Makin' Money

Back to the savings future?

Chris Farrell Mar 20, 2012

Here’s some portfolio advice from a 1929 Literary Digest article.

The first step in a safe and sane financial program is insurance. … After insurance, the next requirement is to build up a cash reserve of at least $1,000 in the savings bank. After that, automatic thrift should be contracted for through installment savings plans, such as building-and-loan associations offer. When these fundamental steps have been taken, the investor is in position to acquire high-grade bonds and guaranteed first mortgages on real-estate. The next advance can be toward diversified preferred stocks, which offer a somewhat higher return. … The last step should be outright purchase of the best grade of diversified common stock.

Sound familiar?

If you substitute Treasuries for guaranteed first mortgages and high-dividend blue-chip stocks for preferred, the portfolio advice mirrors standard investment advice for conservative investors. It’s managing your personal finances with a focus on limiting downside risk, rather than trying to create as much wealth as possible.

The recommendations remind me of the approach advocated by finance professor Zvi Bodie and financial advisor Rachelle Taqqu in their recently published, Risk Less and Prosper: Your Guide to Safer Investing. (I found the Literary Digest quote while reading a wonderful scholarly paper — Normal Investors, Then and Now — by Meir Statman, Professor of Finance, Santa Clara University’s Leavey School of Business.)

The article recommends establishing an automatic savings program with a building-and-loan association. It’s sound advice, although I’d substitute credit union for building-and-loan. It’s too bad that the automatic savings idea never got the institutional support it should have in past decades, at least once FDIC insurance and its credit union equivalent had been created.

Instead, after the Second World War industry and government worked together to boost borrowing over savings.

In a remarkable article for Fortune in 1956, journalist and social critic William H. Whyte, Jr., captured the borrowing ethos of the new suburban middle class. Budgetism: Opiate of the Middle Class essentially portrayed the middle class living on the installment plan.

They save little not because they cannot save — people have never been more prosperous. They save little because they do not really believe in saving. … The people who are most responsible for the dangerous increase in mortgage and short-term debt are younger couples in the $5,000-to-$7,500 bracket. Sober suburbia is their habitat. No pink Cadillacs, no riotous living. Eminently respectable are the young suburbanites; most of them are salaried members of large organizations; they are homeowners; they go to church; from one-third to one-half have gone to college; more will send their children to college; and about 65% of them vote Republican. And they are the true prodigals.

Whyte closed his article on budgetism musing on whether the installment debt dynamic could be used to encourage savings rather than borrowing. “So far, budgetism has operated largely to put more people in debt, but there is nothing inherent in the process that requires it to do that,” he writes. “Budgetism, essentially, is a person’s desire to regularize his income by having it removed from his own control and disciplined by external forces. But could not this urge be applied to savings, too?”

Yes, it could. Many people these days are setting up their own automatic savings programs. Technology makes it easier than ever. Nevertheless, the fundamental institutional obstacle remains: Lending to consumers is much more profitable than the business of encouraging consumers to save. The tax code, too, favors borrowing over savings. At the very least policymakers today should work to eliminate the bias of debt over equity.

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