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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXV

Commerce and Finance - Chapter XXV

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII



A large number of banks exist and flourish under state regu-
lations. Many of them were organized and engaged in business
prior to the formation of our national banking system and de-
clined to enter that system,, but the larger portion have since
been organized from time to time to meet the real or supposed
needs for better banking facilities in the communities in which
they are located. As previously stated, by an amendment to
the National Banking Law in July, 1866, the government im-
posed a tax of ten per cent, upon the note circulation of all
state banks. The purpose of the tax was to drive the state bank
notes out of circulation and thus make room for the national
bank currency, and it accomplished its purpose perfectly. In
other respects, however, the state banks were unaffected and have
continued to do business in the same way, subject only to the
regulations imposed by the laws of the states in which they are
situated. A state bank discounts notes and drafts, receives
deposits, buys and sells exchange and performs all the regular
functions of any bank. Its internal mechanism and organization
of officers and clerks is substantially the same as those of a
national bank. The state laws usually require a directory of
five or more persons to manage the affairs of the bank, and it
must be a regularly organized corporation, formed and conducted
in compliance with the statute.

While national banks are usually considered as possessing
decided advantages over state institutions, the latter in turn
have, in the opinion of some bankers, decided advantages, among



which may be mentioned: They are not subject to such severe
restrictions as to capital, reserve, etc.; are not examined so criti-
cally: are not. in many states, required to make

Ad vantages of ,., . ,

state Banks reports or returns; have greater liberty in the
making of loans, and may certify checks in excess
of the amount which the depositor has on deposit. This latter
right is strictly and rigidly denied to national banks, and at first
thought would seem to be only a wholesome restriction as applied
to any bank, but in certain classes of transactions, notably those
connected with the stock exchange, it may be necessary for a
bank to certify in excess of the deposit. While the practice is
clearly objectionable it may be necessary under certain con-
ditions. The banking laws of the different states are very dis-
similar and produce the same variety in the character of the
banks formed under them, so that in order to understand the
requirements and restrictions under which state banks exist, it
will be necessary to consult the statutes of the different states.
Next lower in the order of size and importance come the
private banks.* These differ from state banks, being usually
not corporations with a fixed capital divided into shares and con-
trolled by a board of directors, but having an
Private Banks indefinite capital owned entirely by one or more
persons. The stockholders in a state' bank are
limited in their liability to the bank, but in the case of a private
bank the owners or stockholders (in case of a stock company)
are individually responsible for the liabilities of the bank without
limit. Private banks usually grow out of favoring conditions.
In a town too small to justify the organization of a national
bank with a capital of $25,000, and yet needing banking facili-
ties, a leading merchant who is well known as a responsible man,
decides to open a bank as an annex to his store. His bank
commands the confidence of the public, on account of his repu-

*In 1902 there were 1,302 state banks in the United States, according
to the Comptroller's


tatioii for wealth, character and honesty. Or some man who
is in the habit of buying notes or making small loans at remuner-
ative rates, finally concludes to enlarge his office, and hangs out
his sign as a banker. The capital of a private banker may be
small, but he is well known in the community and is esteemed
for his ability and integrity. His bank is not subjected to
any examination by state or national authorities, nor is he re-
quired to make reports or publish statements of the bank's
condition. Such is the origin of many of the private banks. As
the resources of the community grow and the business of the
private bank gradually expands, it is frequently organized into a
state bank or merged into the national system.

As to the details of management of private banks, these are,
or should be, in compliance with the rules of larger institutions.

Even private bankers cannot ignore the rules of
Management safe banking without sooner or later suffering the

consequences. In rare instances the practice has
been adopted by private bankers of making public reports of
their condition, and these reports have been published along
with those of state and national banks, as a means of inspiring
public confidence. The private banker can offer to his customer
the advantages of unlimited liability for every obligation .of the
bank, and a greater concentration of responsibility, with a
stronger sense of direct personal interest in the welfare of the
concern than is felt by either the directors or officers of in-
corporated institutions, either state or national. The best guar-
anty which a customer can have of the soundness of his "bank is
the integrity and ability of its management, and the private
banker can offer this as well as the state or national bank.


During the latter part of the 18th century there seemed to
be a general advance in the spirit of fraternal and provident
societies in Europe and especially in England, and out of this


grew the mutual savings bank as a means of taking care of the
poor who came to want by improvidence or misfortune. The
earliest institution of this kind was established in 1765, but not
until about the close of the century did these institutions become
permanently established. In 1816 and 1817 the need of savings

banks became apparent in New York and Boston.
sat!ngsBanks The country was then becoming well settled and

the people were able to accumulate a surplus out
of their earnings, but poverty prevailed throughout the country
generally, on account of the improvidence of the people, who
squandered their earnings and paid no attention "to those small
but frequent savings when labor is plentiful which may go to
meet privation in unfavorable seasons/' A bill was introduced
into the New York legislature in 1819 and passed, for the in-
corporation of savings banks, and continues, with some modifi-
cations, as the basis of the savings bank system of the state at
the present time.

In 1900 there were in the United States 1,007 savings banks,
with deposits aggregating approximately $2,600,000,000, held
in the name of 6,000,000 depositors. This vast sum represents
the accumulated savings of a large class of people, especially
those who are inexperienced in handling or investing money and
whose savings are too small to loan or invest to advantage. The

savings bank offers to the weak the aid of the ex-
Character pericnccd who understand finance, to receive their

small gains and hold them securely against that
time when need or desire may require the store for prudent use.
"It accumulates money; it inspires and trains men to get money
and to the wise use of it; it adds to the sum of national resources
in money, and adds to the means for advancement in material
improvement/' Many state banks combine the functions of
banks of discount with those of private savings banks, and while
the character of the two are entirely different there is no con-
flict between them. The savings bank aims to gather wealth


while the commercial bank uses it, and turns it into the channels
of business. The profits of the savings bank, of the mutual kind,
go to the depositors, while the profits of the ordinary commercial
bank go to the stockholders or owners. "The savings bank opens
its doors to savers; it receives and permanently invests money.
The bank opens its doors to borrowers and users of money, for
pay. One serves by receiving and keeping, the other serves by
lending. The savings institution is a receiving reservoir from
little springs; the bank is a distributing reservoir of accumulated

Savings banks in the United States differ from those in
England in not being required to invest their funds exclusively
in government securities. Thus of the $2,600,000,000 on de-
posit in our savings banks in 1900, 30 per cent, was loaned out
on real estate, 18 per cent, invested in state and other stocks
and bonds, 11 per cent, in railroad bonds and stocks, and 3
per cent, in government bonds. While the ordinary discount
bank must keep its funds as free as possible from permanent in-
vestments such as real estate loans, the savings bank pursues

exactly the opposite course, its favorite form of
investments investment being real estate loans. The savings

bank does not hoard its money. It does not en-
gage in speculation, but makes investments in solid securities
of recognized value.

In the eastern states nearly all of the savings banks are con-
ducted upon the mutual plan. Their capital consists of the
deposits, and the depositors are the owners of the bank. The
business of the bank is managed by a board of trustees who re-
ceive no compensation for their services. The only salaries

paid are to those officers and clerks who give their
Mutual entire time to the business. The income arises

from interest on loans, and after taxes and running
expenses are paid, the net profits go to the depositors as inter-
est or dividends. This system seems to most nearly accomplish


the object for which such institutions were formed, as it gives
the depositor the full benefit of whatever profit may arise from
the conduct of the business.

In the western states and on the Pacific coast most of the
savings banks are private institutions, organized and conducted
for the benefit of the owners, the same as other banks, and
paying a fixed rate of interest to depositors. Such institutions
have a fixed capital and maintain a reserve to meet withdrawals

and secure the confidence of the public. They
Private correspond to state banks, being usually subject

to certain requirements and restrictions of the
state laws, intended for the better security of depositors. Of
course it is largely a question of management whether a savings
bank is secure or not, either by the mutual or private system.
All the law can do is to hedge about the interests of depositors
and place restrictions upon officers. The depositors themselves
must judge as to the ability and integrity displayed in the man-
agement of the institution.

The rules for the conduct of the business differ widely in
different savings banks. Some receive deposits as low as a dime,
while a dollar is the limit in others. Some allow interest only
on the smallest balance of the half year, while others compute
the interest upon monthly balances. Money withdrawn before
the end of the month or half year is not entitled to interest for

the time it was on deposit. Most banks, as a means
Rules of protection to themselves, may require thirty

or sixty days' written notice from depositors be-
fore money can be withdrawn. This regulation is only enforced
in time of panic to enable the bank to realize on its loans or


During the past twenty-five years there has developed in the
United States a class of financial institutions called Trust Com-
panies, combining the functions of a bank with those of a


fiduciary agent. They receive deposits and make loans, but of
a different character from those of ordinary banks. It is the
policy of conservative banking to make only short
Functkms time l ans > an ^ upon collaterals or upon mercan-

tile paper such as is given for goods sold. Every
commercial bank aims to avoid getting its funds locked up in
fixed property such as real estate, upon which it would be diffi-
cult to realize in case of a financial stringency. On the other
hand, trust companies aim to make long time loans on real
estate or other sound security. Their money consists largely of
trust funds belonging to estates, for which they act as adminis-
trators, executors or assignees, and from the nature of these
deposits they are privileged to loan them out on long terms.
Trust companies act as conservators of those who are not com-
petent to manage their own estates, guardians of minor children
whose estate they may hold until the heirs reach majority, 'when
it is divided; assignee and receiver in cases of insolvent firms
or corporations, etc. They also act as trustee in corporation
mortgages, and registrar and transfer agent in case of bond
Functions issues by railroads and other large corporations,

of Trust They do a general financial business for bankers

and others, collect rents and interest, make invest-
ments, hold titles, pay annuities and execute wills and other
trusts. With the growth of "capital and complications of invest-
ments, trust companies have become important agents in our
financial and commercial system, and are now almost a necessity
in floating bond issues and promoting large enterprises. They
are state institutions, being organized under statutes or special
charters from the legislatures of the states in which they are

Suppose some large enterprise is to be carried through, such
as the building of a railroad, requiring a large capital, much
in excess of that which the managers or promoters of the enter-
prise would be able to furnish of their own. Many other people


are able and willing to furnish funds for the enterprise, but at
once the query arises, How do they know that their investment
will be a safe one? How do they know that the company has
been properly organized; that the title to the property is clear
and perfect, and that there has been no over issue of bonds?
Each prospective investor could insist upon investigating the
affairs of the company and having all of these and many other
similar queries answered to his satisfaction before
parting with his money, thus making the financing
of the enterprise almost impossible. Just here
the trust company is very serviceable. By assuming the registra-
tion and issue of the bonds, the character of the securities, so
far as genuineness, title, etc., are concerned, is established. The
trust company takes title to the property under the mortgage,
issues the bonds, pays the interest, and in fact transacts the whole
business, turning over the proceeds from the sale of the bonds
as the money is paid in. Purchasers of bonds rely upon the trust
company to see that there has not been an over issue of the

Another important service rendered by trust companies is in
issuing stock for large corporations, and in case of sale, making
transfers of same. When the stock is listed on the stock exchange
this is an assurance to buyers that the stock is genuine, and there
has not been an over issue. Then again, it enables purchasers
to have the stock properly transferred without the necessity of
sending the certificates to the headquarters of the company,
which may be a considerable distance away. For instance, a
corporation in Omaha desiring to have its shares listed on the
Chicago Stock Exchange may make an arrangement with a
trust company in Chicago to attend to the registration and
transfer of its stock, as a convenience to buyers, and it is not
then necessary for a buyer to send his certificates to Omaha to be
transferred. That can be done by the trust company here.

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