Thrifts

In a speech on March 3, 2010, then Harvard Law professor Elizabeth Warren characterized the current landscape of the US financial system as one that pits families versus banks. Warren was arguing for the need for a consumer financial protection agency to protect families against the deceptive practices of the banking industry.*

Warrens plea is only the latest round of families, or the little people, trying to get access to financial services. Throughout the eighteenth and nineteenth centuries, commercial banks were just thatbanks that focused on commercial or business customers. Commercial banks during that time were not that interested in offering accounts to individuals or households, especially if those households were headed by members of the working class.

The first financial institutions to focus on serving families, especially working-class families, were the thrifts: savings banks and Savings & Loans. In this chapter we examine the evolution and current status of thrifts as well as credit unions. We examine these depository institutions in their attempt to provide financial services to families, or the little people. We will see that in doing so, these small depository institutions have created a fair amount of controversy. We also scrutinize one of the most controversial entities that strives to provide financial services to those outside the commercial banking system: finance companies. We look into the products provided by finance companies in order to gain a better understanding of the controversies that surround them.

Savings Banks

What are known today as savings banks were earlier called mutual savings banks or simply mutual savings associations. The mutual in the name represents the fact that these depository institutions were mutual associations; that is, they were owned and controlled by the depositors. The original intent of savings banks was to promote savings among societys poor.

The first savings bank is believed to have been formed in Hamburg, Germany, in 1778.* Although the Hamburg institution took deposits and spare cash of domestic servants and handicraftsman, they issued annuities instead of offering deposit accounts.* A few years later, in 1798, a Friendly Society for the benefit of women and children was established in Tottenham, a district of north London in England. The society also issued annuities to members, almost all of whom were poor orphans and widows, but the society also provided payments during times of illness, or a single larger payment for burial in case of death. Two other objectives of the society were to fund loans and create a bank for savings for the poor of Tottenham. In 1804 this bank for savings was formally organized and began operations.

Some believe the first savings bank was created in 1799 by Reverend Joseph Smith of Wendover in southeast England. Reverend Smith circulated in his parish a proposal to take deposits from his working-class parishioners during the summer months and return these deposits plus one third at Christmas. Reverend Smiths entity supposedly began operation shortly thereafter, making its start date 1800.

Savings Banks Come to the United States

While the debate over which of these European institutions can claim to be the first savings bank in the world goes on, it is clear that they each had a similar goal: provide a way for the poor in society to save. They both sought a way to bring some type of financial services to the least fortunate in society.

In the United States there is much less debate over who was the first to form a savings bank with a goal of increasing savings among the poor and working class. In 1816 the Massachusetts state government sanctioned the creation of a savings bank. The plans for the savings bank were put forward by the Honorable James Savage of Boston earlier that year. The first public announcement of Savages idea appeared in a small religious monthly publication in December 1816, in which he espoused the importance of helping the poor and working class to help themselves through savings. Savages Provident Institution for Savings was approved by the Massachusetts legislature on December 13, 1816.

Provident began operation the following spring, promising to pay depositors a 1% return quarterlymore if the institution could afford it. The first 1% dividend was declared and paid in July 1817. Thereafter, a 1.25% quarterly dividend, or a 5% annual percentage rate, was paid until 1822. This represented the first time the poor and working class in the United States had a depository institution that focused specifically on their needs. Provident continued in operation for 176 years, until 1992, when it was purchased by Fleet National Bank of Massachusetts.

Today savings banks still are found mostly in the northeast United States, and they seek to serve a wider range of households, not only the working poor. Over the preceding decades savings banks have continuously evolved and expanded. Today savings banks look much like other thrifts: Their deposits are insured by either the FDIC or a state-regulated deposit insurance scheme, and they provide financial services to a wide variety of customers. Because they focus in particular on serving their consumer depositors, most savings banks today are relatively small, with assets of less than $1 billion. By way of comparison, JP Morgan Chase had a little over $2.5 trillion in assets in 2014.

Respond: What was created as a means for the poor and working class and extends to a much deeper issue, discrimination?