Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

It seems unnecessary to incorporate the state banking laws in this edition. Nearly all the States, except the newer States and Territories, have special chapters in their corporation acts concerning banks and moneyed institutions, but these chapters are usually of old date, and have practically been superseded for so long a time by the national banking laws that they have become obsolete in use and form.

The increasing attention paid in recent years by the state legislatures to the regulation of the state banks has been partly due to the rapid growth of the banks in numbers and in financial importance; but it is to be accounted for primarily by a change of view as to the purpose of banking regulation. The antebellum state-bank regulations were intended to secure the safety of the bank note. Although the depositor was protected by many of the regulations, this protection was purely incidental. The view that note-issuing banks alone required governmental regulation persisted for a considerable time after the passage of the national-bank act. Since the national banks had a monopoly of the issue of bank notes, the regulation of state banks was considered needless. As the importance of note issue as a banking function decreased, banking regulation, as seen in the national-bank act, began to be considered desirable as a protection to depositors.

The Evolution of the Trust Company

With the exception of the power to issue notes, which would be unavailable because of the tax on note issue, the powers of the state banks of to-day are essentially the same as the powers of the state banks which were in operation before the Civil War. On the other hand, the trust company is a new type of banking institution, the functions of which are even yet not clearly defined. A great part of the legislation with reference to trust companies, therefore, has had to do with defining the powers of these corporations.

The early laws for the incorporation of trust companies show the widest differences of opinion with regard to their field of operation. The one point of agreement appears to have been the idea that a corporation could administer trusts more advantageously and safely than an individual. But the companies in all the States were given additional powers more or less closely connected with their trust powers. Some of the companies, chiefly the very early ones, were empowered to insure lives and to grant annuities. In a considerable number of States the companies were authorized to insure the fidelity of persons in positions of trust and in some States to insure titles to land. Almost all the companies were empowered to do a safe-deposit business. Among these powers there was a certain apparent connection. The power to insure the fidelity of trustees, administrators, and executors seemed a natural addition to the powers of a company which might act in such capacities. Similarly, it appeared that the business of insuring titles to land was one which could be most economically conducted by a corporation which, in its capacity of trustee, would be a large owner of real estate.

One other power was given to practically all the companies—the power to receive deposits of money in trust. The following quotation from the Report of the Massachusetts Commissioners of Savings Banks for 1871 shows the use which it was expected would be made of this power:

The trust company in Worcester and the New England Trust Company in Boston, both in successful operation, are the first of such corporations established in this State. They were incorporated after a very careful investigation by the legislature, with power to hold money in trust, and so restricted in making loans and investments as to afford the safety which the character of their business requires. A similar institution will soon be organized in Northampton, and others are contemplated. They are well calculated to promote public interests by affording to the owners of capital not engaged in business many of the advantages secured by our savings-bank system for the savings of labor.

The development of the trust company as reflected in the legislation with reference to its powers shows two main tendencies: (1) The companies have to a very large extent given up the insuring of the fidelity of persons in positions of trust and the guaranteeing of land titles. (2) They have largely increased their banking activities.

1. In some States which formerly authorised trust companies to insure the fidelity of persons in positions of trust, or to guarantee titles to real estate, the more recent laws do not permit the combination of such business with the business of a trust company.

The fidelity insurance business during the past twenty years has been largely concentrated in the hands of a comparatively small number of companies which have agencies in all parts of the country and which do not undertake a trust or banking business. The elimination of fidelity insurance from the functions of the trust company has not been chiefly or even largely due to adverse legislation, but to the nature of the fidelity insurance business. The most successful conduct of that business appears to require, like other kinds of insurance, that the risks shall be numerous and widely distributed. These conditions are best met by companies which carry on business in many different places.