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,3 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.

3 Now vice president, Bank of the Manhattan Company, of New York.

[From Annual Report (1908). of Superintendent of Banks, State of Massachusetts.]

74196°-S. Doc. 745, 61-3-13

It will be seen from the above that the principal causes of the savings-bank failures in Massachusetts have been unwise investments in real estate,1 bad management, and the defalcation of bank officials. It will be noted, however, that the terms of the proposed law do not permit investment of the retirement fund in real estate, but restrict it to investment in public bonds alone.

PUBLIC BONDS SAFE INVESTMENTS.

A bond may be defined as follows: "An instrument by which a government, municipality, or corporation contracts and agrees to pay a specified sum of money on a given date (sometimes reserving the right for earlier payment), the bond itself being a coupon-bearing (or registered) note under seal; the coupons representing the quarterly, semiannual, or annual interest, as the case may be, at a fixed rate.” 1 The strength and security of Federal, State, and municipal bonds as investments rest on the fact that they are based primarily on the power of taxation, although they themselves are usually exempt from taxation.

FEDERAL BONDS.

The bonds of the United States Government have been issued at various times to cover the national debt. As investments they are secured by the national credit and the national honor. As the American people have shown themselves to be essentially a debt-paying people, their promise to pay is regarded as among the most unimpeachable securities in the markets of the world. It has been said that "the Government of the United States enjoys to-day the proud distinction of having outstanding bonds bearing the lowest rate of interest at which bonds have been issued by any nation, and, furthermore, its bonds are selling in the market at a price which indicates that its credit is not surpassed by that of any other nation." 2

VARIOUS ISSUES OF FEDERAL BONDS.

The good credit of the Nation began with the foundation of the Government and is largely due to the fine understanding and high ideals of Alexander Hamilton, first Secretary of the Treasury, who persuaded the new Government not to repudiate the colonial debts, amounting to $72,775,895, but on the contrary to assume them. The people of the country have always shown themselves eager to pay a public debt and willing to submit to heavy taxation to do so. By 1812 the national debt was down to $45,000,000. The war of 1812 increased it, so that in 1816 it amounted to $127,334,933, but in 1835 1 See Money and Investments, by Montgomery Rollins, p. 44.

* See Memorandum Concerning United States Bonds, revised to Oct. 1, 1902, prepared by Fisk and Robinson, p. 18.

it was all paid. The Mexican War piled it up again so that in 1851 it amounted to $68,304,796. By 1857 it was down to only $28,699,831. Several Indian wars increased it to $98,580,873 by 1861.

At the opening of the Civil War the Treasury was empty and the national credit reduced to a 12 per cent basis. All kinds of borrowing followed. Over 20 different forms of obligations were issued, bearing rates of interest varying from 7 per cent down to nothing, and with maturities of from 30 days to 40 years. The expedient most criticized was the issue of legal-tender notes. There were several great war loans, all of which the people of the country floated with alacrity. One was the 6 per cent five-twenty year loan of 1862, issued in denominations from $50 to $10,000. Another great war loan was the seven-thirties of 1864 and 1865. The maximum of public debt was reached August 31, 1865, and amounted to $2,844,649,626, against which there was only $88,218,055 in the National Treasury. The war being over, however, the Nation began at once to recover financially, as well as in every other way, from the effects of the struggle. In 1879, specie payments were resumed, and by 1893 the debt had fallen to $1,545,985,686.13, with a balance of $778,604,339.28 in the Treasury. In 1894, however, on account of currency laws which made it necessary to maintain the parity of various forms of currency with gold, an increase in the gold reserve was secured through two sales of 5 per cent bonds, of $50,000,000 each. In 1895 the Government sold $62,000,000 of 4 per cent bonds redeemable after 1925, and in 1896, $100,000,000 more of 4 per cent bonds of 1925. In 1898, the war with Spain made necessary an issue of 3 per cent ten-twenty year bonds amounting to $198,792,660. After the war the Government had large revenues, and the process of debt-paying began again. The refunding act of 1900 provided for the refunding of the threes, the fours of 1907, and the fives into new 2 per cent 30-year gold bonds. Upward of $646,000,000 have thus been converted. It will be seen from the following tabular statement that these consols of 1930, bearing 2 per cent, constitute approximately 70 per cent of the interestbearing national debt. The Panama Canal loans, negotiated in 1906 and 1908, called for issues of 2 per cent 10-year bonds. The principal Government issues now outstanding, all of which date since the year 1895, are therefore as follows:

TABLE XXXV.-Showing principal outstanding bonds of the United States.