FOOTNOTES:[89]The following table, fromThe Monetary Systems of the Principal Countries of the World, compiled in the office of the Director of the Mint, Washington, 1912, gives the weight, fineness, etc., of the coins of Great Britain:GoldDenominations.Weight.Fineness.Fine weight.Weight.Pure gold or silver.Value in United States money.Grams.Thousandths.Grams.Grains.Grains.5 pounds39.9410916-2/336.6125616.3720565.0080$24.33252 pounds15.9764916-2/314.6450246.5488226.00329.7330Sovereign7.9881916-2/37.3225123.2744113.00164.8665Half sovereign3.9941916-2/33.661261.637256.50082.4332SilverHalf crown14.137992513.0775218.1760201.8119$0.6083Florin11.310392510.4620174.5405161.4495.4866Shilling5.65519255.230987.269580.7232.2433Sixpence2.82759252.615443.633940.3008.1216Fourpence (groat)1.88509251.743629.089326.9071.0811Threepence1.41379251.307621.816220.1788.0608Twopence.9425925.871814.544613.4536.0405Penny.4712925.43587.27156.7252.0202[90]A. Barton Hepburn,A History of Currency in the United States, pp. 450-473. The Macmillan Company. New York. 1915.
[89]The following table, fromThe Monetary Systems of the Principal Countries of the World, compiled in the office of the Director of the Mint, Washington, 1912, gives the weight, fineness, etc., of the coins of Great Britain:GoldDenominations.Weight.Fineness.Fine weight.Weight.Pure gold or silver.Value in United States money.Grams.Thousandths.Grams.Grains.Grains.5 pounds39.9410916-2/336.6125616.3720565.0080$24.33252 pounds15.9764916-2/314.6450246.5488226.00329.7330Sovereign7.9881916-2/37.3225123.2744113.00164.8665Half sovereign3.9941916-2/33.661261.637256.50082.4332SilverHalf crown14.137992513.0775218.1760201.8119$0.6083Florin11.310392510.4620174.5405161.4495.4866Shilling5.65519255.230987.269580.7232.2433Sixpence2.82759252.615443.633940.3008.1216Fourpence (groat)1.88509251.743629.089326.9071.0811Threepence1.41379251.307621.816220.1788.0608Twopence.9425925.871814.544613.4536.0405Penny.4712925.43587.27156.7252.0202
[89]The following table, fromThe Monetary Systems of the Principal Countries of the World, compiled in the office of the Director of the Mint, Washington, 1912, gives the weight, fineness, etc., of the coins of Great Britain:
GoldDenominations.Weight.Fineness.Fine weight.Weight.Pure gold or silver.Value in United States money.Grams.Thousandths.Grams.Grains.Grains.5 pounds39.9410916-2/336.6125616.3720565.0080$24.33252 pounds15.9764916-2/314.6450246.5488226.00329.7330Sovereign7.9881916-2/37.3225123.2744113.00164.8665Half sovereign3.9941916-2/33.661261.637256.50082.4332SilverHalf crown14.137992513.0775218.1760201.8119$0.6083Florin11.310392510.4620174.5405161.4495.4866Shilling5.65519255.230987.269580.7232.2433Sixpence2.82759252.615443.633940.3008.1216Fourpence (groat)1.88509251.743629.089326.9071.0811Threepence1.41379251.307621.816220.1788.0608Twopence.9425925.871814.544613.4536.0405Penny.4712925.43587.27156.7252.0202
[90]A. Barton Hepburn,A History of Currency in the United States, pp. 450-473. The Macmillan Company. New York. 1915.
[90]A. Barton Hepburn,A History of Currency in the United States, pp. 450-473. The Macmillan Company. New York. 1915.
[91]The trust company supplements the bank. Through a long process of evolution the bank has developed as a means of facilitating the exchange of commodities. The trust company is a still further step in the same process, and, in a highly organized society, it meets needs which the bank is not able to supply.
In a new community the general store forms the centre of the business life of the place. With growth and increasing trade, the private banker sees room for the profitable employment of his funds. The state or national bank meets the needs of further growth. Success and the accumulation of wealth pave the way for the trust company. The bank is organized primarily to serve the needs of active commercial life; the trust company handles funds in less active circulation.
It is customary for the courts to designate or approve certain trust companies as depositories for funds paid into court, and the effect of such designation or approval would be to relieve executors, trustees, or others acting in a fiduciary capacity and depositing with these companies from liability for loss through their failure. A person charged with due care in the selection of a depository could not be held to have been wanting in such care in choosing as a depository a trust company which the court has itself approved.
The powers of trust companies vary in different states, and when they are created by special legislation, local companies are found with different charter privileges. The capital and surplus of these institutions are liable for their acts in fiduciarycapacities, and in some states they are required to deposit with one of the state departments a fund as a special guarantee. The liability assumed is generally accepted by the courts in lieu of the bonds which individuals acting in similar capacities are required to give.
The development of trust companies in the United States has been remarkably rapid. Since 1882, when the first legal authority was given for the exercise by corporations of fiduciary powers, they have steadily grown in number until there are now more than fifteen hundred, distributed as follows:
Alabama30Arizona9Arkansas38California24Colorado16Connecticut31Delaware12District of Columbia5Florida9Georgia25Idaho10Illinois75Indiana108Iowa29Kansas4Kentucky42Louisiana22Maine39Maryland21Massachusetts56Michigan6Minnesota4Mississippi19Missouri49Montana7Nebraska13Nevada1New Hampshire4New Jersey86New Mexico10New York78North Carolina38North Dakota5Ohio60Oklahoma10Oregon20Pennsylvania260Rhode Island11South Carolina17South Dakota12Tennessee73Texas52Utah9Vermont26Virginia19Washington20West Virginia22Wisconsin9Wyoming5Hawaii5——Total1555
Their business in all departments has shown a steady increase, and the trust companies of the United States to-day carry deposits amounting to over $3,858,300,000. Net deposits in the 7397 national banks aggregate $5,891,670,000.
In some states commercial banking and trust powers are exercised by the same companies. In such cases, separate departments are maintained for the various classes of business. Another method is for the same individuals to organize a national bank and a trust company, the former under national and the latter under state laws.
The securities company or trust company organized under state laws and controlled by a national bank with the stock interest in the former distributed among the owners of the stock of the bank and evidenced by indorsement on its certificates is still another expedient which has been resorted to in order to enable a closely affiliated and controlled organizationto exercise legitimate functions which are, however, outside the province of a national bank.
The earning power of trust companies has equalled and even exceeded that of the banks, and the stock of those companies which are well established and doing a flourishing business sells at such a premium that investment in it at its market value gives a very low return.
Trust company failures have been few and far between, and where they have occurred they can be traced to a disregard of sound banking principles and to the assumption of unwarranted risks. Even in the case of companies which have failed there is no record of any impairment of trust funds, whatever loss there was having been borne by the stockholders and, to a less degree, by the depositors. This fact, the result of the absolute separation of trust assets from assets belonging to the company, is the strongest argument for the employment of trust companies in fiduciary capacities, and explains their rapid growth in popular favor.
The literature put out by these institutions invariably recites the advantages to be gained by dealing with them instead of with individuals. The following is a good example of such reasoning:
A trust company is preferable to individual trustees, because it possesses every quality of desirability which the individual lacks, to wit:—
(1) Its permanency: it does not die.(2) It does not go abroad.(3) It does not become insane.(4) It does not imperil the trust by failure or dishonesty.(5) Its experience and judgment in trust matters are beyond dispute.(6) It never neglects its work or hands it over to untrustworthy people.(7) It does not refuse to act from caprice or on the ground of inexperience.(8) It is invariably on hand during business hours and can be consulted at all times.(9) Its wide experience of trust business and trust securities is invaluable to the estate.(10) It is absolutely confidential.(11) It has no sympathies or antipathies and no politics.(12) It can be relied upon to act up to its instructions.(13) It does not resign.(14) All new investments of value suitable for trust estates are offered in the first instance to trust companies, and in that way it has a choice of valuable security; and as its purchases are on a scale of magnitude, it can usually buy at a rate which is lower than that at which the individual trustee can purchase.
(1) Its permanency: it does not die.
(2) It does not go abroad.
(3) It does not become insane.
(4) It does not imperil the trust by failure or dishonesty.
(5) Its experience and judgment in trust matters are beyond dispute.
(6) It never neglects its work or hands it over to untrustworthy people.
(7) It does not refuse to act from caprice or on the ground of inexperience.
(8) It is invariably on hand during business hours and can be consulted at all times.
(9) Its wide experience of trust business and trust securities is invaluable to the estate.
(10) It is absolutely confidential.
(11) It has no sympathies or antipathies and no politics.
(12) It can be relied upon to act up to its instructions.
(13) It does not resign.
(14) All new investments of value suitable for trust estates are offered in the first instance to trust companies, and in that way it has a choice of valuable security; and as its purchases are on a scale of magnitude, it can usually buy at a rate which is lower than that at which the individual trustee can purchase.
The most common objection to the appointment of corporate trustees is thus stated by Augustus Peabody Loring, Esq.:
The trust companies, which have of late years become so numerous, to a considerable extent do away with the element of personal risk attaching to an individual trustee; but they lack the advantages of personal management. These companies sometimes fail from improper management as utterly as individuals do, and as a rule the lack of personal management results in securing the minimum return only on the amount invested, and lacks the great advantages often secured by the able personal oversight of individual trustees.
The trust companies, which have of late years become so numerous, to a considerable extent do away with the element of personal risk attaching to an individual trustee; but they lack the advantages of personal management. These companies sometimes fail from improper management as utterly as individuals do, and as a rule the lack of personal management results in securing the minimum return only on the amount invested, and lacks the great advantages often secured by the able personal oversight of individual trustees.
The question, after all, comes back to the personal qualifications of corporate officers and individuals. If the former are less capable than the latter, the fault is with the particular company—not the system, and if interest returns are sometimes less under corporate management, this fact is more than equalized by the added safety to the corpus of the estate.
A "Trustee Company" has been suggested as a proper title for the company doing a legitimate trust business, and is the name used in Australia and in New Zealand. In some states the use of the word "trust" in corporate titles is now regulated by law. Confusion has arisen in the popular mind between the trust company and the trusts or industrial combinations.
The usual functions of a trust company are: banking in a more or less limited form, execution of corporate trusts, execution of individual trusts, care of securities and valuables. In addition, other functions are sometimes exercised, such as life, title, and fidelity insurance, and the business of becoming surety. The earlier companies in the United States were chartered to manage individual estates only and to act in certainfiduciary capacities; the recent development of the trust company has been in the direction of banking functions and corporate trust business.
It is worthy to note that the life insurance companies which originally secured trust powers have, with but few exceptions, given up their life insurance business, and that most of the fidelity insurance and surety business is given over to companies which now make a specialty of such risks. The fact is being recognized that the assumption of vast risks contingent on future occurrences is not compatible with the absolute security which is essential in the transaction of legitimate trust business.
The banking functions of trust companies may include any or all of the following:
The receipt of money deposits payable on demand and subject to check, or payable at a fixed date, or according to special agreement. Interest is usually allowed on all deposits above a fixed maximum amount or on the total sum.
Money advances secured by the hypothecation of stocks, bonds, life insurance policies, bonds and mortgages, or other personal property.
Real estate loans, secured by bond and mortgage. It is customary to loan not over two-thirds of the value of improved property; when the property is unimproved, not more than half.
Discounting paper is engaged in principally by companies transacting a commercial banking business. The purchase of unsecured paper is permitted in some states where discounting is not allowed.
The purchase and sale of securities.
Trust companies sometimes guarantee issues of bonds, or at least set their stamp of approval upon them.
The issue or guarantee of letters of credit, and the transaction of a foreign exchange business.
The care of savings deposits. For this purpose a separate department is usually maintained.
Among the most important functions of a trust company are those relative to the business of other corporations:
Of late years the trust companies in the Eastern cities have been selected as trustees instead of individuals whenever the law of the State where the property was situated allowed such selection. Trust companies have manifold advantages over individuals in such a relationship; they do not die; the large amount of financial business which they daily transact provides them with the machinery for such purposes; while their well-known names stand as evidence to the purchasing public that at least the necessary formalities have been complied with. Beyond that responsibility the trustees of corporation mortgages usually assume none.In recent years the trust companies have shown a tendency, when acting as mortgage trustees, to recognize a greater moral responsibility than they at first were willing to bear. Trust companies did not, of course, intend to appear as in any way guaranteeing the bonds to which they certified, though that seems often to have been the erroneous opinion of the unthinking; but trustees now acknowledge themselves bound within the limits of the mortgage to use their influence to protect the interest of the bondholders. A trust company which should now allow the issue of unsecured bonds because of some glaring defect in the language of the mortgage, would not longer be morally excused by financial opinion, though perhaps held technically innocent.[92]
Of late years the trust companies in the Eastern cities have been selected as trustees instead of individuals whenever the law of the State where the property was situated allowed such selection. Trust companies have manifold advantages over individuals in such a relationship; they do not die; the large amount of financial business which they daily transact provides them with the machinery for such purposes; while their well-known names stand as evidence to the purchasing public that at least the necessary formalities have been complied with. Beyond that responsibility the trustees of corporation mortgages usually assume none.
In recent years the trust companies have shown a tendency, when acting as mortgage trustees, to recognize a greater moral responsibility than they at first were willing to bear. Trust companies did not, of course, intend to appear as in any way guaranteeing the bonds to which they certified, though that seems often to have been the erroneous opinion of the unthinking; but trustees now acknowledge themselves bound within the limits of the mortgage to use their influence to protect the interest of the bondholders. A trust company which should now allow the issue of unsecured bonds because of some glaring defect in the language of the mortgage, would not longer be morally excused by financial opinion, though perhaps held technically innocent.[92]
As trustee under corporate mortgages and trust deeds, the trust company acts for the bondholders. It is customary for it to authenticate each bond issued subject to the provisions of the mortgage, to represent the bondholders in case of default, and to exercise such other functions as may be provided in the mortgage.
A generation ago it was customary for a railroad to name one or more individuals as trustees of the mortgages executed to secure bond issues. The development of trust companies and their manifest advantages over individuals in such a capacity has resulted in their absorbing almost all this business. Trust companies are now generally appointed as trustees in corporation mortgages, and are also often named to succeed individuals who have died or resigned. The appointmentis one of the most important and far reaching which the trust company can accept. Its name and reputation serve as an assurance that the transaction is a regular one, and entered into in good faith. Although the modern corporation mortgage is usually explicit in its terms to the effect that the trustee in no way guarantees the value of the security and assumes no liability except for its own negligence, yet the intimate connection between the trustee and the borrowing corporation in the minds of investors makes it necessary that care be taken not to assume trusteeships which may lead to a wrong use of the name and credit of the trust company.
As trustee under mortgages securing bond issues, the title to the mortgaged property is vested in the trust company for the benefit of the security holders. The corporation owning the mortgaged property retains physical possession of it so long as the terms of the obligation are complied with, except in the case of securities pledged, which are usually lodged with the trustee. In case of default, however, it devolves upon the trustee to protect the interests of the bondholders, and this may necessitate the foreclosure of the mortgage and sale of the property.
As fiscal agent it dispenses coupon and interest payments on bond issues, and dividends on stock. It receives sums set aside as sinking funds to provide for the retirement of obligations at maturity, or when bonds are subject to redemption, draws the specified amount by lot and pays the principal.
As registrar the trust company authenticates certificates of stock and bonds in order to prevent an over-issue, and to reduce the chance of loss or theft. As transfer agent, the company attends to perfecting transfers of ownership for stock and bond issues or parts thereof.
The New York Stock Exchange, like most other stock exchanges, in its constitution requires that all active listed stocks must be registered. This Exchange also requires that a trust company or other agency shall not at the same time act as registrar and transfer agent of the same corporation. In the popular mind, and even in the minds of some trust company officers, the difference between the duties of the two positions has been more or less confused. Both have been created tosafeguard and facilitate the passing of title to shares of stock, but the duties of a transfer agent and a registrar are not synonymous; they are distinctive. One is called upon to examine and give clear titles to property transfers, and the other is merely to record such transfers.
As manager of underwriting syndicates, the trust company issues the prospectus and markets the securities of corporations which are being launched, or of established companies which are putting out new securities.
In railroad and other reorganizations, the trust company takes a prominent part, acting both as a depositary for, and as a representative of, the committees which formulate and execute the plans of reorganization. Its officers often have a large share in the preparation of such plans.
As assignee and receiver, the trust company acts in the same capacity for corporations as for individuals and firms or partnerships, assisting in winding up insolvent businesses and in conducting embarrassed ones.
The execution of individual trusts is the function originally assumed by trust companies. The various other forms of business which are now engaged in, have, with the exception of life insurance, been later developments of the trust company idea. The earliest power granted these companies was to receive moneys or other property, real or personal, in trust. The trust company now also acts as executor and administrator of the estates of decedents.
As executor appointed by the will of a decedent, it takes out letters testamentary upon probate of the will, advertises, files inventory and appraisement, pays debts, collects claims, makes the requisite accounting to the probate or orphans' court, and makes distribution of the estate in accordance with the terms of the will and the court's decree.
As administrator acting under appointment of the register of wills or probate court, it performs similar duties, distributing the estate in accordance with decedent's will if there is one, or if there is none, in accordance with the intestate laws ofthe state, which specify the order of succession and distributive shares in the case of estates of decedents leaving no wills. There are different kinds of administrators, in any of which capacities a trust company may be called upon to act.
As trustee under will, the trust company carries out the provisions of the will, investing and managing the estate or particular fund in accordance with the directions of the testator. As such it may hold real and personal property.
As trustee under deed or private agreement, a contract is entered into between the company and the owner of the property, by which the title to the property is vested in the corporation subject to the terms recited in the instrument. Such deeds of trust may be revocable or irrevocable. Marriage settlements are frequently made in this way.
The trustee's duty in investing the funds is a double one; namely, to invest them securely so that the principal shall be preserved intact, and to invest them as productively as possible under his powers, so that they shall yield the best rate of interest obtainable for the benefit of the person or persons entitled to the income. He must hold the scales evenly, regarding scrupulously his duties to all beneficiaries. The popular idea that security is the only consideration is erroneous, as the trustee is equally bound to invest the funds as profitably as possible and cannot neglect one duty more than the other. The mistaken impression that the corporate trustee, even more than the individual, is mindful only of the safety of the principal and entirely loses sight of the question of income, has arisen from the restrictions as to investments imposed by law, and frequently also by the will or trust deed, and from the fact that the individual executor or trustee, rightly or wrongly, sometimes assumes risks and personal liability which the proper rules of a trust company would not permit it to assume.
The executor or trustee is governed, as to the kinds of investments, by the directions of the will or deed of trust. This may require the purchase of "legal investments" only, or state that the trustee is not to be confined to securities prescribed by law, or give specific directions as to the classes of securities which are to be bought. The terms of such documentsare always strictly construed by the courts; if no directions are given, the trustee is expected to buy only "legal" securities, and when he exceeds his powers he is held responsible for any loss. Administrators and guardians without broader powers given by will are obliged to invest, except at their personal risk, in such securities as are sanctioned by law or directed by the court.
Some states prescribe by statute the securities in which a trustee may invest. "Where there is no statute or decision of the highest court fixing the class of securities in which a trustee may invest, he can safely follow the rule prescribed for the investment of the funds of savings banks." In general, city, State, and United States bonds, first mortgages secured on improved real estate with ample margin, are among the investments sanctioned by law. As to real estate, stocks, and first mortgage bonds of railroad, manufacturing, and other corporations, the practice varies in the different states. Loans on personal property, second mortgages, and other investments subject to prior liens or of a speculative character are excluded. All investments must possess "intrinsic" value; the courts hold trustees liable for any losses from speculative risks—but any gains accrue to the trust estate.
The trust company acts as guardian, curator, or committee of the estates, and in some states, of the persons of minors, those who are insane or mentally incompetent, spendthrifts, drunkards, and any other persons not legally qualified to take charge of their own affairs. In the case of a minor, the trust terminates on the ward's becoming of age; in other cases, when the disability is removed, or in accordance with a decree of court. These appointments are frequently made by order of court, and to it accounting must be made. In some states the company is styled "conservator" when caring for the estates of persons of unsound mind.
When acting as attorney in fact, the company obtains its authority by virtue of a letter of attorney which usually is or can be recorded, conveying certain definitely specified powers.This may be either to perform a single act—such as to satisfy a mortgage—or may be broader and continuing, granting authority to sell and transfer securities and collect income. A general power of attorney, as the term indicates, is a delegation to another of the general powers of the person appointing—as to payments, collections, transfers of property, and all transactions of a business nature.
As agent merely, the company takes charge of property, real or personal, for its owner, but such agency does not imply nor ordinarily include authority to sell or convey title. Moreover, trust companies as agent often take up lines of business which they either cannot or would not engage in on their own account. Thus, a trust company can act as agent for fire or life insurance companies, for water, gas, and other public service corporations. In new communities and where it is difficult to find responsible representatives, the trust company can often render efficient service and secure a steady income without risk by assuming agencies of various sorts.
As assignee the trust company takes possession of the property assigned for the purpose of carrying out the terms of the deed of assignment in the interest both of the assignor and the creditors of the assignor. The deed of assignment is an acknowledgment of an embarrassed or insolvent condition, and the efforts of the assignee are directed to realizing as much as possible from the assets intrusted to its management.
As receiver, the duties may be very similar to those of assignee, although they are usually broader in scope. The business may not be insolvent, and the application for the appointment of a receiver may be due to temporary difficulties only. By such an appointment the property is preserved intact and equal treatment is afforded creditors. An able receivership often results in the adjustment of difficulties and the return of the property to its owners on a paying basis. While in the case of assignee the appointment is by the individual, partnership, or corporation executing the deed of assignment which specifies the powers and duties of the assignee, in the case of receiver the appointment is by a court and the company so appointed acts as an appointee or ministerial officer of the court, and as such is directly subject to the court's orders.
A trust company acting as receiver is better able than an individual to furnish additional capital, if amply secured, and thus successfully to meet the difficulties which withdrawal of credit and restricted capital have temporarily brought upon an otherwise prosperous business. The courts authorize the issue of receivers' certificates to provide funds for purchase of equipment and the proper maintenance of the property and conduct of the business when the creditors are benefited by such expenditures. Such certificates may be made a first lien on all assets, taking precedence even of mortgages and other secured obligations. The receiver thus secures the capital necessary to make the property more productive and to secure the largest return from the business.
As custodian or depositary, the trust company sometimes holds property the title to which is in dispute, delivering the same when the ownership is legally determined.
In taking charge of escrows or conditional instruments or deeds delivered to a third party until the condition is performed, the trust company acts in a similar capacity, as the joint representative of both parties.
The trust company acts as the representative of both the living and the dead in practically every legal relation in which an individual is qualified to act. Its function is not only to keep intact the estate of which it has charge, but to look to and safeguard the interest of every beneficiary.
The functions already recited have resulted in the assumption of the duty of caring for property other than that of the estates held in the trust department. In the safe deposit department, individual safes are rented, bulky packages—not containing stocks or bonds—are received on storage, certificates of deposit covering securities are issued, and provision is made for access to, and examination of, the property so deposited. For personal property received on storage, the charges are either according to bulk or value. Wills are usually receipted for and kept without charge.
The examination and insurance of real estate titles is a later development often found in connection with the usual trust functions.
Fidelity insurance and suretyship providing against loss by reason of the dishonesty of individuals and the non-performance of obligations, contracts, etc., have often been combined with the various forms of trust company activity. They are, however, largely passing into the hands of corporations especially organized for the transaction of such business.
When acting as trustee under corporation mortgages, a definite charge may be made for accepting the trust, and a fixed amount per annum thereafter for paying coupons and performing other duties. For the certification of bonds it is usual to charge fifty cents per bond in the case of large issues, and one dollar for small issues. The figures, however, vary in different places. The charge for certifying the bonds may be the only one, although an additional charge is usually made for counsel fees. In case of default and consequent foreclosure of the mortgage, extra payment is made to the trustee covering all services incident to the foreclosure.
For the disbursement of sinking funds, interest, or coupons, the temporary use of the money may be considered adequate compensation, if the amount involved is large. A commission on the sum distributed or a fixed amount is charged when acting as fiscal agent, apart from duties in other capacities. For acting as registrar or as transfer agent it is usual to make a fixed charge per annum, based on the amount of labor involved. The transfer agent is usually paid about twice as much as the registrar. Compensation for acting as manager of an underwriting syndicate may be a fixed sum or a commission, according to the provisions of the underwriting agreement. For acting as depositary under plans of reorganization, assignee, or receiver, a lump sum is usually paid covering all services. Agency work of various sorts is paid for in accordancewith the usual practice in the business which is undertaken; a fixed sum, or a fixed sum and a commission, or a commission only, may be received.
The trust company is in a position to render valuable, and often indispensable, aid to its corporate clients. Large amounts being involved, the great railroad and industrial corporations are willing to pay well for such services. Corporate trust business has, consequently, been a profitable field for the trust companies.
An examination of the laws of the various states is interesting as showing the attempts which are being made at regulation. Most of these laws have been enacted within recent years and to-day there are but few States which do not have such statutes on their books.
The step which Massachusetts first took in requiring a legal reserve to secure deposits has been followed by similar action in other states. In general, the wisdom of prohibiting companies which engage in the care of estates from assuming excessive risks is becoming better recognized. The promotion and underwriting of commercial ventures and the assumption of unknown risks are functions not compatible with the proper exercise of the duties of trustee or executor.
The supervision of trust companies by the separate states provides an elastic system to supplement the rigidly guarded powers of the national banks, and can adapt itself to changing conditions and enlarging needs, leaving for solution according to the requirements of each section of the country such questions as proper functions, reserves, and the authority to establish branch offices.
FOOTNOTES:[91]Adapted from Kirkbride and Sterrett,The Modern Trust Company, pp. 1-13, 113, 114, 127, 143-146, 204, 205, 208. The Macmillan Company. 1913.[92]Thomas L. Greene,Corporation Finance, p. 59.
[91]Adapted from Kirkbride and Sterrett,The Modern Trust Company, pp. 1-13, 113, 114, 127, 143-146, 204, 205, 208. The Macmillan Company. 1913.
[91]Adapted from Kirkbride and Sterrett,The Modern Trust Company, pp. 1-13, 113, 114, 127, 143-146, 204, 205, 208. The Macmillan Company. 1913.
[92]Thomas L. Greene,Corporation Finance, p. 59.
[92]Thomas L. Greene,Corporation Finance, p. 59.
[93]The savings bank works with those unacquainted with the ways of business and who could not single handed take good care of their money, or invest it safely or profitably. The bank of discount is generally managed by business men versed in the ways of business, acquainted with monetary affairs, and able to conduct financial operations with intelligence. They combine theircapitalin order to make it effective; the savings bank combinessavingsin order to make themcapital, and as such to acquire a power impossible to the scattered savings.
The savings bank is for the saver; its funds are invested permanently, while the business bank opens its doors to business men and loans rather than invests its funds, and for a short time only. The latter deals with borrowers rather than savers, and serves for hire. The one serves best by keeping—the other by lending. Oneaimsat profit, while the othernevermakes (or should make) profit an end. The savings bank is the receiving reservoir for the little springs, the bank of discount is the distributing reservoir for accumulated capital.
We must get the last idea clearly in mind or we get a misconception of the savings bank. However much the element of interest may figure in the management, and whether we pay depositors 4 per cent. or 3 per cent., or no interest at all, the accumulation of interest is not to be compared in importance with theaccumulation of principal.
No man ever acquired riches at 4 per cent. In fact, 4 per cent. upon small deposits is so trifling a matter that it may be ignored in considering the greater value of the increase of capital. However desirable the accumulation of interest maybe (and this in the course of years is considerable), the chief end and aim of the savings bank should be theaccumulation of principal.
We may roughly classify savings institutions into: First, mutual (trustee), or philanthropic; second, stock (including "savings and trust companies"); third, co-operative, or democratic, as exemplified in the co-operative banks of Europe. The first are usually managed by a self-perpetuating body of trustees, who do not share the earnings; the second are managed by the directors elected by the stockholders; the third are managed by officials elected by the members.
A second classification may be made into public and private institutions; the first includes the postal and municipal banks; the private embraces the mutual, stock, and co-operative. A third classification may still be made into the "unit" and the chain system. In the unit system the bank is an independent entity and has no connection (aside from a managerial standpoint) with any other bank. The banks of the United States are all, excepting the Postal Savings Banks and a few branch savings banks, of this character. In the second, the bank is but a part of a chain, as in the postal system, the municipal banks of Germany, and the co-operative credit banks of Europe. We shall briefly review each system.
Theoriginalsavings bank is the trustee bank. As Hamilton says, "It stands for the attempt on the part of the well-to-do to improve the condition of the poorer classes, and involves a self-sacrificing service on the part of a few in the interest of the many." While many of the early savings banks partook of this character, others were organised from purely selfish motives and were characterised by bad management and bad faith from the start. A study of savings bank frauds will amply bear out this statement.
The "spirit of commercialism" hereafter spoken of hasinvaded the domain of the mutual savings bank and it cannot in truth be said that some of the newer banks were organised from any spirit of philanthropy, although the management as a whole may be above suspicion and honorable in the highest degree.
But, however this may be, the mutual savings bank is a product of the East and promises to remain so in spite of the fact that some of the Western states have very good, if not excellent, savings bank laws.
The distinguishing characteristic of the trustee savings bank ismutuality.Allthe earnings of the bank, less reasonable administrative expenses and the apportionment to surplus or guaranty fund, are divided among the depositors in the form of interest.
One or two features of the mutual bank may be mentioned. First, the investments of such institutions are usually carefully restricted, looking primarily to the element of safety; and as long as the trustees keep their funds so invested they cannot be held, either in law or morals, responsible for losses. Second, the predominancy of the mortgage loan. The nature of the deposits being more or less permanent, investments of a permanent character may be made without fear of a sudden demand for their return on the part of depositors; and to safeguard the banks from such unexpected calls, quite generally trustee banks are permitted by law to require notice, the usual time being either sixty or ninety days. The third distinguishing feature is the self-perpetuation of the board of managers. No amount of money canbuya man's way into a mutual savings bank. He cannot, as in stock concerns, buy enough stock tovote himselfinto office—he can only gain office as the other men advocate his cause. And, on the contrary, he cannot be votedoutof office. Only an act, such as bankruptcy (which voids his office), can affect him, and, like a Supreme Court judge, he is appointed during good behavior.
The greatest weakness of the trustee bank is this: Lacking the "essential element" that prompts men to undertake such ventures (profit), it does not appeal to the average man of means unless he is sentimentally inclined; and not being indispensable to trade and commerce, like a bank of discount,it does not come to be a commercial necessity. Even in a great State like New York we find twenty-eight counties with no savings banks. And in many of these counties there are large and thriving towns and cities. Thus the city of Jamestown, with over 30,000 population, has no savings banks; while Elmira, with over 35,000 population, has but one, and that with but half a million assets.
From the viewpoint of intensive results, as tested by the volume of patronage accorded these institutions, a perusal of the statistics will demonstrate that in some places the trustee bank has had a remarkable record. For instance, in Maine, a sparsely-settled State, and largely of a rural nature, we find one savings account to every 3 of the population. More remarkable is Vermont, the "Green Mountain State," where natural conditions would seem to be much more hostile to such development, we find 30 per cent. of the population having savings bank accounts. New Hampshire has an account for every 2-1/2 of the population, while Massachusetts heads the list, with seventy-five out of every hundred. New York has one to every three.
"In seeking an explanation of this remarkable success of the trustee system," says Hamilton, "we are reminded that New England is singularly separate and distinct in its customs, habits and ideals from the rest of the country. Notwithstanding the large foreign population, the dominant type is more homogeneous and more Anglo-Saxon than it is in any other section, and therefore fixed customs have been more rigid and controlling. Among the ideals behind the customs and institutions must be noted a stern, Puritanical sense of simple living, industry and providence, and this spirit is so strong as to be well calculated to give color and direction to the philanthropic impulse. There is also an unusual amount of public spirit, of collective rather than a neighborly character, as seen in the institution of the town meeting."
The stock savings bank, where it is a savings bank, and not a bank of discount under a savings title, differs in no essentialdegree from the mutual institution. The mutual bank belongs to the depositors; the stock bank to the stockholders. The mutual bank pays dividends to depositors only; the stock bank pays dividends to both stockholders and depositors. The stock bank does not pretend to be philanthropic in its management. It is purely a business proposition, and where the investments are of the accepted savings bank type, it can justly claim to be on a par with its mutual friends, provided, of course, that it measures up to the standard in its management.
As is implied in the term "stock," it issues capital shares and pays dividends thereon. It has, therefore, the added protection of the stockholder's liability, which, together with the accumulated surplus, affords the element of strength so necessary in all financial concerns. It usually pays the depositors a stipulated rate of interest, and the profits beyond this belong to and are distributed to the stockholders as dividends. The partnership idea is entirely lacking, and the depositors get what they bargain for, while the surplus goes to those who invest, not necessarily their savings, but theircapital, and assume all risks of the business. It could not in law or equity "scale down" its deposits to make good any losses—a feature peculiar to the mutual institution.
In this respect one thing is certain: In so far as safety is concerned, especially in a young bank, the stock bank with the stockholders' liability is surely superior to the mutual, unless the trustees of the latter are of such high order and of such financial worth as to be able andwillingto assume the burden of any losses that may accrue until the surplus or guaranty fund affords ample protection. This was the trouble in the early days of the mutual savings banks in England.
New Hampshire is the only state in which "guaranty savings banks" are found. These are a combination of mutual and stock—a cross between the two. They do not transact a commercial business, being strictly savings banks in their functions, yet having "special deposits," which to all intents and purposes are capital stock. "The guaranty savings bankdiffers from the ordinary mutual savings bank in that it has capital stock orspecial deposits, as they are called. It pays a certain stipulated rate of interest to itsgeneraldepositors andany surplus of earnings above this dividend is available for dividends on the capital stock or special deposits. These special deposits constitute a guaranty fund for the general depositors, and the charter ordinarily stipulates that the special deposits shall always equal 10 per cent. of the deposits."
Such institutions are savings banks in every sense of the word, but the strictly mutual feature is lacking in the specialising of part of the deposits and paying a higher rate of interest on these deposits. In New York State savings banks cannot take a "special deposit," but in New Hampshire, in return for the higher interest rate, the special depositors assume all the risk of loss or depreciation, and, as in the case of stock concerns, they would be the first to suffer in the event of insolvency.
This form of savings banks properly belongs to a strong class of municipalities. They can only thrive in places where the local spirit is strong, the local government pure, and where the local officials are accustomed to wield a large measure of authority. Accordingly, they have come into being and met with success in those countries where the early history of the town made a large measure of local autonomy a necessity. Towns of this class possess the public spirit and the intelligent administration required for the success of such a public venture. They also possess a fund of gratuitous public service among the citizens which may be drawn upon when occasion requires.
Such banks are found in Austria, France, Italy, Denmark, Sweden, and Japan. The best examples are to be found in Germany, where they have been in operation for a long period of years. Savings institutions exist here at present in great variety and number, including State or Province Savings Banks, City Savings Banks, Township Savings Banks, County Savings Banks,Bezirk(District) Savings Banks, Private Savings Banks, and Co-operative Savings Banks.
These banks have some 19,000,000 pass books out and their deposits amount to 13,500,000,000 marks ($3,213,000,000). These deposits are practically all guaranteed by the various municipalities of the Empire, which condition forms a bulwark of confidence in the security of private wealth and earnings that cannot be shaken by hard times, panics, bank failures, etc.
The co-operative banks of Europe, otherwise called "People's Banks," are essentially savings banks, in that they depend for their working capital upon the accumulated savings of their members. The aims of these banks are firsteconomic, to enable the economically weak to make themselves financially strong by the power of combination; second,moral, to bring the members together in a unity of interests and to develop character by making thrift and good habits the groundwork of their operations; third, educational, to train in business methods and in the handling of money those whose scope has been narrow and whose experiences have been few in this regard.
In the establishment of these banks, the cardinal rules have been: Maximum of responsibility, minimum of risk, maximum of publicity. To secure the maximum of responsibility, unlimited liability has been accepted by the members in many cases; that is, each one pledging his all for the good of all; and, second, to secure the minimum of risk, character is made the basis of membership and good habits the prime requisite for membership. No investments are made in speculative enterprises, and the purposes for which the money is borrowed are closely inquired into and due care taken that the funds shall be applied for such purposes only. To secure the maximum of publicity the action of the bank in all matters is given the widest publicity possible in order that the work may have public inspection.
The result of these simple rules has been that the poor have proven as good, if not better, creditors than the rich; for once losing credit they can never regain it except by the slow process of years of good behavior.
The great pioneers in the "People's Banks" were Raiffeisen and Schulze-Delitzsch. They fully appreciated that any system that would succeed must descend to the level of its beneficiaries and they have admirably adapted the co-operative idea of banking.
The home of the mutual savings bank is in the East, where it began operations in 1816, and may even be said to be in the Eastern States; for west of Buffalo and south of Baltimore, we find only 21 savings banks of the mutual character. Out of 647 savings banks of the mutual type found in the United States, 593 are found in New England, New York, and New Jersey; and over one-half, or 334, are found in the two States of New York and Massachusetts. Maine, Vermont, Connecticut and New Hampshire have 215, the total of which accounts for all but 100 of the mutual savings banks in this country.
The dearth of savings banks in Pennsylvania is notable. It would seem strange that in a state of such character, where the mutual savings bank had its first test, and where in individual instances it has been extremely popular and successful, the failure of such an institution has been so pronounced; but Pennsylvania is the home of the building and loan association (there are over 1,400 in operation), which seems in a measure at least, to fulfill the same purpose. From a pamphlet issued by the Dollar Savings Bank of Pittsburgh in 1905, the striking sentence is gathered, that to-day at the end of half a century the Dollar Savings Bank stands as theonlyinstitution of its kind in Western Pennsylvania.
As we go south and west the banks take on a more commercial aspect, and the savings bank as we know it in the East is a rarity, and the word "savings" in their title is a misnomer. This is particularly true of Iowa, where we find practically all state banks using this word, and yet very few of them are other than banks of discount. The reason for the large number may be in the economic conditions of that State, and also the fact that banks may organise with as low as $10,000 incapital, making it possible to establish a bank in even the smallest place.
In Illinois, for instance, we find no distinctively savings banks, and in a city like Chicago, where if the same success had attended the savings banks as it has in New York, upwards of a billion dollars would be on deposit, we find no strictly savings institution other than banks of discount and trust companies operating savings departments.
The reasons for the absence of mutual savings banks in the West and South lie, no doubt, as Hamilton suggests, in the fact that these sections were not settled from religious, but commercial motives; and the "spirit of New England" being lacking, the savings bank which requires a peculiar spirit of philanthropy, and age, as well, has not become a factor in the development of the country. In fact, the eleemosynary institution, such as the college, the hospital, or the savings bank, the former requiring endowments of money to become successful, and the latter the endowment of gratuitous management to become possible, is last to follow in the economic development of a community. Another reason may be in the pre-ponderance of agriculture among the employments, which does not, until the country becomes highly prosperous, afford much in the way of idle funds which would go into the savings banks. The mutual savings bank is a product of the East and promises to remain so in spite of the fact that some of the Western states have very good, if not excellent, savings banks laws.
The dearth of savings banks in the South is, no doubt, due to the prostration following the Civil War, which left the country drained of its resources; the general ignorance of banking functions, and the improvidence of the Negro.
The postal savings bank is not a bank, or a banking system, so much as it is an adjunct of the Government; for the fundamental idea is that through the post office the Government holds itself out as willing to accept the savings deposits of the people, invest them in its own securities and become absolutelyresponsible for the safe return of the funds when called for, with a nominal rate of interest. All the leading countries of the world except Germany and Switzerland now operate the postal savings banks. While the rules may differ in the details, the general scheme is the same, and a review in brief of the system of Great Britain will serve to illustrate the methods of operation of such an institution.
The present system was established in England in 1861. The deposits, at whatever office they may be made, can be withdrawn from any other office which transacts a savings bank business. The accounts are kept in London and all moneys are remitted to the headquarters, where it is handed over to the Commissioners for the Reduction of the National Debt, who invest the funds in public securities.
Deposits may be made as low as one shilling or multiples thereof, and the limit of deposits for an individual is $150 during one year or $650 in all. Charitable societies may deposit without limit. For the benefit of youthful depositors, who have not a shilling to deposit, cards are issued upon which stamps are placed as purchased, and when filled represent one shilling, and may be turned in as cash. School managers are urged to bring this plan to the attention of the pupils, and it has been productive of good results, over 5,000 schools having adopted this system. The interest rate is fixed at 2-1/2 per cent. and never varies.
[94]In spite of the numerous differences in the postal savings bank system of the forty-odd countries possessing them, there are certain fundamental features common to all. Whatever else a postal savings bank may be, it is without exception an institution working principally through the post offices, and its primary object is the encouragement of thrift among the poorer classes by providing safe and convenient places for the deposit of savings at a comparatively low rate of interest. Inthe discussion of the postal savings bank proposition in this country, no one questioned the desirability of encouraging habits of economy and thrift on the part of the public, nor was there any question that adequate savings bank facilities should be provided for this purpose; the debate hinged very largely upon the question whether adequate facilities of this character were not already provided by private initiative.
The advocates of a postal savings bank claimed that adequate savings facilities were not and could not be provided by private enterprise, because of the expense of conducting savings banks in small communities, and also in larger communities where the people were not yet educated to the saving habit; and they pointed particularly to the lack of savings facilities in the southern and western states....
... The country is not nearly so well provided with banks receiving savings accounts as with post offices. In the United States there are 270 square miles of territory to each bank carrying savings accounts and 50 square miles to each post office; there is a population of 8,370 to each such bank and of 1,542 to each post office; and there are 5.4 post offices to each bank carrying savings accounts. A comparison of the figures for the different sections and states shows that it is in the southern, western, and Pacific states that savings bank facilities are most lacking.... The New England, eastern, and middle western states are much better provided with banking facilities than are the other sections; but even in these states post office facilities are much more ample than savings bank facilities....
An objection repeatedly urged against the establishment of a postal savings bank was that it would prove a competitor to existing banks. The fear of such competition appears to have been the chief cause of the opposition of most members of the banking fraternity to all postal savings banks proposals. Senator Cummins of Iowa said in the Senate: