In speaking of banks I have had in mind up to this point the "commercial" bank, organized under national or state laws, or the trust company, rather than savings-banks, or savings departments of ordinary banks and trust companies. A savings-bank is really an investment institution more than it is a bank in the ordinary sense of the word. While a great deal of what already has been said applies to savings-banks also, it is necessary to explain their operations a little more in detail. The commercial bank invests its funds in the credit of business men, lends them money, in other words. The savings-bank invests its money more extensively in bonds, stocks and mortgages. The commercial bank performs its chief service to depositors by providing them with checking accounts and making loans to them. Paying them interest is only incidental. The savings-bank usually does not permit a checking account, but it pays a larger rate of interest. It is primarily for the investment of small sums rather than for financial convenience.

Savings-banks pay an average rate of interest running from three to four and a half per cent. There are several kinds of savings-banks, depending largely upon the laws of the states in which they are organized and located. In a few of the eastern states the only savings-banks permitted at all are the "mutual" kind, where all the earnings go to the depositors either as interest or as a surplus fund further to protect them. Except where the laws permit only these mutual institutions, savings-banks or savings departments in commercial banks and trust companies must be judged as other banks are, on their individual business merits. It should be added, however, that in many states the laws regulate so closely and carefully what investments shall be made that failure is rare in the extreme.

The very first step in investment is to learn to use a savings-bank. Don't save five or ten dollars and carry it around in your pocket. It will burn holes.

The savings-bank and the savings departments of other sound banks were instituted for the small saver. Their fundamental purpose is to assemble the savings of the masses, invest them wisely and pay over a goodly share of the profits by way of interest-dividends to the depositors. One savings-bank in New York City has paid out eighty-eight million dollars in interest on deposits in seventy-five years, nearly all to relatively poor people. In such an institution the small investor is on safe ground. He can not, as a rule, go wrong.

The advantages of a savings-bank for investment purposes are easy to state:

It has stood the test of time. More people invest their money in this way than in any other, except perhaps in life-insurance. There are more than four billion dollars in savings-accounts. About ten per cent. of the people of this country are depositors.

Safety

In addition to most careful laws regulating the investments of savings-banks, more rigid than are usually followed by individuals, is the highly important fact that the bank distributes its investments over such a wide variety of securities, that loss in one direction is minimized by the soundness of other securities. This the average individual can not afford to do in his own investments. In other words the savings-bank insures itself against total or even moderate-sized loss by the variety of its purchases. Recent statistics showed the total liabilities of failed savings-banks in proportion to the aggregate deposits of all such banks to be only about six ten-thousandths of one per cent. (.0006%). Deduction for the amount realized on the substantial assets of those few unfortunate institutions still further reduces the already infinitesimal loss to depositors.

Convenience

This is very great. The average investor is without experience or education in the selection of stocks and bonds and he can put his money in a savings-bank practically without the study or detailed investigation which is needed in making a direct investment, and receives almost the same income as from the very highest grade of bonds. He has to deal with small sums, in odd amounts and at irregular intervals, and even the largest savings-bank will take any sum over a dollar, and often as low as five or ten cents, at any time. There are very few other suitable investments for such small odd sums available at all times. In attempting to find them one often meets with bitter experience and loss.

Another convenience is that unlike most other investments any form of bank deposit may be converted back into money, usually without any notice whatever and at any moment without loss or shrinkage. Only in times of panic is the so-called thirty- or sixty-day notice rule enforced. While there is usually a maximum of deposits permitted to any one person, it is practically never below one thousand dollars, and usually as high as three thousand or five thousand dollars.

Compound Interest

The investor in bonds or stocks must collect his interest or dividends, and if he does not use the money, must attend personally to investing it. Interest allowed by the savings-bank at the end of a given period, if not withdrawn, is placed to the depositor's credit, and itself draws interest from that time on, thus automatically becoming a part of the deposit. That means a constant increase in the amount at interest, and in the interest payments, besides being a great convenience.

Freedom From Tax

In most states, savings-bank deposits are free from taxation by state or local authorities.

For those whose great consideration is convenience in paying bills by checks, or to a business man needing loans, an ordinary commercial bank or trust company is more suitable. To all other persons a savings-account is the way to start on the road to success. Great numbers of persons can afford and should have both kinds of bank-accounts.