STATE BANKS AND TRUST COMPANIES SINCE THE PASSAGE OF THE NATIONAL BANK
ACT
[140]The banking institutions of the United States other than national
banks are ordinarily classified into (a) state banks, (b) trust
companies, (c) stock savings banks, (d) mutual savings banks, and (e)
private banks. The following pages deal with two of these classes, viz.,
state banks and trust companies. It will be desirable at the outset to
distinguish them from the other classes, and to outline the history of
legislation concerning them since 1865.
The term "state bank" has been used in the United States in several
different senses; but whatever the variance in meaning, such banks have
always had one common characteristic--incorporation under state
authority. In the bank reports of some of the States, private banks are
not distinguished from state banks. This is due to the fact that in
these States incorporated and unincorporated banks are subject to the
same regulation. A private bank, however, is an unincorporated bank.
Not all banking institutions incorporated by the States are state banks.
Mutual savings banks, stock savings banks, and trust companies are also
corporations organized under state laws or charters granted by state
legislatures. The distinction between mutual savings banks and state
banks is clear. Mutual savings banks do not have a capital stock and do
not carry on a discount and deposit business--_i. e._, they do not
discount commercial paper, and do not receive demand deposits payable on
check. State banks, on the other hand, have a capital stock and carry on
a discount and deposit business. Many state banks, however, receive
also savings deposits. The line of demarcation between state banks and
stock savings banks is much less definitely marked. Both state banks and
stock savings banks have a capital stock. Stock savings banks are
primarily savings banks, and many of them do not do a discount and
deposit business, but confine themselves to the savings bank business.
But in several States the distinction between state banks and stock
savings banks is of the most unsubstantial character, since the stock
savings banks carry on the business of a commercial bank, receiving
demand deposits payable on check, and discounting commercial paper.
Finally, the distinction between state banks and trust companies is not
exactly the same in any two of the States.
"State banks" then, as the term is used in the following pages, are
banks of discount and deposit (as distinguished from savings banks,
mutual and stock) incorporated by one of the States or Territories (in
contrast with private banks, which are unincorporated, and with national
banks, which are organized under the national-bank act).[141]
In 1860 there were in the United States 1,562 state banks. Owing to the
repressive influence of the national-bank act, hastened in its effect by
the 10 per cent. tax on state-bank notes, the number of state banks had
by 1868 fallen to 247. One result of this decline in the number and
importance of state banks was the cessation of state banking
legislation. The old laws regulating state banks of issue were swept
away by code revisions, or remained obsolete and unchanged on the
statute books.
The number of state banks began to increase about 1870. In a few States
old banking laws intended for the regulation of banks of issue hampered
their development, but in the remaining States they were left for a
considerable period almost entirely without regulation. As late as 1892,
in his digest of the state statute law, Mr. Stimson said:
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.
For the most economical conduct of the title insurance business an
expensive plant is necessary. The business in each city tends therefore
to fall into the hands of a single company, which ordinarily finds it
profitable to devote itself entirely to the one kind of business. At the
present time, only a very small part of the trust companies in the
United States insure titles to land.
2. The second great tendency in the development of the powers of the
trust company--the enlargement of its banking powers--has also been
primarily an economic development and not one due to legislative design.
As has already been noted, the early trust companies ordinarily had
power to receive trust deposits and to loan money. Some such powers were
necessary for the exercise of their trust functions. The opportunity to
enlarge the banking powers of the companies lay in the difficulty of
distinguishing clearly between the powers which it was intended to
confer upon the trust companies and the banking powers possessed by
state and national banks.
In the greater number of the States the wording of the sections
conferring powers to do a trust business was such that the trust
companies were either held by the courts to be empowered to do a banking
business, or, if the power to do such business seemed not to be granted,
were able by some change in the method of doing the kind of banking
business in question to bring it within the powers actually conferred.
In Missouri, for instance, since 1885 trust companies have been
empowered to "receive money in trust and to accumulate the same at such
rate as may be obtained or agreed upon or to allow such interest thereon
as may be agreed." The supreme court of Missouri in construing the power
thereby conferred has held that a trust company can take only
interest-bearing deposits, but that such deposits may be demand deposits
payable on check. The rate of interest may, however, be nominal.
In other States the trust companies have attained legal recognition of
their banking powers by slow steps. The history of the Pennsylvania
trust companies affords an illustration. In the Pennsylvania general
corporation act of 1874 no provision was made for the formation of trust
companies, but provision was made for the incorporation of
title-insurance companies. By an amendment to the corporation act in
1881 title-insurance companies with a capital of at least $250,000 were
given trust and fidelity-insurance powers; but it was expressly provided
that such companies were not authorized thereby to do a banking
business. In 1885 the trust companies were given the power to receive
upon deposit for safekeeping valuable property of every description, and
in 1895 trust companies were given power to "receive deposits of money
and other personal property and to issue their obligations therefor ...
and to loan money on real and personal securities." In 1900 the United
States circuit court of Pennsylvania decided that Pennsylvania trust
companies might legally receive demand as well as time deposits.
Pennsylvania trust companies apparently even now cannot discount
commercial paper, but they may loan on it as collateral and may purchase
it from the holder.
The States in which the banking powers of the trust companies have been
most narrowly restricted are Iowa, Michigan, Nebraska, and Wisconsin. In
Nebraska a trust company cannot do a banking business. In Iowa trust
companies cannot do a banking business except that they may receive time
deposits and issue drafts on their depositories. In Michigan trust
companies are expressly forbidden to do "a general banking business."
The Michigan commissioner of banking in his report for 1906 complained,
however, that the law was not clear as to the banking powers of the
companies. In Minnesota the trust companies may receive trust deposits,
but may not "engage in any banking business except such as is expressly
authorized for such a corporation." In Wisconsin the extent of the power
of trust companies to receive deposits was much debated until 1909, when
the legislature provided for the incorporation of "trust-company banks,"
which have power to receive time and savings deposits, but do not have
power to receive deposits subject to check.
The result of the two tendencies described above--the elimination of the
insurance powers of the trust company and the addition of banking
powers--has gradually standardized the powers of the trust company,
until at the present time the trust company, as it appears in the
corporation laws of most of the States, may be fairly well defined as a
bank which has power to act in the capacity of trustee, administrator,
guardian, or executor.
In a number of States the legislation concerning trust companies deals
with them explicitly from this standpoint. The Illinois bank act of 1887
provided that any bank might have power to execute trusts by complying
with the trust-company law. In Alabama and Tennessee any state bank may
be appointed and may act as an executor, administrator, receiver, or
guardian. In Mississippi any bank with a paid-up capital of $100,000 may
do a trust-company business. In Georgia any trust company may acquire
banking powers by complying with the laws regulating banks. In Texas
banks may acquire trust-company powers. The same tendency is shown in
the important banking laws enacted in Ohio in 1905 and California in
1909.
The gradual change from the view that the trust company is an
institution of markedly different character from the ordinary bank of
discount and deposit to the view that the trust company is merely a bank
exercising functions additional to those exercised by the majority of
banks has been the chief influence in determining the form of the legal
regulations imposed upon trust companies. As long as the older view
obtained, the regulations concerning trust companies were widely
different from those imposed upon banks; but as the trust company has
increased both the scope and amount of its banking business, the
regulation of the banking business of the trust company has tended to
become assimilated to the regulations imposed upon state banks.
INCORPORATION
Since 1865 state banks and trust companies have been incorporated by the
use of one of three methods: (1) By special charter; (2) under the
"business incorporation law"; (3) under the general banking law. Not
very many of the States have used consecutively all three methods, for
the special charter and the "business incorporation law" were used
contemporaneously in different sections of the country. Both have given
place, in the great mass of States, to the general banking law. From
1865 to 1875 probably the greater number of the banks formed were
incorporated under special acts; from 1875 to 1887 incorporation under
the "business incorporation law" was the prevailing method, and since
then the general banking law has become the almost universal method of
incorporating banks and trust companies.
CAPITAL AND SURPLUS REQUIREMENTS
When the States began to give attention to the regulation of the banking
business the question of capital received immediate attention. The
national-bank act and the banking laws in New York and the Middle West
which had survived from the antebellum period contained provisions
concerning the amount and payment of capital. A requirement with regard
to capital was recognized as the central point in any system of bank
regulation. The capital stock is a buffer interposed between the bank's
creditors and losses which the bank may suffer. If there is no capital,
losses may fall directly on the creditor, and the larger the capital
stock, other things being equal, the less the likelihood of loss to the
depositor.
The States and Territories may be divided roughly into two groups
according to the amount of the smallest permissible capital for state
banks:
1. In the Eastern States and the more easterly of the Middle Western
States, the banking laws, with one exception, require that banks shall
have a capital of at least $25,000.
2. In the other sections of the United States banks in most of the
States are incorporated with a capital as small as $10,000, although in
a few of these States the smallest permissible capital is $15,000,
$20,000, $25,000, and $30,000, and in one, North Carolina, it is $5,000.
The amount of capital required, except in a few States, is not a uniform
amount, but is graded, usually according to the size of the city in
which the bank is located. In 29 of the 37 States and Territories which
require under a general law a specified amount of capital for the
incorporation of state banks the amount of capital is thus graded. The
grading of the amount of capital required according to the population of
the place in which a bank is located has been chiefly due to the desire
to bring about some adjustment between the capital of each bank and the
volume of its business. It is assumed that the larger the business of
the bank the greater the chance of its suffering large losses and the
larger the capital necessary to protect its depositors against loss. It
is also assumed that the size of the city in which it is located is a
rough index of the volume of business done by a bank. Under many of the
state banking laws the grades are very numerous. The minute gradation of
the capital requirements found in many of the state banking laws is due
to the desire to encourage the formation of banks in the smaller cities
and towns, for it is to be noted that in the greater part of the state
laws the grades are not numerous for the larger places.
Obviously, if any law requiring a minimum capital for banks is to be
effective, it must provide specifically for the payment either of all
the capital or of a specified sum; otherwise the directors of the bank
may require the payment of only a small part of the capital. The
provision in the national-bank act concerning the payment of capital has
been the model for similar provisions in the banking laws of a large
number of the States. Many of the state banking laws likewise contain
the same provision as the national-bank act with reference to surplus.
In several States the laws make no provision with reference to the
amount of capital required for a trust company. In Connecticut,
Delaware, New Hampshire, and Vermont, trust companies are incorporated
only under special acts and the amount of their capital is determined in
each particular case by the legislature. In Rhode Island trust companies
are incorporated by a board which has power to fix the terms of
incorporation, including the amount of capital.
The first general laws for the incorporation of trust companies in the
United States required such companies to have a much larger capital than
that required for banks, but the later legislation shows a distinct
tendency in the direction of lowering the requirements in regard to
capital. In nearly all of the States, however, the requirement for trust
companies is still substantially different from that for state banks.
The smallest permissible capital for a trust company ranges from $5,000
in North Carolina to $1,000,000 in the District of Columbia. The
majority of the States, which provide that trust companies must have a
specified minimum capital, do not permit the organization of trust
companies with a smaller capital than $100,000.
In only one State, Iowa, is the smallest permissible capital less for
trust companies than for state banks; in six States it is the same; in
all the others it is larger. The accumulation of a surplus is not
required in so many States for trust companies as for banks.
LIABILITY OF STOCKHOLDERS
With the practical prohibition of the issue of state bank notes in 1866
and the consequent decrease in the number of state banks, the liability
of stockholders in state banks became in nearly all of the States,
except where an additional liability was imposed by the constitution,
the same as that of stockholders in ordinary business corporations.
Since 1880, however, provisions imposing an additional liability on the
stockholders of banking corporations have been placed in the banking and
trust-company laws of nearly all the States in which state banks or
trust companies have assumed any great importance. In the larger number
of the States and Territories the liability is a proportionate one, and
the stockholders are responsible "equally and ratably and not one for
another."
The imposition of the statutory liability on the stockholders of state
banks and trust companies has not proved of great service as a
protection to bank creditors against loss. As yet little has been
accomplished in the way of making the enforcement of the liability
effective.
RESTRICTIONS ON LOANS AND DISCOUNTS
The desirability of some legal limitation on the extent of the liability
to a banking institution which any one person, firm, or corporation may
incur is largely due to the fact, that, since the American banking
system is a system of independent banks, the resources of many of the
banks are necessarily small in comparison with the needs of some of
their customers for loans. A large manufacturing concern located in a
small town may very well be able to use all the assets of the local
bank. If the local bank were the branch of a larger bank, the mere fact
that a large loan was wanted by a manufacturer in a small town would be
of no significance, since the amount of the loan would be small compared
with the total assets of the bank.
Moreover, in many banks a controlling interest is held by a person,
firm, or corporation that is actively engaged in other business
enterprises. Such control is far more likely to be found in small banks
than in large, and in a system of independent banks than in one of
branch banks. One consequence of the close identification of interest
thus brought about between banking and other business enterprises is the
probability that loans will be made directly or indirectly to some one
borrower to an amount larger than a proper distribution of risks would
justify.
The national-bank act in its original form provided that the total
liabilities to any national bank of any person, company, corporation, or
firm for money borrowed should not exceed one-tenth of the amount of the
paid-in capital stock of the bank. The liabilities of the members of the
firm or company were to be included in the liabilities of the firm or
company. It was provided, however, that "the discount of bills of
exchange in good faith against actually existing values and the discount
of commercial or business paper actually owned by the person negotiating
the same" should not be considered as money borrowed. This section of
the national-bank act remained unchanged until 1906, when it was amended
so as to permit a single liability to be contracted equal to one-tenth
of the capital and surplus, instead of one-tenth of capital only, but it
was also provided that the liability should not, in any case, exceed 30
per cent. of the capital stock.
In the banking laws of seven States the limit on the amount of single
liability is the same as under the national-bank act. The banking laws
of almost all the other States permit a larger amount to be loaned on a
single liability than is permitted by the national-bank act.
In nearly all of those States in which trust companies have acquired
full banking powers the provision limiting the amount of any single
liability applies to both banks and trust companies. In only one State
or Territory--New Mexico--is there such a provision for trust companies
and none for state banks. In a few States--Kansas, Michigan, Minnesota,
Missouri, Montana, Oklahoma, New Jersey, Nebraska, and Wisconsin--there
are limitations on the amount of a single liability for banks, but none
for trust companies.
LOANS TO DIRECTORS AND OFFICERS
In almost all the banking institutions of the United States the
directors or a part of them are actively engaged also in other business
enterprises; and in many cases they borrow from the banks or trust
companies in which they are directors. Moreover, in some banks one or
two of the directors own a controlling interest, and are at the same
time large borrowers. The possibility, in such cases, that larger loans
may be made than the credit of those directors warrant is very
considerable. The national-bank act contains no provisions regarding
loans to directors, but in the laws of about one-half of the States
attempts have been made to devise rules which would prevent the making
of loans to directors in excess of the amount to which their credit
entitles them. The requirement that loans to directors shall be formally
approved by the board of directors is the one most frequently found. It
has been thought that directors would be reluctant to vote for excessive
loans to other directors if their vote is to be recorded.
REAL ESTATE LOANS
There is no more characteristic difference between state banking laws
and the national-bank act than the fact that, in almost all the States,
state banks and trust companies may make loans on the security of real
estate, whereas national banks are [were] prohibited from doing so
[before the passage of the Federal Reserve Act]. In some States, where
the influence of the example of the national-bank act was strong enough
at the beginning of state-bank regulation to secure the insertion in the
state banking laws of the prohibition of real estate loans, it has later
been found desirable to amend the laws in this respect. The Pennsylvania
general banking law of 1878, for instance, did not permit banks to loan
on real estate, but was amended in 1901, so as to permit such loans to
be made. In North Dakota and South Dakota, also, similar changes have
been made in the banking laws. In 1910 trust companies in all the States
and Territories where incorporated under general laws were allowed to
loan on the security of real estate. State banks so incorporated may
also loan on real estate in all the States and Territories except New
Mexico and Rhode Island. In Rhode Island, however, banks may loan on
real estate part of their savings deposits.
A few of the state banking and trust-company laws contain provisions
limiting the amount which may be invested in real estate loans.
Not withstanding the disadvantages of real estate as a convertible
asset, the power to loan on the security of real estate is a valuable
one to many of the state banks.[142] Many banks, particularly those in
the smaller towns and cities, if restricted to loans on personal
security, find it difficult to fully employ their funds. There are not
sufficient local loans of this kind to employ all the funds of the bank;
and the amount not so employed, if it is to yield a revenue, must either
be invested in outside commercial paper or deposited with banks in the
great commercial cities.
RESERVES
In most of the antebellum state banking laws reserves were required only
against note issue. In Ohio, for example, the general banking law
required a reserve of 30 per cent., against circulation, but none
whatever against deposits. Several of the state banking laws which
survived the destruction of the state bank-note issue contained,
however, provisions requiring banks to hold a reserve against deposits;
but in none of these States was the increase in the number of state
banks important. In those States in which the state banks were organized
under the "business incorporation laws" there were, of course, no
reserve requirements. Until 1887 a reserve was required for state banks
in only three States, Ohio, Minnesota, Connecticut, and in these the
required reserves were small. Even since the revival of state bank
regulation, which began in 1887, the requirement of a reserve has not
been regarded in many of the States as an important part of the state
banking law.
The most striking and important difference between the reserve required
by the national-bank act and the reserves required by the state banking
laws is that under the national-bank act the reserve is a percentage of
"deposits"--_i. e._, of all deposits--while under the banking laws of a
majority of the States either no reserve is required against time or
savings deposits, or a smaller amount of reserve is required than
against demand deposits.
None of the state banking laws require that the reserve of any class of
banks shall consist wholly of cash in bank. All the laws permit balances
in other banks to be counted at least as a part of the reserve. There
are great differences among the laws, however, with respect to the
amount which may be so counted.
The laws in all the States leave the banks almost entirely free to
deposit their funds in banks in the great commercial centres. The strong
economic pressure toward concentration is thus left free to act toward
drawing reserves into banks located in the reserve and central reserve
cities.
In the greater number of States which incorporate both state banks and
trust companies the reserve requirement is the same for both classes of
credit institutions. Slight differences between the requirements for
trust-company reserves and those for state-bank reserves are chiefly of
two kinds. In the first place, the provisions for trust-company reserves
more frequently permit the counting of bonds as a part of reserve;
secondly, the provisions for differing amounts of reserve against time
and demand deposits.
In recent years there has been much complaint in some States that the
reserves required for trust companies are inadequate.
BRANCH BANKS
The most characteristic feature of American banking is the extent to
which the banks and trust companies are independent institutions. The
national-bank act makes no provision for the establishment of branch
banks except in cases of the conversion of state banks which already
have branches. Such banks are allowed to retain their branches on
condition that the capital is assigned to the mother bank and the
branches in definite proportions, but only a few national banks have
branches. Under none of the state banking laws has there been built up
an important system of branch banks. This has been partly due to the
very general desire of each American community, no matter how small, to
have its bank managed by its own citizens, and partly to the fact that
in most of the States the establishment of branch banks is either
explicitly forbidden or in no way provided for by law. In eight
States--Colorado, Connecticut, Mississippi, Missouri, Nevada,
Pennsylvania, Texas, and Wisconsin--the opening of branch offices is
forbidden by specific enactment. In a large number of other States the
banking laws make no provision for the establishment of branches, and it
has been held in most of these States that the opening of branch offices
is unlawful.
The States in which state banks and trust companies are definitely
permitted to have branches are California, Delaware, Florida, Georgia,
New York, Oregon, Rhode Island, Virginia, and Washington. In Louisiana,
Maine, and Massachusetts trust companies may have branches. In Maryland
and North Carolina branches are operated by some banks and trust
companies which were chartered by special act. There are in several of
these States, however, restrictions on the opening of branch offices. In
New York and Massachusetts branches may be established only in the city
in which the principal office of the bank or trust company is located.
In New York, moreover, only banks located in a city of 1,000,000
inhabitants or over may have branches; but any trust company may have
branches. In Maine a trust company may establish branches only in the
county in which it is located or in an adjoining county.
In nearly all the States which permit banks or trust companies to
establish branches one or both of two conditions are imposed. In the
first place, additional capital is required for each branch bank over
and above the amount of the parent bank. Secondly, the establishment of
a branch bank must be specifically authorized by some state official or
officials.
The number of branches of banks and trust companies cannot exceed a few
hundred in the entire United States. Compared with the total number of
banks and trust companies this is a small development. Moreover, the
most important affiliations among banking institutions are among those
located in the same city. The "chains" of country banks possess, for the
most part, little vitality, and in the total banking business of the
country they play an insignificant role. The great mass of state banks
and trust companies are independent institutions. The most enduring
affiliations at present existing among the banking institutions are
those between a national bank and a trust company or a state bank and a
trust company. The comparatively limited powers of the national banks
and in some States of the state banks have made it desirable for many of
these institutions to affiliate trust companies with themselves in order
that desirable business may not be lost.
FURTHER REASON FOR THE LACK OF BRANCH BANKS IN THE UNITED STATES
[143]It would seem that there must be a reason for this peculiarity [the
small number of branches] in the banking system of the United States. In
searching for this reason, the first fact of importance seems to be
that, although the organization of branches has been permitted to the
non-note-issuing banks in some of the States, they have not been
organized, while in other countries they have been established in nearly
every case. by note-issuing banks. This seems at once to indicate that
in places where notes are the most important medium of exchange a
connection of some sort exists between the issue of notes and the
establishment of branches.
The inducement to the establishment of branches by banks is, of course,
the possibility of profit. But as has already been frequently pointed
out, profit can be obtained only by making loans. These when greater
than the amount of the capital, as it is necessary that they should be,
can be made by the loan of funds left with banks by others or by the
issue of circulating notes. It is also clear that, were the
possibilities of loaning beyond the amount of the capital wholly or
chiefly confined to one of these forms of liability--the other being
unavailable, as in the case of the state bank notes whose issue is
prohibited by the 10 per cent. tax--and were this other form distasteful
or impossible of introduction among the community where the branch was
to be established, the motive for the creation of the branch would be
absent. This motive has been wanting in many parts of the United States.
By the laws of the United States, the issue of notes has been made
impossible to all save national banks, and the capital of these banks
has been limited to $50,000 as a minimum. Banks other than national
must, therefore, be established under state laws, some of which have
permitted the organization of such institutions with capitals as low as
$5,000 or $10,000. They can, however, make use only of deposits as a
means of loaning beyond the amount of their capital. But deposits do not
provide a desirable form of currency for use in country districts. It
follows, therefore, that the state-bank systems supply the deficiencies
of the national system only in so far as they furnish independent banks
of smaller capital than $50,000 ($25,000 since 1900).
Nor would it have been of material assistance had the organization of
national banks of capitals smaller than $50,000 been allowed. As the
system has worked out, the issue function has been a useless one. The
compulsory deposit of bonds to secure circulation has hampered the banks
in exercising this function, since the requirement to deposit bonds now
cuts off all profit arising from the issue of notes. Moreover, the rural
communities are those where interest is highest, and hence where notes
can least advantageously be issued under the present system of
bond-deposit, owing to the high price of the bonds. These difficulties
probably cannot be overcome by the establishment of banks of lower
capitals than now exist.
[144]At the 1910 convention of the Alabama Bankers' Association, held in
Birmingham in May, one of the speakers, whose topic was "State Banks and
Their Branches," closed a condemnatory address with the words: "We
believe the days of the branch bank are numbered." Two months later, at
Cooperstown, Hon. E. B. Vreeland told the bankers of New York State, at
their convention: "No one will ever live to see the day when the branch
banking system which prevails in Canada and in Germany and in England
and in France will be tolerated by the people of the United States."...
"The economies of the branch banking system are such that no other
system can live beside it. It is just as sure as the sun will rise
to-morrow that the branch banking system, if taken up in the United
States, would in the end drive out of existence all the banks in every
city and town in the country outside of the great financial centres.
That is the experience of the world."
If this statement means anything it is a confession that the system of
local single-office banks is wasteful in operation, and it seems to me
that it sets forth one reason why branch banks are inevitable. When a
banking system is wasteful it is the stockholders, borrowers, and
depositors who suffer from the circumstance, and as soon as they realize
the fact its doom is sealed.
It should be said here that it is not their economical operation alone
that has enabled the branch banks to displace the small local banks in
England, Germany, and France. The branch institutions are cleaner, more
efficient, and they provide better opportunities for the clerks and
officers; they give a better and more complete service to the localities
in which they work.... Another reason is found in their stability during
crises....
THE NEW YORK STATE BANK ACT OF 1914[145]
In June, 1913, George C. Van Tuyl, Jr., superintendent of banks of the
State of New York, appointed a commission to look into the banking
conditions of the State and to make a thorough revision of the law
relating to banks. This commission conducted many public hearings;
sought information from banking experts in this State and in other
States; made a careful study of private banking conditions, rural
credits, and other special banking problems of the State; and, finally,
on February 25, 1914, they presented their report in the form of a bill
of some 500 pages. After a good many amendments had been made to appease
conflicting interests, the bill was passed and became law April 16,
1914.
In general, the new law marks a decided improvement and shows a
commendable spirit of progressiveness. Its framers believe that it is a
law which may well become the model for other States, and there are some
who say that it is without question the best balanced and most
comprehensive state banking legislation which has ever been enacted.
The new law was the outgrowth of the general agitation for banking
reform which had swept over this country following the panic of 1907.
The inciting cause, however, was the passage of the Federal Reserve Act
which made it necessary to revise the state law so that the state banks
either might join the federal system or be in a position to compete
successfully against the national banks of the State, whose powers had
been considerably enlarged by this act. In part, the law is modelled
after the federal act, and, in part, European experience has been drawn
upon.
Under the new law the state banks will have even more importance in the
competition for banking business than in the past. From the point of
view of banking power, the 278 banks of deposit and discount and trust
companies have aggregate deposits in excess of those of the 479 national
banks in the sum of $281,786,000.[146] Furthermore, it has been
estimated that the total resources of the New York state banks are
equivalent to 17 per cent. of the aggregate resources of all banks in
the United States, both state and national. Superiority in banking power
is one element in the strong competitive position of the state banks,
and another element is the privileges granted to these banks under the
new law which, in some respects, are superior to those granted the
national banks under the federal law. In view of the fact that the state
banks can enjoy either directly or indirectly most of the advantages of
the federal system and also that in some particulars the state law gives
them more liberal powers, it seems probable that these banks will
continue to see an advantage in their state charters; and thus the
amount of defection from the state system will be negligible.
More real power has been given to the banking department in the
provisions of the law. Through investigation, authorization
certificates, and regular uniform reports, the superintendent of banks
has more direct control over the banks than ever before. Besides the
extension of the supervisory powers, the penal provisions of the act
have been strengthened and made more exacting.
1. _Features of the act relating to banks of deposit and discount and
trust companies._ The reserves required against deposits were reduced
substantially, and made nearly uniform with those required for national
banks. The following table gives the percentage of reserve required and
the percentage of reserve on hand which the new law specifies for these
banks.
------------------------+---------------------+--------------------------
|Banks of deposit and |
| discount | Trust companies
|Per cent. of deposits| Per cent. of deposits
------------------------+----------+----------+----------+---------------
Population | Required | Reserve | Required | Reserve
| reserve | on hand | reserve | on hand
------------------------+----------+----------+----------+---------------
2,000,000 or over | 18 | 12 | 15 | 10
1,000,000-2,000,000 | 15 | 10 | 13 | 8
Elsewhere in the state | 12 | 4 | 10 | 4 or 3
------------------------+----------+----------+----------+---------------
The reserve requirements are made still more definite by the fact that
the law compels the banks to keep one-half at least of the reserve on
hand in "gold, gold bullion, gold coin, United States gold certificates,
or United States notes: and the remainder in any form of currency
authorized by the law of the United States other than federal reserve
notes."
Among the powers granted to these banks is the power "to accept for
payment at a future date, drafts drawn upon its customers and to issue
letters of credit authorizing the holders thereof to draw drafts upon it
or its correspondents at sight or on time not exceeding one year." This
clause gives a much wider power to the state banks in the important
matter of acceptances than its counterpart in the Federal Reserve Act.
In the one case both domestic and foreign acceptances may be made and
handled without stipulation as to aggregate amount and bearing
maturities of one year or less, while in the other case the acceptances
are limited to those arising out of the importation or exportation of
goods with maturities not exceeding six months. Seemingly, the state
banks have the advantage, and to this extent the state law is superior
to the federal act.
One other important forward step was taken in relation to this group of
banks. They are given the privilege of establishing branches outside
the State of New York, either in the United States or in foreign
countries. This privilege is qualified, however, by the provision that
no bank can establish such branches unless it has a combined capital and
surplus of $1,000,000 or over and the written approval of the
superintendent of banks. Although the old law permitted trust companies
to establish branches in the place where they were incorporated, the
practical effect was to limit branch banking to the city of New York. In
this particular also the state banks have the advantage over the banks
in the federal reserve system which are allowed to establish branches
only in foreign countries.
2. _Features relating to private banks and bankers._ The regulation of
private banks and bankers is an entirely new departure in the law of
this State. In the past the banking department had no authority to
supervise that relatively large number of private bankers who receive
deposits in small amounts from the wage-earning classes while conducting
in connection therewith a mercantile or some other kind of business.
Mercantile firms like the Siegel Company, by paying a higher rate of
interest upon deposits than savings banks, were able to obtain the
savings of many small depositors. This money was invested in the
business and secured only by the capital stock of the mercantile
establishments. In case the firm failed there was no security back of
these deposits but these same shares of stock, and so depositors were
fortunate if they received in settlement even 40 per cent. of their
claims. Such firms were not doing a legitimate banking business inasmuch
as they did not keep their assets in liquid form and carried no reserve
against deposits.
The new act corrects this situation by giving the banking department
authority to conduct independent investigations into any violation of
the banking law by a corporation or individual. In the future a
corporation which is in any way engaged in the business of banking
cannot hide under the wing of the general corporation law when the
banking department sees fit to make an investigation of its affairs.
Some of the specifications of this part of the law are all securities,
property, and the evidences of title thereto in which the permanent
capital and the deposits are invested are to be segregated and kept
separate from all other property and assets of the private banker;
depositors have a prior lien on the assets of the private banker, in
case of insolvency or suspension of business; and, in addition, every
private banker must maintain a reserve of 15 per cent. against deposits
in cities of the first class and a reserve of 10 per cent. in any other
city, one-tenth of which shall consist of reserve on hand and the
remainder may be kept on deposit subject to call with banks approved by
the superintendent of banks. These requirements will go far toward
preventing the recurrence of such disasters as the Siegel failure.
3. _Features relating to co-operative credit._ Within the last thirty
years the agricultural methods of the State, in harmony with the
agricultural methods throughout the United States, have undergone great
changes. Scientific farming, improved machinery, and changed market
conditions have brought new problems in the field of agricultural
credit. To-day agriculture has come to be in a real sense capitalistic
and has in consequence laid new requirements on the credit structure of
the nation. Moreover, the period of large returns or satisfactory
returns from an extensive and rather careless cultivation of the soil,
which made possible an ignoring of unit cost, or, at least, brought the
farmer to minimize the importance of such cost, has given way, so far as
the successful farmer is concerned, to the careful estimates of cost and
close calculations of profits on a narrow margin between unit cost and
unit selling price.
In the field of cost, the rate at which capital or money may be borrowed
is no small factor; and with the high rates prevailing in the United
States in comparison with those current in Europe, the borrower in this
country who pledges his land or agricultural products as security for a
loan finds himself at a disadvantage. To meet this condition cheaper
agricultural credit has been strongly urged. Europe furnishes the
example in her well-organized land banks and co-operative credit unions.
Already Massachusetts has a law authorizing co-operative organizations
for furnishing cheaper credit facilities to the agriculturalist, and in
Illinois there is a "credit foncier" which has been in successful
operation a number of years. New York State has put itself in line with
this growing movement to furnish ample and cheaper credit to the farmer
and the purchasers of real estate by putting into the new law provisions
for the establishment of a land bank and co-operative credit unions.
Sections 421-438 authorize ten or more savings and loan associations,
the aggregate resources of which shall not be less than $5,000,000, to
form a Land Bank of the State of New York. This bank can "issue, sell
and redeem debenture bonds secured by bonds and first mortgages made to
or held by member associations" and "invest its capital and other funds
in bonds secured by first mortgages on real estate situated within the
territory in which its members are authorized to make loans." The bank
is not permitted to do a general deposit business or incur any
indebtedness upon notes and bonds in excess of twenty times the amount
of its capital. The debenture bonds authorized by the act are to be
issued in series of not less than $50,000, and may be called on any
interest day at 102-1/2 provided a sixty-day notice is given.
Amortization payments upon mortgages which are given as collateral
security for the debentures of the land bank shall be sufficient to
liquidate the debt in a period not exceeding forty years.
In Article XI the law provides for the establishment of credit unions. A
credit union may be organized by any seven or more persons with a share
capital the par value of which shall not exceed $25. The objects of the
credit union are: (1) to loan money in small amounts on personal
security or in larger amounts on endorsed notes at rates not exceeding 1
per cent. per month, inclusive of all charges incident to the making of
such loans; (2) to receive the savings of its members in payment of
shares on deposit; (3) to borrow money to an amount not to exceed 40 per
cent. of its capital; (4) to pay dividends on its share capital. As to
the method of making loans, the law prescribes that a credit committee
shall pass upon all applications for loans which must be made in writing
and must state the purpose for which the loan is desired and the
security offered. No loan will be made unless it receives the unanimous
approval of the members of the committee present at the meeting,
provided always a majority of the committee is present.
With the land bank acting as a central clearing agency for the local
savings and loan associations and the organization of many rural credit
unions the problem of agricultural credit will be largely solved for New
York State. This, however, all hinges on the proper functioning of the
land bank and the co-operation of the farmers in the establishment of
local credit unions. Agriculturists as a class are slow to adopt new
methods and it may be only after prolonged education that all the
possibilities of this new legislation will be realized.
FOOTNOTES:
[140] Adapted from George E. Barnett, _State Banks and Trust Companies
since the Passage of the National Bank-Act_, Publications of the
National Monetary Commission. Senate Document No. 659, 61st Congress,
_Second Session_.
[141] [At least one savings bank has gained admittance to the Federal
Reserve System as a "state" bank.]
[142] According to reports to the National Monetary Commission on April
28, 1909, the loans of all the state banks in the United States on the
security of real estate were 20.6 per cent. of their total loans and
discounts.
[143] _The Report of the Monetary Commission of the Indianapolis
Convention_, pp. 377-8. The University of Chicago Press. 1898.
[144] Adapted from H. M. P. Eckardt, _Branch Banking Among the State
Banks_, The Annals of the American Academy of Political and Social
Science, Vol. 36, No. 3, November, 1910 pp. 626-630.
[145] Adapted from Everett W. Goodhue, _The Revision of the New York
State Banking Law_, The American Economic Review, Vol. V, No. 2, pp.
413-421.
[146] Annual Report of the Superintendent of Banks of the State of New
York, Jan. 6, 1915, p. 33.