Moulton, Harold G.: Principles of Money and Banking, Part II, chap. viii. Patterson, W. R.: Pawnbroking in Europe and the United States (United States Department of Labor, Bulletin No. 21, March, 1899, pp. 173-310). City. Wassam, Clarence H.: The Salary Loan Business in New York Wolff, Henry W.: Peoples' Banks. CHAPTER XXIX FINANCIAL INTEGRATION The desirability of specialization by financial institutions has long been emphasized in the writings of both economists and practical bankers and in legislative acts and court decisions. Just as specialization became the dominant characteristic of industry and commerce during the greater part of the nineteenth century, so specialization in the field of finance came to be regarded as in the natural order of things. A few brief statements will be sufficient to indicate the prevailing views as to what constitute the "legitimate" functions of the different types of financial institutions that we have been discussing in the preceding chapters. In the writings of economists and practical bankers are found repeated statements to the effect that the business of commercial banking is merely to facilitate commercial transactions through the making of short-time loans-to manufacture credit and furnish an important part of the medium of exchange. Emphasis is also very commonly placed upon the relation of commercial banking to the marketing or mercantile process; indeed the term "commercial" bank owes its origin to this emphasis the words commercial and mercantile being used as practically synonymous terms. Banking literature and legislation unite in condemning the making by commercial banking institutions of long-time loans for fixed capital purposes. Savings banks, on the other hand, are in theory intended to facilitate only the raising of fixed capital, to collect the little rivulets of individual savings and turn them over in larger amounts for investment uses. Investment banks similarly act as intermediaries in the raising of funds for fixed capital purposes. Even the trust company was originally designed to act primarily in the capacity of trustee, its banking functions being limited, at best, to investment operations incidental to the employment of trust funds. There is nowadays relatively little specialization by financial institutions. From our analysis in preceding chapters, we have already seen that in practice financial specialization is far from complete. We have seen, for instance, that savings banks do a considerable volume of commercial banking business; some of them, particularly in the Middle West, are, in fact, difficult to distinguish from commmercial banks, since they handle both commercial and savings accounts and make loans for commercial as freely as for investment purposes. Indeed, a large majority of all savings banks make loans for working capital purposes directly to customers and indirectly through the purchase of commercial paper and acceptances in the open market.' We have seen that commercial banks do not now confine their loaning operations to mercantile establishments, but extend credit to all classes of enterprise, industrial and financial as well as commercial; we have seen that some of their unsecured loans are devoted to fixed capital purposes-this being particularly the case with the state institutions, and we have found that they make a huge volume of loans on collateral, a large percentage of which is devoted to fixed capital purposes.' It has been noted that commercial banks now usually have savings departments;3 and it may be noted that many of them also have investment banking or bond departments. Some of the largest commercial banks of the great financial centers are extensively engaged in underwriting activities, while many of the state commercial banks are actively interested in the financing of urban real estate operations, particularly the construction of apartment buildings. Investment banks nowadays frequently have commercial banking departments; while even the commercial paper houses have in some instances, at least, broadened the scope of their operations to include underwriting and bond distribution. Finally, in our study of trust com1 See chap. xviii, particularly the financial statements on pp. 328 and 333-34 above. See also pp. 731-32 below. * See chap. xxi. 'See pp. 334-35 above. panies we have seen that the laws now permit them to engage in a great variety of financial operations, including trusteeship, agency, suretyship, and both investment and commercial banking.' In a general way it is, therefore, already clear that there is in fact no such clean-cut specialization among financial institutions as has been commonly supposed. But if we are fully to appreciate the extent to which integration has been carried out in the financial world and the reasons for this trend, it will be necessary to study the development of the trust company as a type of financial institution and to indicate the effects of this development upon the operations of commercial banks. I. CAUSES OF THE GROWTH OF FINANCIAL While the laws of most states did not in the early days give to trust companies specific power to engage in commercial banking operations, the opportunity to increase their profits by accepting demand deposits and making short-time loans was so enticing that these institutions gradually assumed the functions of discount and deposit. This of course brought them into direct competition with national and state commercial banks, which were denied the power to engage in trust company business; and for a generation vigorous opposition was waged by the commercial banks to this "unwarranted" invasion of their sacred field of enterprise. It was contended, moreover, that this broadening of the scope of trust company operations was as dangerous as it was illegitimate. Numerous cases came before the courts and at first the decisions supported the contention that commercial banking was not a legitimate field of trust company operation. But as the trust companies of various states continued to extend the commercial side of their business, the state courts gradually came to accept the movement as inevitable.2 See also statement on p. 762 below. 2 See Tso Hang Mai, The Banking Functions of Trust Companies (a Master's thesis of the University of Chicago), 1920. It was during the decade of the eighties that the trust companies first actively engaged in the commercial banking business. Flying in the face of banking theory and the powerful opposition of the commercial banks, both state and national, the trust companies continued to expand the commercial side of their business and to grow with amazing rapidity. It will be seen from the charts on pages 359-60 that while the number of trust companies is still much smaller than the number of national and state banks, the rate of increase has been quite as rapid, more rapid indeed than that of the national banks; and that the average size of trust companies is about three times that of national and twelve times that of state banks. The greater number of national and state banks, particularly of the latter, is largely attributable to the fact that until recently the trust company has found a remunerative field of enterprise only in the larger cities-a fact which is also the explanation of the large average size of the trust company. In the last few years, however, the number of trust companies has been rapidly increasing in the smaller cities. That the rapid growth of the trust companies has not been confined to the investment and trust features of the business may be seen from the following statistics of deposits in trust companies, and in state and national banks respectively in the year 1918:1 *Some state institutions do not differentiate in their reports between time and demand deposits. I 1 Report of the Comptroller of the Currency, II (1918), 170, 794, 818. |