NATIONAL BANKS AND THE TRUST COMPANY PROBLEM ADDRESS DELIVERED BY EUGENE E. PRUSSING, OF PRUSSING, BROWN & KING, CHICAGO, BEFORE THE AMERICAN BANKERS' ASSOCIATION, AT NEW YORK, SEPTEMBER, 1904. THE purpose of this paper is briefly to consider the situation which has arisen in the last fifteen years, though it has only recently become acute in its manifestations, and which has been not inaptly, though not quite accurately, called the "trust-company problem." It is considered safe to assume in this audience not only the existence, but also the importance, of the problem. The first consideration is to define its character; the second is to learn its cause and history; and the third and last, to suggest a possible remedy. Broadly speaking, it may be defined to be the anomalous condition of affairs which permits the existence in the same community, side by side, of two classes of banking institutions, competing for practically the same business-namely, deposits-one of which is quite strictly limited in respect to its investments and guarded by definite requirements in respect to its cash reserve, while the other is practically free from both these wholesome restraints. These two competing classes are the national banks, organized under the National Banking Act, on the one hand, and the state banks and trust companies, organized under state laws, on the other. The situation is peculiar to this country; it does not, nor did it ever, exist in European countries; its essential characteristic is legal. The reason for its existence is to be found in our dual form of government, our separation of state and national affairs, and the questions of policy arising therefrom. The existence of the problem has little or nothing to do with the nature of the banking business. Technically speaking, from the standpoint of banking science, it is an accident. Its immediate cause lies in the failure of the National Banking Act to give national banks power as broad as those given to the state banks and trust companies by the banking laws of the various states enacted in recent years, and commensurate with the modern requirements of the business. The National Banking Act provides for only commercial banks, which were the chief need of the public at the time of its enactment. Since its enactment new and great public needs have arisen, which the national banks have not been able to meet. The main point in the situation is this: State banks and trust companies generally are authorized to do a general banking business-that is to say, to receive deposits from and make loans to, commercial, savings, trust, and all other customers-while the national banks are confined to a limited banking business, and are authorized to make only commercial loans, and thus practically, though not legally, to receive only commercial deposits. All other deposits naturally tend to the state banks and trust companies. Broadly speaking, state banks and trust companies are not regulated by law in their investments and loans, and there is practically no requirement as to their cash reserve, while the national banks are closely guarded by law in both respects. If the national banks as a class are to maintain their positions as the leaders in the business, something radical must be done with the legal situation thus created. The question is: How should this be done? The facts necessary to a consideration of the situation are these: Our national banks are, legally speaking, the result of an exercise of the powers of the federal government with respect to war and the currency, for the purpose of aiding the government in the great operations involved in borrowing money for, and paying the expenses of, the War of the Rebellion. When they were created, their existence was regarded by many as temporary. Their continuance for forty years after the close of the war, in times of peace, is evidence of their value as instruments of commerce and their helpfulness in furthering the prosperity of the nation. The means they were to employ in aiding the government were to issue currency based upon the deposit of government bonds purchased by the banks, and to facilitate the sale of government bonds to the public. As an incident to this business they were authorized to receive deposits of money, but were authorized to loan money only upon, or in discount of, commercial paper and bills of exchange. These limited powers have placed them at a disadvantage in modern days, when the demands of the public for savings banks, trust companies, and other financial agencies have largely increased the field of banking operations, so that to-day, instead of being far and away the leaders in financial affairs, they are struggling for place and are obliged to ally themselves with institutions of the trust-company class to maintain a fair position with the leaders. in the financial world. The reason for this situation is not far to seek, and the remedy is an obvious one, but the difficulty in bringing the two together, and thus relieving what may become a public misfortune, may not be easy. Reforms of a financial character involving national legislation, though in merely administrative or other subordinate affairs, are very slow of enactment. They require a long campaign of education to arrive at an understanding on the part of even our legislators, for the subject is to most of them terra incognita, and the public has an undefined fear of anything the national banker wants. That an expansion of the powers of national banks has become a necessity to the legitimate exercise of their functions as parts of the machinery of the national government should require no long argument. A statement of the present powers of national banks, coupled with a short historical review of the development of the general banking business, which has resulted from the needs of our government and people since national banks were first established, will easily demonstrate the fact, and should arouse a demand that the undisputed powers of the national government should be exercised to give its sanction to the grant of further authority to these institutions, commensurate with modern requirements. The refunding operations after the war justified the continuation of the national banking system when the first charters began to expire in 1884, and a renewal of charters was granted. Since then these institutions have become so thoroughly a part of the government machinery and a necessity to the public that their abandonment would be regarded as a long step backward. The science of banking at the time of the establishment of national banks was at a very low ebb. It had not progressed very far in this country at any time, though the subject of much political contention and legislative action. The panic of 1875 and the breaking up of commercial relations with the South at the beginning of the war, with the consequent great losses to all engaged in commercial pursuits, especially banking, had reduced the number of banks and their operations to an almost irreducible minimum. The financial needs of the country were being served by a comparatively few survivors of the commercial state banks, the New England and New York savings banks and their imitators in some of the other states, private bankers of various kinds, and a very few, perhaps six, trust companies. The needs of the country during and immediately following the war, the profitable privileges conferred upon the national banks, the patriotic sentiments which both inspired, the successful management of these banks, and their careful supervision by the national government, in spite of a number of disastrous failures among the banks, created public confidence, and naturally resulted in the growth of the national banking system, until it became the chief financial element of the country; and until 1890 it was without a serious competitor in its leadership in financial affairs. In the early eighties, the United States had, financially speaking, recovered from the disastrous effects of the war, and the panic of 1873; we were rapidly paying off the national debt, and the people were accumulating a surplus. The need of investment for this surplus, which no longer found lodgment in government securities, created a demand for proper agencies, especially in the East and Middle West, and the limitations then as now existing upon the powers of national banks turned the thoughts of enterprising persons into other channels. State banks had been almost wholly abandoned, because their profitable feature of issuing bank-notes had been taxed out of existence by the National Banking Act. A few exceptions in some of the states, notably Illinois, maintained their existence chiefly as savings banks, or, if engaged in commercial business, were sustained by reason of the extraordinary character of their stockholders or officers or both. In New England and the middle eastern states savings banks of an especial type had grown up, and, besides these and the national banks, perhaps a dozen of institutions known as trust companies had been established under state charters, and in nearly every instance had flourished. These trust companies were really banking institutions. The name "trust company" did not truly describe the chief part of their business; they received deposits, which they mixed with their own funds, and for which they became bankers and not trustees. These deposits, however, were then of a peculiar character in two respects-viz., they were not payable on demand and they bore interest. They were usually taken upon certificates of deposit, payable generally upon short notice, or at a time stated, not exceeding one year, and bore a rate of interest varying from 2 to 6 per cent., usually less than 4. Such deposits, while not unknown in the national banks, were exceptional in them and were not encouraged, as they involved payment of interest, and the payment of interest to ordinary customers was then considered bad banking. The trust companies, however, solicited these deposits from that increasing class of the community of recent growth known as investors, and naturally, as their business to begin with was limited, looked also to other business for support and profit. In lieu of the patriotic element with which the national banks were invested, the trust company had received another, but also very worthy, characteristic. The father of the trust company selected the agency legally known as the fiduciary trust as one of the chief elements of his creature's composition, and impressed its sacred name upon his child-a most happy and successful thought. The administration of trusts by trust companies is, in fact, not essentially different from, and no more important than, the execution of ordinary financial agencies by other banks throughout the financial world, but the character given to this particular class of agencies by its legal derivation, the sanctity with which it has been enveloped by judicial and legislative action, as well as the popular imagination, make it a highly valuable trade-mark. Nevertheless, we all know that the agency involved in making an ordinary investment for an inexperienced man or woman is no less serious and should be regarded as no less sacred. The public appreciation of this trade-mark, however, in the case of the dozen trust companies referred to, was sufficient to favor them with very considerable patronage and to make several of them, particularly in New York and Philadelphia, leaders in deposit lines, so that bankers generally began to consider them desirable adjuncts to the financial scheme. The trust companies in question were all acting under special state charters, much alike in their chief features, but differing in details. They were not all incorporated exclusively for trust or |