Abstract
Scholars have studied the US banking systems of the late nineteenth century, but the presence and influence of mutual savings banks has largely gone unexamined. A new annual database of New England banks shows that mutual savings banks had a significant presence in the postbellum banking system. Mutual savings banks accounted for about 75 % of the region’s total bank deposits and largely avoided financial panics. The banks seemed to have complemented rather than competed with national banks. Mutual savings bank growth was correlated with agriculture and urbanization, whereas national bank growth was correlated with manufacturing. Mutual savings banks also channeled significant funds to national banks through the interbank network.
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Notes
For instance, the Banker’s Magazine stated that “[T]he comparative condition of these institutions, for a few years past, is a favorable index to the accumulating wealth of laboring classes, and illustrates fully the industry and thrift among minors as well as adults” (1873, p. 161).
Olmstead (1976) finds that mutual savings banks provided higher returns than most government bonds.
Even Manning draws heavily from Keyes’ work, sometimes taking whole passages from the older text verbatim.
The restriction to New England was made because the majority of mutual savings banks were located in the region. New England states also published reports during the 1870s, whereas many states did not until after 1890 (Mitchener et al. 2015).
Bodenhorn (2003) describes the country’s initial concerns regarding bank power.
The Bank for Savings in New York City also debated using the word “corporation” instead of bank in order to receive a charter (Olmstead 1976, p. 9).
It is important to note that depositors did not have voting rights and could not appoint managers or trustees. Large depositors, therefore, might have held some sway with their ability to suddenly withdraw funds, but would have been unlikely to have dictated lending decisions at the bank.
Insider lending was less of an issue when usury rates were often binding as a bank did not receive a lower interest rate and had extra information on borrowers (Lamoreaux 1994).
While there are also some banks that limited the amount of deposits that could be put in the bank on a given day, we do not find evidence that banks contractually limited withdrawals.
Some banks even voluntarily discouraged large accounts. For instance, some New York banks paid five percent interest on accounts over $500 and six percent on all other accounts (Olmstead 1976).
Krost (1938) shows that withdrawals during the Great Depression were disproportionately from large depositors.
The best evidence of this is seen in the Rand McNally Bankers Directory.
Payne and Davis (1956) also suggest that the regional distribution might be due to the higher degree of inequality and the popularity of philanthropy in the Northeast.
New York displays a similar pattern albeit with more state banks surviving.
Lacking individual data, we do not include trust companies in the analysis. However, the aggregate results are not much different when combining trust companies and state commercial banks. Discussed in the “Appendix 1,” trust companies came in relatively late and made up less than one-fourth of all institutions in New England. Thus, while trust companies were a larger portion relative to state banks in New England, they did not fill in gap left by the “missing” state commercial banks.
The total number of state banks in the nation went from 592 in 1877 to 14,011 in 1914. The fact that mutual savings banks did not have the same expansion suggests that mutual savings banks filled a similar need as commercial banks.
It is worth noting that New England is known for a relatively low closure rate of all banks which makes the lower rate of mutual savings bank closure all the more meaningful. The failure data reported by the Comptroller of the Currency’s Annual Reports after 1892 show a closer match. Three national banks and four mutual savings banks failed in New England during the Panic of 1893, and two national banks and no mutual savings banks failed during the Panic of 1907. Between 1892 and 1914, 25 national banks failed compared to 24 mutual savings banks. That said, mutual savings banks voluntary liquidations were more spread out across time than national banks, as the later tended to concentrate around panics.
Note that the Panic of 1907 had its largest and most immediate effect on trust companies and only later spread to national banks (Moen and Tallman 1992). National banks are thus typically recognized as the most stable institutions during the period, further emphasizing the low closure rate of mutual savings banks.
Deposits at mutual savings banks grew by $1299 million between 1870 and 1914 (about 450 percent), whereas national bank deposits only grew by $402 million (about 385 percent).
Payne and Davis (1956) provide a detailed analysis of the specific assets and loans of the Savings Bank of Baltimore before 1870. They also posit that most other mutual savings banks were similar.
Only Vermont’s “missing reports” could be labeled as systematic, and even then, it is only because the state did not publish information between 1870 and 1876.
Since county boundaries did not significantly change in New England after 1860, no corrections need to be made before interpolating the values across time. The linear assumption also allows us to fill in manufacturing data for 1910 when it was not reported.
Similar results are found when using a linear probability model.
We also obtain whether a county had a clearinghouse in operation from Jaremski (2014). There is some variation in the presence of a clearinghouse. In the 66 New England counties, there were five clearinghouses in 1870, nine in 1880, 10 in 1890, 13 in 1900, and 14 in 1910.
All dollar values are deflated to a 1900 basis using Officer (2008).
While we could yield similar results by separately regressing national banks and mutual savings banks, this process keeps location and year fixed effects constant across both bank types and allows for a clear reference to the charter bank coefficients.
The structural differences in banks prevent common ratios such as capital to assets and circulation to assets, from being used in the regression as they would take values of zero for all mutual savings banks. The ratio of deposits to assets is also unusable as nearly all of a mutual savings bank’s liabilities were individual deposits.
Table 6 in the “Appendix 1” provides the full model, so that specific coefficients can be seen.
It is important to note that only a handful of mutual savings banks ever acted as correspondents. As such, it is likely that these banks were somewhat different from others, thus explaining the particularly large coefficient.
It is also likely that smaller banks would work harder and have more flexibility to attract business away from the larger banks.
Table 7 in the “Appendix 1” provides the full set of coefficients for the models.
It is important to note that trust companies were not homogenous. Because they formed to take advantage of regulatory arbitrage, their structure and investments were different across states. For instance, there were many hybrid trust companies that blended both a commercial bank department and a savings bank department in New England. In this way, their composition cannot be directly compared across locations.
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Appendix 1: Trust companies in New England
Appendix 1: Trust companies in New England
The paper ultimately has focused on the competition between mutual savings banks and national banks as state commercial banks made up such a small proportion of the New England banking system. However, the analysis leaves out trust companies. Discussed by Barnett (1911) and Neal (1971), trust companies were often formed to get around formal banking regulation in order to invest in risky securities and longer-term projects.Footnote 34 To facilitate this lending, they actively pursued depositors through high interest rates and established correspondent relationships with banks and brokers in areas outside of their formal place of business. The approach allowed money to flow to the Western frontier where interest rates were higher and gave companies a greater ability to diversify across products, locations, and markets.
Due to their minimal regulations, trust companies may have become the “defacto” state commercial banks in the New England after the Civil War, explaining why state commercial banks did not return in the late 1880s and 1890s. We determine whether this was the case by collecting aggregate trust company information for New England. The data show that trust companies filled some of the gap left by state commercial banks but not all of it. Looking at the number of institutions in the top panel of Fig. 6, trust companies and state banks made up less than 25 % of the financial system in 1914, and for most of the period, they made up less than 15 %. When looking at deposits in the lower panel, trust companies and state banks are on par with national banks but do not make up more than 25 % of total deposits. The figures also show that trust companies grew relatively late in the period. About 50 trust companies were created in the late 1880s, but most of them arrived in the 1900s. This pattern tends to be later than the growth of state banks but the same as trust companies in other areas.
Combining trust companies and state commercial banks (1870–1914). Notes Figures provide the aggregate number of banks and deposits broken down by bank type
The aggregate data suggest that trust companies played a significant role in the New England financial system, but were not solely responsible for the lack of state banks. Instead, mutual savings banks and trust companies likely split the business between them. Mutual savings banks took on the individual depositors that wanted a safe return from local investments, whereas trust companies took on investors that wanted a higher return from investing in other areas. Testing this hypothesis, however, would take much more detailed trust company and mutual savings bank investment and depositor data, and is left for future researches.
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Jaremski, M., Plastaras, B. The competition and coexistence of mutual and commercial banks in New England, 1870–1914. Cliometrica 10, 151–179 (2016). https://doi.org/10.1007/s11698-015-0127-0
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DOI: https://doi.org/10.1007/s11698-015-0127-0