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as in Report
Payment of interest or dividends from date of deposit together with assurance that deposits and shares will be repaid on demand or "on request” are aptly designed to attract short term funds. There is ample evidence that substantial totals of such short term investment funds are being attracted to the mutuals.
One evidence of this is in the high rate of withdrawals to new deposits in the mutual savings banks and to new share capital in the savings and loan associations. The Savings Association League of New York State recently reported that for the seven months ending July 31, 1956, New York savings associations had a new savings inflow of $773,071,266, which was $96,489,242 above that for the corresponding period last year, an increase of 14.3% and that outflow was $589,237,807, which was $61,781,375 and 11.7% above a year ago. In addition, savings banks in New York in the first nine months of 1955 had deposit inflow of $3,882 millions against withdrawals of $3,465 millions, or a net inflow of only 10.7% of the deposit inflow for the period. Withdrawals of that magnitude are scarcely consistent with a contention that the mutuals' tremendous deposit and share gains are “savings”. This is strong evidence that the mutuals are actually moving toward what amounts in fact to a demand deposit type of business. The only material difference is that the demand is by presentation of a passbook rather than by check, and even that has been much simplified through “Bank by Mail” programs.
A study for the years 1951 through 1954 shows the same trend and it seems to be on an ascending scale.
Net Inflow of Savings as a Percentage of New Savings
Capital for Insured Savings and Loan Associations in
(000,000 omitted) States with Important
States without Important Competition from
Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, New Jersey, New York, Delaware, Pennsylvania, Maryland, Ohio, Minnesota, Washington.
All other states, including the District of Columbia, but excluding Puerto
Further evidence of the endeavor of the savings and loan associations to attract short term investment funds appeared in a lead article of the Wall Street Journal of December 22, 1954.
"At a meeting in Portland, Oregon, not long ago, 150
as in Report
pliance dealer reviewed a $50,000 balance carried in a
That situation is much less likely to arise so long as the mutuals are content to seek strictly savings funds. Such true savings funds have great stability, as witness the experience of the mutual savings banks during the banking crisis of 1933. With huge holding of temporary investment funds which would be withdrawn in any emergency, that favorable experience would be almost certain to be reversed.
Many savings bankers will privately acknowledge their concern over this trend of the past ten years for short term investment funds to flow into their institutions in large volume. In the vernacular of the trade it is “hot money",
This raises a very serious question as to whether the practices which encourage the flow of these temporary investment funds into the mutual savings institutions ought not to be curbed. Among these practices are: (i) Payment of interest or dividend from date of deposit. (ii) Repayment on demand or "on request".
It also raises the still more serious question of the necessity of creating a better public understanding of the nature of our types of banking and quasi-banking institutions. A savings and loan association is not a bank, nor is it set up to do a banking business. Neither is it an agency of the government. Nor are its obligations guaranteed by the government. All of these misconceptions are widely held by the public at large and have been deliberately encouraged.
Exactly as in Report
What will be the effect of the continued growth of the mutual thrift institutions on our Federal Reserve Banking System?
The Federal Reserve is charged with two primary functions
(i) To maintain a sound banking and currency structure
in the United States.
(ii) To promote economic stability and growth by in
fluencing the availability of credit. Both functions are vital to the welfare of the people of our nation. However, with the passage of time, the second function—that of promoting economic stability and growth by influencing the availability of credit-has assumed the greater importance. In “The Federal Reserve System”, pp. 1-2, Washington, D. C., 1954, it is stated
“From the outset, there was recognition that these original purposes were in fact integral parts of a broader objective, namely, to help counteract inflationary and de-. flationary movements, and to share in creating conditions favorable to sustained high employment, stable values, growth of the country, and a rising level of consumption. Acceptance of this broader objective widened over the years and today it is understood to be the primary purpose of the System.”
How can the Federal Reserve perform this all essential function if major sources of bank credit are beyond the reach of its credit control powers! Recently while the Federal Reserve was endeavoring to place restraint on the availability of credit, the Home Loan Bank Board made a billion dollars available to the savings and loan associations. Regardless of who was right as to whether the pace of business should be curbed or stimulated, that kind of seesawing by two powerful government agencies can prove disastrous. A regulatory stalemate between two governmental agencies operating in the same field can never be anything but unhealthy and dangerous.