CHAPTER V.

PROVISIONS FOR INVESTMENT OF RETIREMENT FUND.

Provision for the investment of the fund created under this plan by the savings of the civil service employees is made in section 2 of the proposed bill which reads as follows:

SEC. 2. That the amounts so deducted and withheld from the salary, pay, or compensation of each employee shall be deposited in the Treasury of the United States and shall be credited, together with interest at three and one-half per centum per annum, compounded annually, to an individual account of the employee from whose salary, pay, or compensation the deduction is made. The moneys so deducted and the income derived therefrom may from time to time be deposited in savings banks designated by the Secretary of the Treasury for that purpose: Provided, That the savings banks receiving such deposits shall pay interest thereon at a rate of not less than three and one-half per centum per annum, compounded annually. For the safe-keeping and prompt payment of the money deposited with them the Secretary of the Treasury shall require the savings banks to give satisfactory security, by the deposit of bonds of the United States, bonds or other interest-bearing obligations of any State of the United States, or any legally authorized bonds issued for municipal purposes by any city or town in the United States which has been in existence as a city or town for a period of twenty-five years, and which for a period of ten years previous to such deposit has not defaulted in the payment of any part of either principal or interest of any funded debt authorized to be contracted by it, and which has at such date more than twenty-five thousand inhabitants, as established by the last national census, and whose net indebtedness does not exceed five per centum of the valuation of the taxable property therein, to be ascertained by the last preceding valuation of property for the assessment of taxes; or any legally authorized bonds issued for municipal purposes by any city or town in the United States which has been in existence as a city or town for a period of twenty-five years, and which for a period of ten years previous to such deposit has not defaulted in the payment of any part of either principal or interest of any funded debt authorized to be contracted by it, and which has at such date more than two hundred thousand inhabitants, as established by the last national census, and whose net indebtedness does not exceed seven per centum of the valuation of the taxable property therein, to be ascertained by the last preceding valuation of property for the assessment of taxes. In this clause the words "net indebtedness" means the Indebtedness of any city or town, omitting debts created for supplying the inhabitants with water, and debts created in anticipation of taxes to be paid within one year, and deducting the amount of sinking funds available for the payment of the indebtedness included. The Secretary of the Treasury shall accept, for the purposes of this act, securities herein enumerated in such pro

portions as he may from time to time determine, and he may at any time require the deposit of additional securities, or require any bank to change the character of the securities already on deposit. It shall be the duty of the Secretary of the Treasury to obtain information with reference to the value and character of the securities authorized to be accepted under the provisions of this section, and he shall from time to time furnish information to savings banks as to such bonds as would be accepted as security. When consistent with the best interests of the fund created by this act, the Secretary of the Treasury shall distribute the deposits herein provided for, as far as practicable equitably between the different States and sections.

If, for any reason, the Secretary of the Treasury shall not be able to make satisfactory arrangements with savings banks for all of the funds, then he may invest the balance in any of the aforementioned securities.

The moneys deducted from salaries and the income derived therefrom shall be held and deposited or invested, as above described, by the Secretary of the Treasury until paid out as hereinafter provided. Any deficiency in the fund hereby created to carry out the provisions of this act shall be paid out of any money in the Treasury not otherwise appropriated.

For the purpose of aiding the Secretary of the Treasury in depositing and investing the funds created by this act a board of investment is hereby created, composed of the Treasurer of the United States, the Comptroller of the Currency, the chief of the office created by the provisions of this act, and two persons to be designated by the President from among the employees of the classified civil service. The members of the board of investment shall be sworn, and shall hold office until others are appointed and qualified in their stead.

TWO PROVISIONS FOR INVESTMENT OF FUND.

It will be seen from this that the bill provides for the investment of the retirement fund in two ways:

(1) Indirectly, by deposit in savings banks meeting certain require

ments.

(2) Directly, by investment in a certain limited class of securities. The bill provides that the banks receiving these funds must pay not less than 3 per cent interest on the deposits, and that they must give Federal, State, or municipal bonds as security for these deposits. Failing to make satisfactory arrangements with savings banks for all of the fund, the Secretary of the Treasury is authorized to invest the balance directly in the aforementioned securities.

NOT FEASIBLE AT PRESENT TO DEPOSIT FUND IN SAVINGS BANKS.

Several men prominent in savings-bank circles have been asked for their opinion of the investment clause in the proposed bill. The consensus of opinion seems to be that the provisions in the bill for handling the funds are theoretically sound, but that one of them is not at present practicable. While there is no good reason for changing the two main provisions-that the funds be deposited first in savings banks, and, secondly, invested in a limited class of securiites the fact should be brought out that the first provision is not

likely to be of much service. Under present conditions it would not be possible to deposit any large amount of the retirement fund in the savings banks of the country.

Differences between eastern and western savings banks.

In considering the subject it is necessary to bear in mind several important differences between the savings banks of the East and those of the West. Generally speaking, the savings banks of New York and New England may be put in one class and those of the rest of the country in another. Those of the former class operate under the strictest laws governing such institutions. The rate of interest which they pay is usually 3 or 4 per cent, whereas the savings banks of the West seldom pay more than 3 per cent. The savings banks of the East are generally mutual banks, and the profits of their investments are distributed among the depositors, whereas the savings banks of the West are more often the property of stock companies and are run mainly for the profit of the stockholders.

These differences in bank administration would prevent the widespread acceptance of the Government's superannuation fund by the savings banks of the country. The provision in the bill that 3 per cent interest must be paid on the clerks' savings would exclude the fund from the majority of western banks, because they are unwilling to guarantee that rate of interest. On the other hand, the eastern banks paying 4 per cent interest on deposits could not accept the fund, because the bill provides that savings banks receiving the employees' savings must give satisfactory security in the shape of United States, State, or municipal bonds, or other stipulated interest-bearing obligations. The New York and Massachusetts laws prohibit the preferring of depositors.

One practical objection to the provision in the bill that the employees' savings be deposited in savings banks is the fact that the deposits would have to be received in the names of the individual depositors. Under existing laws they could not be accepted as a lump deposit from the Government. This requirement would necessitate considerable accounting, and constitutes in the minds of some bank officials, though not of all, an objection to the acceptance of the employees' savings. Also the limited amount allowed individual depositors would make it impossible for some banks to accept the savings of the higher-salaried employees for the full period of accumulation. Altogether, it seems plain that the greater portion of the Government employees' savings could not now be deposited under existing laws in savings banks, but would have to be invested in the securities named in the bill.

INVESTMENT OF FUND SHOULD BE RESTRICTED TO PUBLIC SECURITIES.

Although it does not appear feasible to deposit any large amount of the retirement fund in savings banks, the officials consulted were agreed in thinking that the securities in which it is invested should be limited to those acceptable to the New York and New England savings banks, with the exception of railroad bonds, real estate, and notes secured by personal indorsement. The liability of loss to the employees, if the investment of the fund is limited to Federal, State, and municipal bonds, they believe to be negligible. Mr. Andrew Mills, president of the Dry Dock Savings Institution, of New York, stated that during the past 30 years that institution had not lost a dollar through securities of that class, although it had had an average of $12,000,000 invested in that way. The nature of the retirement fund, which would be made up of the savings of a large body of people, makes the propriety of limiting its investments to the best of savings-bank securities hardly debatable.

SAVINGS-BANK INVESTMENTS.

Savings banks are defined by Hamilton as "institutions established by public authority, or by private persons, in order to encourage habits of saving by affording special security to owners of deposits, and by the payment of interest to the full extent of the net earnings, less whatever reserve the management may deem expedient for a safety fund; and in furtherance of this purpose bank offices are located at places where they are calculated to encourage savings among those persons who most need such encouragement." 1

According to the same authority, a savings bank is distinguished from an ordinary commercial bank in several ways. Its object is to promote thrifty habits among the laboring classes and to increase their resources. Its first concern, therefore, is safety of the deposits, its earnings being a secondary consideration. As its directors and managers have no special financial interest in the returns, the methods are therefore extremely conservative. A commercial bank, on the contrary, is primarily a money-making institution, run in the interests of stockholders, the managing officials being often heavily interested in the stock. They want safe investments, but there is a constant temptation to waive considerations of safety in the interest of larger net returns to stockholders. Commercial banks discount paper and are tempted to take risks in speculation. Savings banks do not, but invest their deposits in public securities or in loans secured by realestate mortgages.

An earlier writer, J. Howard Van Amringe, says that banks of issue and discount have only one point in common with savings banks, and

1 See Savings and Savings Institutions, by James H. Hamilton, p. 161.

that is the receipt of deposits. He emphasizes the difference still more by declaring that the former exist for the convenience of the rich, the latter for the benefit of the poor. The poor he defines as those who have no invested capital. The charter for the first savings bank in New York State was granted on the plea of the New York Society for the Prevention of Pauperism.1

It seems proper, therefore, in discussing the investment of the fund that will be created from the employees' savings, to emphasize the fact that the legal restrictions placed upon the investment of savings bank funds vary greatly in different States of the Union. Some of the States have enacted laws which are very strict and conservative, properly safeguarding the interests of the depositors, while others allow so-called "savings banks" to do business in a loose, unsafe way that is directly contrary to the traditional spirit of savings institutions. This abuse is well described in the following quotation:

The stock savings banks are numerous in Western and Southern States, and, in addition to being institutions conducted for the benefit of shareholders, have, with but few exceptions, little to distinguish them from ordinary commercial banks, possessing all the powers and privileges of such institutions, and differing only in the added privilege of accepting savings deposits. Some of these savings deposits, too, are held subject to check, thus practically nullifying any added security that a savings institution is supposed to give. Again, in instances, particularly in the Western States, the only apparent difference between a savings bank and a State bank, other than the name and the statute under which the organization may have been effected, rests solely in the now obsolete privilege of issuing currency-the State bank still nominally possessing that right which is denied to the savings bank.

At present the States which regulate most carefully the activities of their savings banks are New York, Massachusetts, Connecticut, and then, perhaps, Vermont, Maine, and New Hampshire. The result is that savings bank failures are not often heard of in these States.

The number of savings banks that have failed under the Massachusetts law during the last 72 years is shown in the following tabular statement, which is taken from the annual report for 1906 of the Hon. Pierre Jay, bank commissioner of the Commonwealth of Massachusetts.

1 See Life Assurance and Savings Banks, a lecture by J. Howard Van Amringe, New York, 1872.

2 See Savings Banks and Safe Securities, by J. G. Dater (1898), p. 11. Now vice president, Bank of the Manhattan Company, of New York.