You say that if we levy a tax upon mutual savings banks, you will have to pay less interest to your depositors. Well, that is exactly what the commercial banks have had to do. Why should it not be fair for you to do it as well as the commercial banks? If we levied a tax large enough so that you would not be able to pay 1 cent in interest, you would be in the same boat as a good many commercial banks. I do not see why that would not be fair. Now will you tell me why that would not be fair? Mr. SCHWULST. The commercial bank pays a tax because it has made profits. Mr. MASON. No; I do not want to know why it pays a tax. I want to know why it would not be fair to levy a tax on mutual savings banks which will bring about the same result as we have brought about with respect to commercial banks. Mr. SCHWULST. You will certainly reduce the interest rate that can be paid to depositors. Mr. MASON. We have done that with commercial banks, and, if we have done it with one, we ought to do it with the other. That is my philosophy, at least. Mr. SCHWULST. No. You are levying the tax in the case of commercial banks on the profit that remains. Mr. MASON. Whether it is on the profit or on the interest, it comes out of earnings anyway. Now, then, I have three little questions which I would like to have you answer, if you can answer them. Can you give me the total earnings of the mutual savings banks in 1950? Mr. SCHWULST. I would have to refer to my papers. Mr. MASON. If you cannot give that to the committee now, will you furnish it for the record? Mr. SCHWULST. I will be very glad to furnish it. I have it in my papers. Mr. EBERHARTER. Mr. Mason, will you yield? This is in answer to your question. Mr. MASON. I want the witness to answer the second question. What is the total amount of interest paid out to depositors by the mutual savings banks in 1950? Mr. SCHWULST. That would be about 14 percent. Mr. MASON. I do not want to know what the percentage is. I want to know what the amount is in dollars, the total dollars paid out in interest, and also the total retained as reserves. Those are the three things I want because they talk turkey to me, and on that basis I will vote to tax these mutual savings banks. That is all, Mr. Chairman. Mr. SCHWULST. I would like to give the answers, those three answers, for the record. I will give you the answer to that last question now. The amount of earnings paid out to depositors was approximately $360 million last year. Mr. MASON. What was the amount of earnings? Mr. SCHWULST. The figure I have just given you would be about 75 percent or 76 percent, or 77 percent of the total earnings. Mr. MASON. Then they kept 25 percent; is that it? Mr. SCHWULST. They kept about 20 to 25 percent. Mr. KEOGH. Mr. Chairman, may I ask a question? Mr. EBERHARTER. As a partial answer to the question asked by Mr. Mason, I want to place in the record at this point the statement that in 1941 the net current operating earnings were $46,300,000, while in 1948 the net current operating earnings were $302,388,000. Those figures apply to the mutual savings banks. Those figures are from the report of the staff of the joint committee presented to us in March 1950. Mr. KEOGH. Mr. Schwulst, in New York State we have the maximum limitation of seventy-five hundred dollars for an account, do we not? Mr. SCHWULST. That is right. A depositor can put into a savings bank in New York State not over seventy-five hundred of his own money. Mr. KEOGH. I wonder whether the statistical studies that you have made, and which you will submit in your supplemental memorandum, will contain a break-down showing what accounts are not in excess of $100 and what accounts are not in excess of $500, as well as what accounts are not in excess of $1,000. Mr. SCHWULST. I can give you the approximate figures now. Mr. KEOGH. Well, I would like to have, if they are available, the correct figures for the record showing how many savings bank depositors have less than $100 in their accounts, and so forth. Mr. SCHWULST. I will be very glad to supply you with information on those points. Mr. KEOGH. As a matter of fact, the philosophy of the mutual savings bank has to do more with the safety of the small man's earnings, does it not? Mr. SCHWULST. That is correct. Mr. KEOGH. Rather than making profits on those moneys? Mr. SCHWULST. That is right. Mr. KEOGH. That is all, Mr. Chairman. The CHAIRMAN. If there are no further questions, we will recess until 2:30 this afternoon. We thank you. Mr. SCHWULST. Thank you very much, Mr. Chairman and gentlemen. He Mr. REED. Mr. Chairman, I want to compliment the witness. has been through a long grueling order, and I think he has done very well. The CHAIRMAN. I compliment the witness on his familiarity with the subject and his adroitness in answering questions. Mr. SCHWULST. Thank you, gentlemen. (The following supplemental statement was later submitted for the record:) SUPPLEMENTAL STATEMENT OF NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS Mutual savings banks are nonprofit institutions. They were organized and are operated for the purpose of promoting thrift among persons of modest means. SIZE OF BANKS The savings banks are, on the whole, relatively small institutions. The median-size savings bank has assets of $14,100,000. As shown in the following table, more than half of the 531 mutual savings banks have assets of less than $15,000,000: Most of the mutual savings banks are old institutions, many of them over 100 years old. Only a few are less than 30 years old. Mutual savings banks are depositaries for small savers whose principal interest is the repayment of their deposits in full. The average savings bank account on December 31, 1949, was $1,005.50. On that date the average accounts, by States, were as follows: A recent survey made in 1949 by Dr. Irvin Bussing, manager of the research department of the Savings Banks Trust Co., revealed that 64 percent of the accounts in New York State savings banks are under $1,000, 22 percent between $1,000 and $3,000, and only 14 percent over $3,000. The maximum amount permitted in any individual account in a New York savings bank is $7,500. A very recent analysis of the accounts of a representative large savings bank in New York State showed that about 45 percent of the accounts were $500 or less. OCCUPATION OF DEPOSITORS Wage and salary earners constitute the largest group of savers in mutual savings banks. Dr. Bussing's 1949 study of the New York State savings banks showed the following breakdown of depositors by occupations: The occupations of depositors who opened accounts with the Philadelphia Savings Fund Society of Philadelphia, Pa., during 1949, excluding Christmas Club accounts numbering 40,241, were as follows: Many parents and other relatives open small savings accounts for minors. The mutual savings banks welcome and encourage these accounts and school savings accounts as a very important part of their program to promote thrift. A very substantial number of the depositors classified as "Miscellaneous or no answer" in Dr. Bussing's survey are no doubt minors. This is borne out by the experience of the Philadelphia Savings Fund Society. As shown above, 19,028 or about 33 percent of the 56,644 accounts were for minors. INCOME OF DEPOSITORS The mutual savings banks are institutions principally for people in the lower income brackets. According to a survey made in 1950 by the Federal Reserve Board, nearly 50 percent of the depositors in savings banks have incomes of less than $3,000 and nearly 77 percent have incomes of less than $5,000. OWNERSHIP OF BANKS The assets and earnings of the mutual savings banks are held solely for the benefit of the depositors. These banks have no stockholders or owners other than the depositors. They are managed by board of public-spirited trustees who hold and invest funds for the benefit of depositors. These trustees can have no financial interest in the operation or earnings of the banks, and they pay to depositors as interest all of the net earnings of the banks, except amounts required as reserves for the protection of the depositors. NATURE AND SOURCE OF RESERVES Mutual savings banks must have adequate surplus or reserves to absorb investment losses which experience has shown are both substantial and inevitable. Without surplus or reserves to absorb these losses, the banks could not meet their contractual liability to repay their depositors' funds at par. The trustees maintain surplus or reserves only at the levels required for the protection of the depositors' money. "Surplus" is a misnomer, since it implies the banks have assets in excess of deposit liability. In name and for accounting purposes they do. But in fact they do not. The history of the savings banks has demonstrated that their longterm investments are bound to depreciate over the years and that the book values do not necessarily represent amounts which can be realized on liquidation. The savings banks' surplus or reserves are simply reserves to cover these losses, and the banks' assets including surplus and reserves are merely adequate to pay off all deposits in full. Thus, a depositor who has $100 on deposit obtains the benefit of his share in surplus and reserves when he receives $100 without diminution for unrealized losses or depreciation in the bank's assets. Surplus and reserves are not accumulated for the purpose of creating an equity or a fund which will one day be distributed to depositors as an accretion to their deposits and accumulated interest. If, in the event of liquidation of a bank, there should remain funds over and above the amount of deposit liability, they would of course be divided among those who are depositors at that time. But this will probably never occur, since surplus and reserves are generally kept at the levels needed to insure payment of the deposits in full. The trustees have no motive for holding back more earnings than are required for this purpose. Savings banks have no capital stock or stockholders. The original guaranty fund is put up by public-spirited citizens. After this fund has been repaid, earnings are the only source of the surplus or reserves needed for the protection of depositors' funds. RETENTIONS OF EARNINGS NOT EXCESSIVE The trustees of mutual savings banks have no interest or motive to withhold earnings which are not needed as surplus or reserves to protect the depositors. The history of the mutual savings banks shows that the trustees have not retained earnings in excess of the required safety margin for depositors. Over the past 30 years the range between the high and low ratios of surplus or general reserve to deposits has been relatively narrow: In Massachusetts and New York, where most of the mutual savings banks are located, the State laws permit surplus accumulations of 154 percent and 25 percent respectively. In fact, the trustees did not retain enough earnings in the past. The losses incurred during the depression proved that the earnings previously retained and accumulated in surplus or general reserves were not adequate. As a consequence, the proportion of net operating income which had customarily been paid out as interest had to be drastically reduced, in order to make up the difference between accumulated surplus and losses and still maintain a reasonable marging of protection for the depositors. Whereas 80.4 percent of net current operating income was disbursed as interest in the period 1920 through 1930, this proportion was sharply reduced in the late thirties and early forties when losses were being taken and asset valuation reserves were being set up. This reduction continued in the middle and late forties in order that the modest surplus ratios above indicated could be maintained against the increases in deposits which occurred during the war and post war inflationary periods. The proportion of net operating income paid out was less than 70 percent during most of the period from 1939 through 1949, although it has been gradually increasing since 1945 as losses and asset valuation reserve requirements have progressively been provided for. The above required reduction in the proportion of net operating income that could be paid out in interest is reflected also in the reduction in the interest rate. That rate averaged 3.97 percent in the period 1920 through 1930, dropped to a low of 1.56 percent in 1946, and subsequently increased to 1.82 percent in 1949. Depreciation losses from 1931 to 1944, after all profits and recoveries, were so large that they would have wiped out 90 percent of the banks' general reserves or surplus accumulated up to that time. In Massachusetts, the published net loss sustained during that depressed period was nearly 25 percent greater than the banks' aggregate reserves at the end of 1930. Yet the ratio of general reserves to deposits in all these banks in 1930 was about one-twelfth larger than it was at the end of 1949. |