gathered together and made to do service in enterprises that benefit the whole people.

115., THE REGULATION OF TRUST COMPANIES1

BY JOHN FRANKLIN EBERSOLE

The trust companies present some different features from the state banks. While it is true that the laws concerning state banks and trust companies are tending to become assimilated, certain important differences remain.

The trust companies are distinctly authorized to accept trusts and to do a safe-deposit business in addition to general banking. The majority of the states which provide for a specified capital require a minimum of $100,000 or over. There is a tendency in recent legislation to lower this amount. "In every state except one the smallest permissible capital is as large for trust companies as for state banks, if not larger; in six states it is the same; in all the others it is larger."

Subscribed but unpaid capitals are permitted in fourteen states, but the majority require full payment. Of the latter over half require full payment as a condition for beginning business. The payment is required by all but nineteen states to be "in cash" or "lawful money." The accumulation of a surplus is not required in so many states for trust companies as for banks.

With respect to loans, trust companies are less restricted than state banks. Nine states which limit state banks do not limit trust companies.

The reserve requirements for trust companies are much less than for state banks. Six states and territories require no reserve whatever. Two states require reserves of trust companies but not of banks. In the remaining states, trust companies are favored by being allowed to count bonds as a part of the reserve, or to hold lower reserves against time deposits. Recent legislation shows a tendency to increase these reserves or to diminish the proportion of bonds held in them. This leniency has probably been due to the different character of the trust company deposits. They are largely inactive and contain but a small percentage of bank deposits which are subject to sudden or large withdrawals.

I

Adapted from "The Relation of State to National Banks,” Proceedings of the American Academy of Political and Social Science, I (1911), 291-92.

116. TRUST COMPANY FAILURES1

BY CLAY HERRICK

Statistics regarding failures and suspensions of trust companies are not obtainable prior to the year 1893. From 1893 to 1907 the percentage of failures (or the ratio of the number of companies failing to the number of companies in business) was about as follows for the different types of banking institutions:

National banks.

State banks....

Savings banks....

Loan and trust companies.

of 1 per cent 10% of 1 per cent

% of 1 per cent fob of 1 per cent

From these figures it appears that the proportionate number of trust company suspensions was less than that of any class of financial institutions except the National banks.

Regarding the losses involved in the failures, the showing of the trust companies is, on the face of the figures, not so good, the losses. assigned to them exceeding those of the other institutions, except the private banks. The figures represent, however, not the ultimate losses, but the best estimates of the probable results obtainable at the time. An examination of the figures for the year 1907, which account for 62 per centum of the entire estimated liabilities for the fifteen years, shows that they give a greatly exaggerated idea of the actual losses involved. Of the 17 trust companies reported suspended in 1907, at this date (November, 1908) about one-half have reopened for business, while several others are being liquidated without loss to depositors.

Especial interest attaches to the record of trust companies during and since the panic of 1907, because it was the first severe strain that has been undergone by these institutions since their great development began. On the whole the record must be pronounced very satisfactory. Although subjected to a strain that was unprecedented, their record compares favorably with that of other classes of financial institutions. The failures which occurred were in no sense ascribable to any inherent weakness in the trust company as an institution, but are accounted for in some cases by the dishonesty of officials and by undue laxity of the state laws under which they operated, and in others by pressure of circumstances which could not be overcome

Adapted from Trust Companies, Their Organization, Growth and Management, pp. 23-24. (Bankers' Publishing Co., 1909.)

by any kind of banking institution. The same causes brought about the downfall of other financial institutions, including National banks and State banks in states having the best laws for their regulation and control. The panic of 1907 did, however, emphasize the necessity of careful and intelligent state regulation and control of trust companies as well as of the other banking institutions.

D. The Regulation of Note Issues

(1) GENERAL PRINCIPLES

117. METHODS OF BANK NOTE REGULATION'

BY FRED M. TAYLOR

The chief problems offered to the student by the bank note circulation are these three: (1) How shall this kind of money be kept at par with standard money? (2) How shall the holders of such money be secured against loss should the issuing bank default on payment? (3) How shall this money be given that elasticity which will enable it to play well its part as that constituent in the system which is depended on to adjust the stock of money to the need for money? Parity, ultimate security, and elasticity, these are the three principal characteristics which wise regulation seeks to secure for the note circulation.

I. THE PARITY OF BANK NOTES

In general all methods of insuring parity may be described as devices whereby a guarantee is given to the note-holder that, in case he cannot use the bank note in the ordinary course of trade he can easily make some other disposition of it which will not involve loss. Under that condition everyone is willing to become a note-holder, and so is willing to accept the note at par.

The principal devices coming under this description are two: (1) making the note a valid tender in some important relation, and (2) providing for its easy, instant, and constant convertibility. It is doubtful whether the former could ever, by itself, maintain parity. Probably, however, it contributes greatly to the result when the conditions for securing convertibility are inadequate, as is commonly the case.

But while it is a valid tender in some important relation contributing to maintaining the parity of notes, the only sure method of Adapted from Some Chapters on Money, pp. 276-94. (Copyright by the author, 1906.)

securing this characteristic is to keep them easily and constantly convertible. The holder of such notes must be able at all times, and in practically all places, to exchange them, without material trouble or expense, for standard money. As a first step toward this end the issuing bank must, of course, redeem the notes over its own counter. But this is not enough. Maintaining this condition is sufficient to keep the notes at par in the immediate vicinity of the issuing bank; but it has often proved unable to hinder those notes from circulating at a discount in distant places. The ideal plan would involve a great number of local redemption agencies scattered over the country, with one or more central agencies for redeeming the notes taken in by the local agencies. In practice, however, it is probably sufficient to provide for redemption at one or more important banking centers. For the existence in the trade centers of an opportunity to get the notes redeemed makes the banks of those centers ready to receive them at par, while this fact, combined with the additional one that banks in lesser places have frequent occasion to send money to the centers, makes this latter class of banks quite ready to receive the notes at par. Thus the maintenance of central redemption secures what is, in effect, local redemption throughout the country.

In the preceding discussion of parity I have had in mind the case of notes issued by a bank still solvent. But the problem of keeping notes at par may also arise when the issuing bank has gone into liquidation. If we suppose that, in such a case, there is no doubt as to the ultimate security of the note, nevertheless that note may not be generally accepted at par, may pass at more or less discount, pending the completion of arrangement for making it good out of the assets of the bank.

This particular case of parity, which one might designate as "liquidation" parity, may be more or less adequately provided for in several ways. One device, which probably contributes, at least, to the desired result, is to provide that the notes of failed banks shall bear interest until paid. This makes them a banking investment, hence makes banks ready to accept them. Another and far more effective device is requiring all banks in the system to maintain a fund, known as a safety fund, from which the notes of any bank in liquidation shall be redeemed.

A third method of securing "liquidation" parity is immediate redemption by a guarantor of the notes. This is the system at present in vogue in the United States. The Federal Treasury agrees to redeem

out of its own funds the notes of any failed bank, recouping itself by the sale of bonds or other property belonging to the bank; and this redemption it undertakes just as soon as the issuing bank shuts its doors. Naturally, under this condition, the notes can never go below par.

II. THE SECURITY OF BANK NOTES

Considered from the standpoint of the methods employed to make the notes secure, systems may be grouped into four classes: (1) Pure Credit or Free Issues, (2) Regulated Credit Issues, (3) Secured Issues, and (4) Guaranteed Issues. The first two of these might be classed together as Asset Issues, in contrast with Secured or Guaranteed Issues. That is, no special property is set aside to secure them. as in the Secured Issues, nor does any institution guarantee them, so that the note-holder must depend on the ordinary assets of the issuing bank to insure him against loss.

A. Pure Credit Issues.-The nature of Pure Credit Issues is suggested by the name. They rest on credit solely, the same sort of credit that supports any personal note. They are free, that is, unregulated, save as all contracts are regulated. The banker is allowed to borrow other people's money by issuing his circulating notes, just as he would borrow other people's money by giving an ordinary note payable in ninety days, or in two years, or at the end of any definite period. The whole transaction is looked on as being the business of nobody except the banker and the person who accepts the note and, thereby, becomes the creditor of the banker. If such person choose to trust the banker, that is his own affair, calling for no interference on the part of the state or of anyone else.

In a system like that just described security manifestly, depends on the promptness and thoroughness with which the rights of the note-holder, under the ordinary law of contracts, are enforced. The note of the banker is payable on demand. If the banker does not keep the engagement, he can be forced into bankruptcy. Anxiety to avoid this result would seem to insure that bankers would be at least as certain as other debtors to keep their engagements, and that therefore the security of these notes might be left to the banker's self-interest and to the legal processes ordinarily used in enforcing contracts. Yet experience and theory alike have fairly established a contrary doctrine, have convinced almost all authorities that no proper guarantee of the security of circulating notes is furnished by the laws regulating ordinary promissory notes.