Where ‘Habits of Economy’ Were Shaped

By Evan Sparks

On a chilly November day in Philadelphia in 1816, Condy Raguet was walking down Chestnut Street, mulling over reports he had read about the then-novel savings bank model in Great Britain for helping the poor.

Raguet—a rakishly handsome 32-year-old merchant, Caribbean traveler and literary man—ran into a few friends along the way and asked them if they had heard of the concept. Without stopping for a reply, he implored them: “Would you unite with me in the endeavor to establish one?”

The friends had heard of the savings banks and instantly wanted to cooperate with Raguet, resolving to meet again in five days’ time. On Nov. 25, Raguet and 11 other prominent young Philadelphians hammered out the principles of the Philadelphia Savings Fund Society. By Dec. 2, the bank was open for business at the office of one of the founders—less than two weeks from conception to operation—with deposits being accepted on Mondays and withdrawals being paid out on Thursdays. With five dollars, Raguet’s African-American manservant, Curtis Roberts, became the bank’s first depositor.

Like Raguet, Bostonian James Savage was also 32 and had cut his teeth in Caribbean trade—this time selling blocks of New England pond ice to cool-craving islanders. Savage read a report from the London Provident Institution for Savings, and he decided a similar savings bank would be of great benefit to Boston, “by supplying to the industrious poor a place of safe deposit for their savings,” as a biographer relates. “In this way, habits of economy would be gradually formed and encouraged.”

Savage spread the word among his peers, and not two weeks after the Philadelphia Savings Fund Society opened for business, 48 of Boston’s leading men incorporated the Provident Institution for Savings on similar principles. It opened for business early in 1817.

Meanwhile, in 1816 New York, the great philanthropists Thomas Eddy and John Griscom had also gotten word of the “friendly societies” in Britain and were seeking to establish one in their hometown. (It took them a little longer due to skepticism about granting new banking charters in the legislature; the New Yorkers had to wait until 1819.)

A savings bank wave swept through the cities and towns of the young republic. Savings banks were established in Baltimore and Salem, Mass., in 1818; in Hartford, Conn., and Providence and Newport, R.I., in 1819; and Albany, N.Y., in 1820. The Baltimore bank founders essentially copied the founding documents of the Philadelphia bank.

That the savings banks in Philadelphia, Boston and New York were launched virtually simultaneously seems like dumb luck—and thus all three cities are credited with kick-starting the American savings bank movement. But they were singing from the same sheet of music. The savings bank was a perfect fit for the America of its time, and it would fundamentally transform the way Americans thought about their money.

The business of savings

While nearly 90 percent of the U.S. population today is served by banks, in the early years of the republic, the principal function of banks was to create money in the form of commercial loans and banknotes. Their services, provided through a monopoly granted by their state charters, were generally only available to the well-to-do.

Add to this the ongoing political controversy over the Bank of the United States, whose charter lapsed in 1811 and was renewed in 1816. After the War of 1812, the United States was plunged into a deep recession that capped off with a financial panic in 1819. And during the period without a central bank, state-chartered commercial banks had proliferated, leading to a massive increase in low-quality banknotes and a bout of inflation. Banks were not widely seen as a friend of the common man.

Savings banks were the first step to building that trust. We tend today to take the security of money for granted, but 200 years ago, few people had a safe place to store money—especially dwellers in the swelling East Coast cities, where wealth was not stored in farm assets, where complex markets had long limited the usefulness of barter and where theft was always a possibility. In 1790, five percent of Americans lived in cities. By 1820, seven percent did—and 11 percent did in the Northeast. By 1850, more than 15 percent of Americans were urbanites, including a full quarter of northeasterners.

Cities were full of institutions designed to part unwary workers from their money, from theaters to taverns to gambling houses. Even the prudent savers would, in time, find themselves importuned by grifting relatives and acquaintances for “loans” that would never be repaid. As the Bank for Savings in the City of New York’s managers observed, “In every part of an active population, and particularly in large cities, the difficulty of procuring the reward of labor is not so great as the power to preserve it.” But commercial banks were uninterested in these small but meaningful sums. “The Banks for Savings provide almost the only remedy,” the report continued. “They give security to the depositor, improve his little stock, and, at fixed periods, allow him to withdraw the whole, if his inclination or interest should prompt him.”

This concept is utterly universal in the present, with perhaps the exception in our low-interest-rate world that the stock is being little improved. But it was a truly novel and appealing approach 200 years ago.

The earliest savings banks focused entirely on the working classes. As Thomas Eddy put it, savings banks “are certainly most admirably calculated to be beneficial to the poor, by promoting among them a spirit of independence, economy and industry.” Mechanics, sailors, clergymen, laborers, tradesmen, apprentices, men and women in domestic service, minors, widows and orphans were all counted among savings bank customers. To maintain this focus, the bank in Baltimore capped total deposits at $500.

The savings banks took deposits, invested in government securities and other yielding instruments and paid interest of 4 to 5 percent. In 1820, the Bank for Savings in New York was authorized to hold real estate loans in order to diversify its assets. Even as the class of permissible assets was expanded in different states over time, it remained limited to collateralized loans, such as mortgages, and preferred stocks.

The banks had found a pressing need, and they grew fast. In Baltimore, by 1840, the first savings bank there counted 10 percent of the population as its customers. The managers of the New York bank optimistically expected $50,000 of deposits in its first year. It attracted three times that in half the time. After just six years in operation, 9,000 depositors were holding $1.4 million at the bank.

Mutual savings banks continued to grow, but not uniformly; they remained concentrated in the small towns of New England and the large cities of the east. But the mutual idea infused other efforts. In 1831, the first building and loan was chartered near Philadelphia and quickly spread through Pennsylvania and across the country, where the need for new housing stock was more pressing than in the urbanized east.

Thrift and generosity

Although designed to be self-sustaining from deposits, the first savings banks were genuinely philanthropic enterprises. They were initially capitalized by contributions from leading citizens for the benefit of the less well-off. In Philadelphia, each of the bank’s 25 corporators paid $10 to cover administrative expenses; those who wished to contribute more could give to an auxiliary fund.

These first savings banks, started as philanthropies, were mutually owned—the trustees held no ownership and took no dividend. To make the trustees’ contributed dollars and the depositors’ saved pennies stretch further, volunteerism was the order of the day. At the Bank for Savings in New York, the trustees took turns “attending” at the bank each month, taking deposits and keeping the books—which helped the trustees get to know their depositors, built up the trust of the depositors in the bank and gave depositors access to the trustees’ free advice and counsel. Trustees took their duties quite seriously. In Philadelphia, Savings Fund Society treasurer George Billington is said to have slept with both the deposits and a revolver under his pillow.

The philanthropic mission of savings banks was clear to their early leaders. James Savage noted that the Provident in Boston did its “greatest good” in affording laborers, servants and artisans, “who constitute two-thirds of our population, a secure disposal of their little earnings, which would otherwise be squandered, or unwisely lent out to petty fraudulent dealers.”

Savings banks arose in the context of a nationwide religious revival whose theological underpinnings emphasized thrift. Historians credit savings banks with infusing the broader U.S. banking sector with this virtue. A century ago, James Manning wrote that “banks are abandoning their traditional attitude of mere passivity and are becoming active, effective stimulators of thrift among all classes of the people, thus fulfilling an educational function of the utmost importance.”

The savings bank legacy is also a reminder of the power of the human touch in banking. “Despite all our vastness and the intricacy of the apparatus we have devised for the transaction of business, whether it be that of a Savings Bank or of a merchant prince,” wrote Manning, “the human factor—the individual personality in contact with other individuals—still holds the reins of power.”

‘It’s a reminder’

The 20th century brought great changes to savings banks. Customers who started out poor became middle-class, and as the banks’ clientele became more refined, they attracted even more middle-class customers. Increasing competition for small deposits led many banks to advertise and diversify. Regulatory consolidation and tax changes reduced distinctive features of savings banks, pushing many mutuals to convert to stock banks and diversify further. Deposit insurance cut into the message of unique security that savings banks had promoted to their depositors for so long.

And while the savings bank is no longer as distinct a form as it once was, today’s savings bank leaders cherish the legacy. In many cases, it’s embodied in bank names like the Dime Community Bank in Brooklyn or the Cape Cod Five Cents Savings Bank in Massachusetts.

“Some people allege that it was because it took five cents to open an account,” says Cape Cod Five Chairman, President and CEO Dorothy Savarese. “Another more common theory is that it was to encourage thrift, and that they were encouraging the fishermen and the cranberry farmers here to put five cents a week into their savings.”

Cape Cod Five is today a full-service community bank offering deposit and payment products, mortgages, commercial loans and wealth management. But the 161-year-old bank is sticking to its old-fashioned name. “We’ve maintained the name even though some people think it’s an anachronism,” says Savarese. “To us—it’s a reminder.”

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About Evan Sparks

Evan Sparks
Evan Sparks is editor-in-chief of the ABA Banking Journal and vice president for editorial services at the American Bankers Association.