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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.

Table 7

Net Inflow of Savings as a Percentage of New Savings

Capital for Insured Savings and Loan Associations in
Regions With and Without Important Competition from
Savings Banks, 1951-1954

(National Data)

(000,000 omitted) States with Important

States without Important Competition from

Competition from
Savings Bankst

Savings Banks
New

New
Net Savings

Net Savings
Year Inflow Capital % Inflow Capital % %
1951 742 2,420 30.7 1,151 3,235 35.6
1952 1,025 2,926 35.0 1,801 4,160 43.3
1953 1,169 3,427 34.1 2,207 5,212 42.3
1954 1,465 4,033 36.3 2,674 6,299 42.5

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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
Rico, Alaska, Guam, Hawaii.
Source: Home Loan Bank Board, Savings and Home Financing Source Book.

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
builders, real estate men and appliance dealers were
served this pitch: Help your own business by putting
your spare funds in savings and loan associations. It
was explained that these associations invest almost
solely in home loans, so money put in them directly
supports the building boom.
“One impressed builder immediately plunked $20,000
into Portland's Benjamin Franklin Federal Savings
& Loan Association, sponsor of the meeting. An ap-

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pliance dealer reviewed a $50,000 balance carried in a
commercial bank without interest and decided to di-
vide it among two dividend-paying savings and loans.
A third businessman persuaded his firm's directors
to okay placement in an association of money set aside
for taxes.
“Such fund shifting is being accelerated on a nation-
wide scale. Since 1945, assets of savings and loan as-
sociations have zoomed from $8.8 billion to an esti-
mated $31.1 billion. Further fueling this growth at
present is a drive launched last summer by the
nation's 6,000 savings and loan associations, led by
their Chicago-headquartered trade organization, the
United States Savings and Loan League.
“Carpenters, bricklayers, plasterers and their trade
unions; home-builders, realtors, manufacturers of
building materials, makers and sellers of home fur-
nishings and appliances—these are among the seg-
ments of the housing industry being urged to shift
their funds to savings and loan associations as a way
to prolong the building boom and thus safeguard their

livelihoods."
The mutual savings institutions are not designed or
adapted to handle large volumes of temporary investment
funds. Their own investments are long term and their
liquidity ratios are much too low. In boom times such as
we have experienced since the end of World War II, de-
mands or “requests” for withdrawal can be met out of the
inflow of new funds as indicated in this state by the sav.
ings and loan report for the first seven months of 1956.
However, if the inflow of new funds should shrink substan-
tially and the outflow should continue or increase, they
would shortly be hard put for liquid resources out of
which to meet it.

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.

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Question Four:

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.

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