In the matter of reserves the proposed changes follow closely the provisions of the Federal Reserve Bill. Under the new law the reserves required will be: In a borough with a popu- Reserve 18 per cent, of lation of 2,000,000 or over (i.e., Manhattan) In a borough with a population of over 1,000,000 and not more than 2,000,000 and not having an office in a larger borough Elsewhere in state which 12 per cent shall be Reserve 15 per cent, of Reserve 12 per cent, of Trust Companies Reserve 15 per cent, of which 10 per cent shall be on hand and 5 per cent may be on deposit Reserve 13 per cent, of which 8 per cent shall be on hand and 5 per cent may be on deposit Reserve 10 per cent, of which 4 per cent shall be on hand and 6 per cent may be on deposit, except that in cities of less than 100,000 population only 3 per cent need be on hand At least one-half the reserves on hand shall consist of gold bullion, gold coin, gold certificates, or United States notes, and the remainder shall consist of lawful money of the United States or any other form of currency authorized by the United States. State banks and trust companies that become members of the Federal Reserve system may keep the reserves permitted to be on deposit with the Federal Reserve Bank. Other reserve depositaries shall be designated by the Superintendent of Banking. The reduction in the reserves for which the new law provides will undoubtedly work a great enlargement in the credit which the State institutions will be able to extend. In the provision which is made for acceptances the greatest possibility of credit expansion is to be found. In brief, this portion of the law permits State banks and trust companies to accept drafts on them and payable within one year. The liability of institutions in the Borough of Manhattan on account of such acceptances for account of any one individual, firm, or corporation is limited to 25 per cent of their capital and surplus. Banks and trust companies elsewhere may accept the drafts of any one individual, firm, or corporation up to 40 per cent of their capital and surplus. The drafts so accepted must be drawn in good faith against actually existing values, or, where they exceed 10 per cent of the bank's capital and surplus, may be, to the extent of the excess so authorized, secured by collateral having an ascertained market value that is 15 per cent more than the obligation against which it is hypothecated. Under the new law State institutions may accept bills to the extent of 25 per cent to 40 per cent of their aggregate capital and surplus, "multiplied by the number of individuals, firms, and corporations who desire and can arrange for this form of credit." The bill contains many other interesting provisions. One of these permits the formation of land banks with authority to issue debenture bonds against guaranteed real estate mortgages. Another imposes some rather drastic restrictions upon private and unincorporated bankers. It is unnecessary, however, to discuss these provisions; they are chiefly of local interest. The changes that are nation-wide in their importance are those that relate to reserves and acceptances. There is reason to believe that the other States of the Union have been awaiting New York's action in regard to its banking system and will speedily follow suit in changing their laws so that the State institutions throughout the country may compete with the increased facilities which the National banks will be able to offer under the Federal Reserve system. The liberalization of the right to accept, for which the New York law provides, will enable the State institution to grant far greater facilities in this respect than the National banks can offer.' On the other hand, the State institutions that do not become members of the Federal Reserve system will be unable to avail themselves of the provisions of the Federal Reserve bill in the matter of rediscounts and Federal Reserve notes. It seems probable, therefore, that the competition in the extension of credits which is almost certain to come when the two systems are fully organized will be one of rediscounts versus acceptances. The extent to which either or both of these means of credit extension shall be popularized and availed of will depend largely upon the education of the public as to their respective merits. This advantage has now been largely overcome by granting to Federal Reserve Banks the right of accepting domestic bills of exchange.-EDITOR. In New York attempts are already being made to form one or two institutions with large capital whose business shall be confined to the purchase and sale of accepted bills. The interdependence of the banks in the Federal Reserve system and the facilities that they will enjoy in the matter of rediscounts and the procurement of Federal Reserve notes will, of course, give them a great advantage in times of stringency, but during periods of monetary ease the State institutions will doubtless be able to attract much business now controlled by the National banks. It seems altogether likely that during the transitionary period the competition between the State and Federal banks will be exceedingly keen. The appeal of the Federal system will be in its National solidarity and the security which that solidarity implies, but the public will have to be educated to appreciate the importance of this factor. 166. THE TRUST COMPANIES AND THE FEDERAL In the process of carrying into effect the provisions of the Federal Reserve act, the Federal Reserve Board has encountered an unexpected difficulty. The Federal Reserve act in subsection (k) of section II provided that the Board might, when such action was not in contravention of state or local law, grant to national banks the power to exercise the functions of trustee, executor, administrator, and registrar of stocks and bonds. Regulations stating the conditions under which these powers might be applied for were not issued by the Federal Reserve Board until February 15, 1915, but, as soon as they had been placed in circulation, a considerable number of applications were at once filed. Trust companies in a number of states, and state banks in several others, believing that the competition to which they would be subjected by national banks, should the latter be vested with the right to exercise the desired powers, would be injurious, immediately undertook to secure action by state authorities designed to prevent the extension of the functions referred to. In several states legislation has already been enacted at the instance of state banks or trust companies, or both, prohibiting the exercise of such functions, and in several more there has been a refusal on the part of the state legislatures to enact any measure removing the existing disabilities I Adapted from "Washington Notes" in Journal of Political Economy, XXIII (1915), 511-12. from national banks and permitting them to exercise the functions referred to, should they be empowered so to do by the Federal Reserve Board. In other states the contest is still in progress and bids fair to continue active for a good while to come. On the other hand, a number of states, particularly in the West and Middle West, have already enacted enabling legislation under which national banks may exercise the functions authorized by the Federal Reserve act, subject to the supervision and control of the Federal Reserve Board. The trust companies, recognizing that their opposition to the provisons of the Federal Reserve act in this respect has been in part ineffectual, have obtained adverse legal opinions and arranged to file suit designed to test the constitutionality of the provision in the act to which objection is thus taken. Such a suit will be designed to test the question whether Congress has power to grant authority of the kind specified to federal reserve banks or to any other corporation whatever, and, should the decision be adverse to the power of Congress, national banks would be unable to exercise the functions in question even in those states in which local law was favorable, and in which, therefore, it was manifest that the people were desirous that national banks should be empowered and authorized to do such work. The point at issue is one which involves more than the mere business interests of the trust companies of the country, it being essential to the question whether or not the effort of the framers of the act to obtain a unification of the banking system shall or shall not be successful. The act, as is well known, provided for the admission of state banks as members of the federal reserve system upon a practical equality of privilege with national banks. In order to offset the favorable position thus given to state banks, and thereby to remove any incentive that might otherwise exist for national banks to surrender their charters and recharter under state law (becoming members of the federal reserve system at will, if so disposed), the Federal Reserve act granted them the trust company powers which are now under discussion. It was felt that by so doing national banks would be enabled to exercise some of the profitable functions heretofore exercised only by trust companies, and that under these conditions they could afford to bear the competition to which they would be subjected through the entry of trust companies into the federal reserve system, vested, as most of them are, with full commercial banking powers in addition to their other rights. To hold that the Federal Reserve act is unconstitutional in respect to the provisions cited. would produce a state of affairs in which, while national banks were subjected to the rigid regulations already applicable to them and were prohibited from engaging in trust business, the trust companies (already authorized to exercise so wide a range of functions) would be able to present themselves to the public as qualified to compete on equal terms with the national banks already in the system. This makes it evident that the real question at issue in the trust company discussion is the extent to which the Federal Reserve Board shall be permitted to proceed with its effort to harmonize and unify the banking system of the country by bringing about a general federation of all commercial banks under its jurisdiction. The Federal Reserve Board has, however, taken no part in the actual legislative discussion in the various states, contenting itself with merely announcing that it was in sympathy with the effort to give effect to the trustee and executor provisions of the Federal Reserve act. 167. DEPARTMENT-STORE BANKING' Is "department-store banking" to be the final outcome of the forces now working toward increasing the functions that may be performed by national banks and the counterforces that would extend the powers of trust companies, if they are unable to keep their monopoly of trust powers? Will each little town that now has only a national or a state bank or a trust company possess in the future a single institution with all the functions of a bank, with those of a trust company added, a savings department, and a safe-deposit vault in the basement? If so, will not the inevitable tendency be to reduce all such institutions to the same basis and perhaps leave only one kind of bank, all in the Federal Reserve system and all under Federal supervision; in a word, all national banks? These are the questions that some bankers have been turning over in their heads and discussing since the irrepressible conflict between national banks and trust companies over the question of trust powers has come to a head in New York State. Forces are at work, growing out of the enactment of the Federal Reserve Act, which tend to put all banking concerns on an even footing, making each bank not only that, but a savings institution and a trust company as well. The provisions in the Federal Reserve Act empowering the Federal Reserve Board to grant to national banks trust company and savings bank powers, together with the provision for limited loans on real 'Adapted from "Department-Store Banking," The Annalist, V (1915), 234. |