II.Clearing Houses in England

A competent examiner—and there are many such now in the government employ—while he can not pass judgment on all the loans in a bank, can, after a careful examination, or a series of examinations, form a wonderfully correct judgment as to the general character of its assets and as to whether its management is good or bad, conservative or reckless, honest or dishonest. Examinations, as they are now conducted, have a most beneficial influence on bank management, especially by way of restraint. The correspondence carried on by the Comptroller, based on the examiners' reports, does an inestimable lot of good in the way of forcing bank officers to comply with the law and in compelling them to face and provide for known losses as they occur. Supervision by examination does not, however, carry with it control of management and can not, therefore, be held responsible for either errors of judgment or lapses of integrity. Examination is always an event after the act, having no control over a bank's initiative, which rests exclusively with the executive officers and directors, and depends entirely on their business ability, judgment, and honesty of purpose.

The clearing-house association of Chicago was the pioneer in the establishment of an independent system of clearing-house bank examinations in this country, its system having been inaugurated on June 1, 1906, with results that have, to the present time, more than fulfilled the expectations of the bankers of that community[134]....

In substantially his own words the Chicago examiner operates under the following conditions: The examinations extend to all the associated banks of Chicago and to all non-member institutions. The work is conducted with the aid of five regular assistants, each fitted by experience to thoroughly do that part of the work assigned to him. The examinations include, besides a verification of the assets and liabilities ofeach bank, so far as is possible, an investigation into the workings of every department and are made as thorough as is practicable. After each examination the examiner prepares a detailed report in duplicate, describing the bank's loans, bonds, investments, and other assets, mentioning specially all loans, either direct or indirect, to officers, directors, or employees, or to corporations in which they may be interested. The report also contains a description of conditions found in every department. One of these reports is filed in the vaults of the clearing house, in the custody of the examiner, and the other is handed to the examined bank's president for the use of its directors. The individual directors are then notified that the examination has been made and that a copy of the examiner's report has been handed to the president for their use. In this way every director is given an opportunity to see the report, and the examiner, in every instance, insists upon receiving acknowledgment of the receipt of these notices.

The detailed report retained by the examiner is not submitted to the clearing-house committee, under whose direct supervision he operates, unless the discovery of unusual conditions makes it necessary. A special report in brief form is prepared in every case and read to the clearing-house committee at meetings called for that purpose. The report is made in letter form, and describes in general terms the character of the examined bank's assets, points out all loans, direct or indirect, to officers, directors, or employees, or to corporations in which they may have an interest. It further describes all excessive and important loans, calls attention to any unwarranted conditions, gross irregularities, or dangerous tendencies, should any such exist, and expresses, in a general way, the examiner's opinion of each bank as he finds it.

Less than a year after the Chicago Clearing House Association appointed its special examiner the associated banks of Minneapolis took similar action. The conditions under which the Minneapolis examiner operates are substantially the same as those governing the examiner at Chicago, the principal difference being that instead of the examiner sending a copy of his report to the president of the examined bank and notifying each of the directors of such bank that he has madesuch examination and that the report is in the hands of the president of the institution, as is the rule of procedure at Chicago, and which, in a measure, leaves it to the discretion of the directors whether they examine the report carefully and in detail, the original report is delivered by the examiner at Minneapolis in person to the board of directors of each bank which he examines, at a meeting convened for that purpose. The report is read and the criticisms, if any, are fully discussed, and the recommendations considered. In this way no director can complain that he had not sufficient opportunity to become fully conversant with all the details of his bank.

[135]The exact origin of the London Bankers' Clearing House will probably never be determined, for, like other institutions whose purpose has been to save time and trouble, its system appears to have been gradually evolved.[136]

With the growth of the check system, each banker would daily find himself in possession of a number of drafts for the credit of his customers that needed collection at the offices of other bankers. This would necessitate each bank sending out one or more clerks on what became known as "walks" to obtain cash or notes for these drafts from the houses on which they were drawn.

As in London alone there were some fifty or more private firms carrying on a banking business this necessitated a considerable amount of work and was attended with grave risk of robbery.

It is probable, therefore, that arrangements were made by some of the bankers, as it is still done in some country towns, to meet at one bank one week and at another the next for the purpose of exchanging checks.

But in consequence of the number of the London bankers this method would prove awkward, and about the year 1770 we find that the walk clerks from the city and West End banks had made a practice of meeting at lunch time at a public house called the Five Bells in Dove Court, Lombard Street, close to St. Mary Woolnoth Church, and not so very far from the site of the Bankers' Clearing House of to-day. Here in the public room, or according to tradition on the posts in the court outside, each day after lunch a rough system of exchange of checks was carried on between the clerks from each bank, the balances being settled in notes and cash. From this rough system has developed the efficient organization of to-day.

In May, 1854, the clearing house was closed for alterations and enlargement, and the business was temporarily carried on at the Hall of Commerce. Here, on June 6, 1854, applications for admission to the clearing house were received from the following joint-stock banks: The London and Westminster, the London Joint Stock, the Union Bank of London, the Commercial Bank of London, and the London and County Bank; and it was resolved "that the secretary be authorized to comply with such applications, subject to the payment of an annual sum to be fixed by the committee to reimburse them for the outlay that has been found necessary to afford accommodation for their admission." There were at this time 25 private banks in the clearing house.

Following on the admission of the five premier joint-stock banks in 1854 there were frequent applications from other joint-stock banks—many from the moment of their foundation. But the wise reply of the committee was invariably that they did not "deem it expedient to take into consideration such applications from any banking establishment that has not been in operation at least for a period of twelve months."

Though the joint-stock banks had been admitted to the clearing house yet they were only allowed to rent seats there and had no share in the management, so for the support of their mutual interests they had a committee of their own which settled the rate to be given by the joint-stock banks in the London district for deposit money at seven days' notice.

In 1858 the country bankers submitted a plan for establishing a country bankers' clearing house in London and proposed that the clearing house committee should appoint two or three of their number to unite with them as a working committee.

The establishment of a separate country bankers' clearing house would have led to many inconveniences, and Mr. John Lubbock, now Lord Avebury, submitted a plan for carrying out a separate country clearing at the clearing house. The committee approved the plan and submitted it to the country bankers' committee, who also gave their approval.

Thus was instituted at the Bankers' Clearing House the country clearing, which more than all else has brought about the almost universal use of checks in England, to the exclusion of notes and coin.

Mr. Lubbock's scheme was so well thought out that from its initiation to the present time the rules have had to be only very slightly modified.

In 1864 the Bank of England entered the clearing house to clear on one side only, the outside, for though the bank presents to the clearing bankers at the clearing house all checks payable by them, all checks and bills drawn on the bank are presented by the clearing bankers at the bank itself, and the proceeds placed to the credit of each bank's account. At the same time the governor of the Bank of England was made ex officio a member of the committee of clearing bankers. After 1864 few changes were made in the working of the clearing house, the volume of the country and town clearings increased greatly, but the house proved capable of meeting any increase.

Friction between the old private bankers and the joint-stock banks grew less as amalgamations and absorptions increased, and before many years the committee of London clearing bankers and joint-stock banks committee amalgamated, it being agreed, as a condition of the joint-stock banks committee ceasing to exist, that all the banks would abide by the ruling of the committee as to the rate of deposit at seven days' notice. Henceforth, every bank in the clearing house was entitled to have one representative on the committee. Suchrepresentatives have hitherto been chosen solely from the board or the partners and are nominated by their banks and formally elected by the committee. The committee elects its own chairman, vice-chairman, and honorary secretary. This committee meets regularly on the first Thursday in each month, Thursday being the day on which the Bank of England in normal times makes any alteration in the bank rate of discount, but it may be summoned by requisition at any time and meets automatically should the bank rate be altered, since this governs the rate of deposit allowed by the bankers.

The committee has full power over all clearing house matters, and from the importance of the banks who compose the clearing house its opinion carries very great weight on all matters in the banking world. It is, however, controlled only by the mutual agreement of its members: and the decision of the majority of its members, though followed loyally, is never used with any ultimate power of compulsion in matters affecting banking in general.

In 1907 a third clearing, the Metropolitan, was established. Hitherto, with the exception of one or two city offices which were included in the town clearing, the collection of drafts on London branches of the clearing banks had been effected by the post and by the sending out of walk clerks by each bank; but in 1907 it was determined to do away with such means of collection as far as possible and to collect the branch checks through the clearing house. This proved so successful that the West End banks were approached the following year, and with one exception readily consented to come into the new plan by which their clearing agents had delivered to them at the Metropolitan clearing all checks drawn upon them. This clearing is the first clearing made each morning and is handled so expeditiously that even the most distant London branches get their checks almost earlier than under the old system. They have, therefore, plenty of time to go through them and to make returns of any checks that cannot be paid in time for such return checks to reach the clearing house early in the afternoon. There are now over 330 banks and branches using this clearing.

For the better defining of the three clearing areas—town,metropolitan, and country—the letters T M C have been placed in the corner of all bank checks. From February 19, 1907, the date of the initiation of the Metropolitan Clearing, up to December 31 of that year, £482,227,000 was paid in this clearing, while for the year 1908 the total was £647,842,000, as compared with the town clearing total for that year of £10,408,254,000 and the country total of £1,064,266,000, making in all a grand total of £12,120,362,000, which figures, vast as they are, were a decrease of £610,031,000 on the total £12,730,393,000 for the previous year, 1907.[137]The work entailed by such vast figures as these could scarcely have been dealt with by hand alone, but by the installation of adding machines the work is easily and quickly done.

It must not be thought that all checks on London are presented through the clearing house, for checks on the London branches of the Scotch banks and of the colonial and foreign banks are still presented over the counter.

Moreover, though it is mutually understood between the clearing banks that checks on each other will only be presented through the clearing house, this agreement has no legal binding.

Two exceptions are continually made; documents or goods have to be taken up against cash, and the owner before parting wishes to be certain of his money. In this case the presenting banker either presents his check for marking—that is to say, the paying banker having ascertained from his customer's account that there is sufficient money thereon, marks the check for payment, which has the same effect as if the banker had accepted it; or, as is becoming more usual, the paying banker gives one of his own drafts on the Bank of England in exchange for the check.

Besides the London clearing house, which is an irregular building of no architectural features whatever, there are eight provincial clearing houses in England—Birmingham, Bristol,Leeds, Leicester, Liverpool, Manchester, Newcastle and Sheffield.[138]

Two only of these clear over £100,000,000 in the year. Manchester cleared £320,296,332 in 1907, with an average weekly total of £6,159,545 and an average daily total of £1,039,923, and Liverpool £196,325,829. The others cleared in the same year from £12,000,000 to £61,000,000. Small figures, indeed, compared with London, where the highest total paid on any one day was, in 1907, £106,703,000. In 1908 the highest total paid in one day in the London clearing was £85,833,000 and the lowest £24,903,000.

In London, as in the provincial places, the object of the clearing house is primarily the convenience of exchange of checks, not the regulation of banking, and little is regulated save, perhaps, the rate of interest to be paid on deposits at seven days' notice.

In these days, too, when the tendency is strong for amalgamation, the local banks are dwarfed by their gigantic competitors, with their branches in many counties and head offices in London, with the result that London each year controls more of the banking in England and the provincial clearings cease more and more to be under local control, but are controlled by their London head offices.

This may, if the present tendency of amalgamation continues,[139]result in the committee of London clearing bankers becoming an important controlling body, but that time is not yet at hand, and though, as we have said, an expression of opinion on the part of the committee carries very great weight, yet anything like dictation would very properly be resented by the important and old-established banks in both London and the provinces that are outside the clearing house.

FOOTNOTES:[121]James G. Cannon,Clearing Houses, Publications of the National Monetary Commission, Senate Document, No. 491, 61st Congress,2nd Session, p. 1.[122]Ibid., pp. 148-150.[123]Ibid., pp. 150-154.[124]Ibid., pp. 163-165.[125]62 members in 1914.[126]Ibid., pp. 41, 43, 44-46.[127]Ibid., p. 37.[128]Ibid., pp. 75-79.[129]O. M. W. Sprague,Banking Reform in the United States, pp. 104-113. Harvard University. 1911.[130]The figures in the text refer to the legal tender holdings of the banks. The banks also held a considerable amount of specie but it was not a free asset as most of it had been received on special accounts payable in gold. Including the specie holdings the reserve ratio was 12.8 per cent.[131]C. F. Dunbar, Economic Essays, chap. XVI.[132]The increase in the amount of money in circulation for August, 1893, was estimated at $70,000,000.[133]James G. Cannon,Clearing Houses. Publications of the National Monetary Commission, Senate Document No. 491, 61st Congress,2d Session, pp. 137-141.[134][A number of the more important cities such as St. Paul, St. Louis, and Philadelphia, following the example of Chicago and Minneapolis, have instituted clearing house bank examinations since 1907.][135]Adapted from Robert Martin Holland,The London Bankers Clearing House. Publications of the National Monetary Commission, Senate Document No. 492, 61st Congress.2nd Session.[136]The date of the establishment of the Clearing House is not known. The Clearing has, however, been in existence about 150 years.—Editor.[137][For the five years 1910-14, the total clearings of the London Clearing House were in the neighborhood of £15,000,000,000 per annum of which the Town, Metropolitan, and Country Clearings were about 86, 5.5, and 8.5 per cent., respectively.][138][The approximate number of clearing houses outside of London, in England, in 1915 is twelve, but these are used only for local clearings. In addition, most of the towns in England and Wales have a local exchange which is a clearing on a small scale.][139]This tendency has continued as to both the joint-stock and private banks.—Editor.

[121]James G. Cannon,Clearing Houses, Publications of the National Monetary Commission, Senate Document, No. 491, 61st Congress,2nd Session, p. 1.

[122]Ibid., pp. 148-150.

[123]Ibid., pp. 150-154.

[124]Ibid., pp. 163-165.

[125]62 members in 1914.

[126]Ibid., pp. 41, 43, 44-46.

[127]Ibid., p. 37.

[128]Ibid., pp. 75-79.

[129]O. M. W. Sprague,Banking Reform in the United States, pp. 104-113. Harvard University. 1911.

[130]The figures in the text refer to the legal tender holdings of the banks. The banks also held a considerable amount of specie but it was not a free asset as most of it had been received on special accounts payable in gold. Including the specie holdings the reserve ratio was 12.8 per cent.

[131]C. F. Dunbar, Economic Essays, chap. XVI.

[132]The increase in the amount of money in circulation for August, 1893, was estimated at $70,000,000.

[133]James G. Cannon,Clearing Houses. Publications of the National Monetary Commission, Senate Document No. 491, 61st Congress,2d Session, pp. 137-141.

[134][A number of the more important cities such as St. Paul, St. Louis, and Philadelphia, following the example of Chicago and Minneapolis, have instituted clearing house bank examinations since 1907.]

[135]Adapted from Robert Martin Holland,The London Bankers Clearing House. Publications of the National Monetary Commission, Senate Document No. 492, 61st Congress.2nd Session.

[136]The date of the establishment of the Clearing House is not known. The Clearing has, however, been in existence about 150 years.—Editor.

[137][For the five years 1910-14, the total clearings of the London Clearing House were in the neighborhood of £15,000,000,000 per annum of which the Town, Metropolitan, and Country Clearings were about 86, 5.5, and 8.5 per cent., respectively.]

[138][The approximate number of clearing houses outside of London, in England, in 1915 is twelve, but these are used only for local clearings. In addition, most of the towns in England and Wales have a local exchange which is a clearing on a small scale.]

[139]This tendency has continued as to both the joint-stock and private banks.—Editor.

[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 concerningbanks 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.

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 ofthe 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 havebeen 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 wasnot 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 companyhas 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.

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.

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.

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.

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 companywere 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.

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 preventthe 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.

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 restrictedto 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.

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 leastas 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.

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 branchoffices 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 rôle. 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 nationalbanks 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.

[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 thegreat 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....

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.

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