New York City Mutual Savings Banks, 1819-1861 by Alan L. Olmstead

Author:Alan L. Olmstead [Olmstead, Alan L.]
Language: eng
Format: epub
Tags: Nonfiction, History, Americas, United States, 19th Century
ISBN: 9781469648064
Publisher: The University of North Carolina Press
Published: 2018-07-25T04:00:00+00:00

INVESTMENTS DURING A PERIOD OF HIGH INTEREST RATES

The available annual investment data conceal rather wide transitory monthly movements, so it is necessary to find a fairly prolonged period of high interest rates in which to apply this model. Such a period existed during the entire year of 1848 when commercial bank discount rates reached a plateau “that has rarely, if ever, been duplicated in the decades for which we have any sort of data. Rates did not fall below 13-1/2 per cent for any month throughout the whole calendar year 1848, and they averaged nearly 15-1/2 per cent in those twelve months.”19 During this same period, the decline in bond prices increased the yield the banks could have expected on this type of investment.20 With a spread of at least 7 percent between the maximum rate that mutuals could legally charge and the short-term rate then current, there was substantial room for personal gain if trustees had wanted to take advantage of the situation.

A look at the portfolios of the Bank for Savings and the Bowery shows that both institutions reduced the amount they had outstanding on mortgages during the year. As illustrated in Table 14, both of these banks experienced relatively slow deposit growth in 1848, which helps explain why their bond holdings increased only moderately. But the fact remains that they both purchased new government issues at the expense of their loans on real estate. If they had wanted to profit from their position at the expense of their depositors’ overall interest, they could have transferred some of their assets out of government securities in order to have more funds available to loan.21 Trustees could also have profited by increasing their deposits in commercial banks of which they were stockholders. In 1848 the Bank for Savings decreased its commercial bank deposits by over $100,000. The Bowery increased its deposits by about $75,000 between January 1848 and January 1849, but a look at the monthly data for this mutual indicates that in January 1848 its commercial bank deposits as a percentage of assets had fallen to 6.2 percent, the lowest level since 1840. Furthermore, its average monthly balance during 1848 was lower than it had been since 1843.

The evidence strongly suggests that the trustees of the Bank for Savings and the Bowery were basing their investment decisions on market conditions (given legal constraints) in order to maximize the rate of return on their portfolios—this was consistent with their depositors’ interests. Evidence also suggests that in doing so they were foregoing possible personal gain. The data for the Seamen’s, although not so clear-cut, lead to the same conclusion.

The Seamen’s was the only mutual with a substantial amount of new money to invest during 1848 (over $700,000). Its funding committee invested approximately $345,000 in stocks and lent about $315,000 on mortgages. The bank also increased its commercial bank deposits by about $62,000. Because of the bank’s rapid growth, this increase in its commercial bank deposits (which constituted less than 1 percent

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