experts, and of practical engineers to determine exactly the funda mental conditions of each investment. Investment banking promises to increase steadily in amount and importance.

§ 5. Savings banks in the United States.

For the in creasing number of wage-earners, salaried employees, and per sons following professions, investment as active capitalists has been steadily growing more difficult' Their savings must usually take the form of passive investments. The op portunities for lending money in small amounts without great risk are few, and the requirement of skill, time, and labor to 5 E. g., Babson Statistical Organization, Brookmire Economic Service. Harvard University. Committee on Economic Research, Moody Manual Co.. Moody Corporation Service.