From the point of view of the convenience of the public there are advantages in the combination of all the banking functions in a single institution, and the success of trust companies to some extent has been due to this cause, but they have also profited from the unequal competition which exemption from certain limitations imposed on state and national banks has enabled them to enjoy. The removal of the conditions which result in this unequal competition, a process already in progress and likely to continue to completion, will reveal the strength of the advantages of combination versus specialization of functions. Previous to such a revelation it will be impossible to determine whether or not the trust company form of organization is destined to become the dominant one.
3. Bond Houses and Investment Companies
A large part of the business of investment banking in the United States is conducted by corporations and firms organized for the purpose of buying and selling investment securities, especially bonds and mortgages. Rarely, if ever, do these concerns conduct savings accounts. Ordinarily they confine their attention exclusively to the investment end of the business and act in the capacity of jobbers, or brokers, or both.
Within the investment field some of them specialize closely and others deal in a wide range of securities. The specialties most frequently followed are government, state, and municipal bonds, railroad bonds, public service securities, timber bonds, irrigation bonds, and real estate mortgages. Specialization involves the development of expert knowledge of the class of securities dealt in and thus of special serviceableness to both investors and the promoters of the enterprises or the public bodies which issue the securities. These specialists sometimes serve as middlemen between the issuers of securities and other investment banks, as well as between them and the real owners of the capital invested, their expert knowledge being of service to the former as well as the latter.
Until recently there have been few attempts to regulate the operation of these institutions by law, but the fraudulent practices of some of them, and the ignorance and weakness of perhaps the majority of investors, have recently created in some quarters a strong public sentiment in favor of such regulation. In several states legislation has resulted, of which the most noteworthy is the so-called "blue sky laws" of Kansas and some other states.
In details these laws differ widely from one another, but they are alike in that they impose upon some branch of the state government the obligation of supervising both companies which issue securities and those which offer securities for sale. The Kansas law, the first of this kind passed in the United States, has been considered too drastic by most of the companies that have attempted to operate under it, but the Wisconsin law, which went into effect October 1, 1913, is looked upon with more favor.
In formulating these and other laws for the proper regulation of these concerns, it has been found difficult to provide adequate protection to the investing public without unduly hampering the issue and negotiation of securities, but this difficulty should, and in time doubtless will, be overcome. A free and open market for bonds, stocks, and other evidences of indebtedness is essential to freedom of enterprise and mobility of capital, which are in turn essential to the economic prosperity of any country. On the other hand, investors undoubtedly need and deserve the protection of the state against misrepresentation and fraud. It is practically impossible for them in many, perhaps in most, cases to obtain the information necessary for self-protection. The matters and conditions to be dealt with in such legislation are so complex and subject to such frequent change that laws are apt to be imperfect, inefficient, or obstructive. It seems probable that those which do not attempt to be specific and detailed, but give wide powers and discretion to administrative boards or commissions, are most likely to be successful.
4. Land Banks
In Europe an important group of institutions has developed for the supplying of agriculture and the building industries with the capital needed in their operations. The greatest number and variety of these are in Germany, in which their development has been continuous since the days of Frederick the Great.
In order to assist in the recuperation of his kingdom from the devastation caused by the Seven Years' War, Frederick caused the land owners of certain provinces to be organized into associations called Landschaften, which were authorized to issue mortgage bonds on the joint security of the lands of all the members of the association in exchange for mortgages on the lands of individual members who needed funds for the improvement of their estates. These mortgages were made payable to the association in the form of small annuities, to which were added the interest paid on the bonds and an increment for the payment of the expenses of the association.