2. Trust growth of the modern trust company dates likewise from a comparatively late time. The word "trust" has long been used for titles of banking and financial institutions for the purpose signifying strength and inspiring confi dence. These old institutions, such as the North American Trust and Banking Company of New York and the Ohio Life Insurance and Trust Com pany, were not trust companies in the modern sense of the word.
It appears that the first institution, in the United States, to be incorporated with the power —to act as trustee was the Farmers' Loan and Trust Com pany of New York, which was incorporated in 1822 under the title of the Farmers' Fire Insurance and Loan Company. The first charters allowing the trust privilege were given to insurance companies, and for many years the insurance and trust functions were carried on together. When the business of trusteeship began to expand and to assume more and more the nature of general banking, the trust com panies gradually divorced themselves from the insur ance companies or else were separated by legisla tion. Insurance companies have remained an im portant factor in the financial field because of the enormous sums which they have to invest.
In the larger cities trust companies have become formidable rivals of the state and national banks. The number of loan and trust companies reported by the Comptroller of the Currency in 1916 was 1,606. These had resources of over $7,000,000,000, or nearly one-half the resources of national banks. The ag gregate capital and surplus amounted to over $984, 000,000. The big trust company development has come in the eastern and middle-western states.
3. Danger of trust is evident that there is a danger in combining trust business with banking business. A certain part of the trust com pany's liabilities takes the form of time deposits. Another part consists of demand items. Ordinarily about 75 per cent of the resources consist of bonds, securities and commercial paper. A considerable part of the resources is kept as deposits in the banks, and for this a low rate of interest is re ceived. This enables trust companies to pay inter est on demand deposits and gives them an ad vantage in competing for deposits. When a sudden
demand for cash comes, the trust companies draw out their deposits and embarrass the banks. The inherent danger of the situation is well illustrated by the fail ure of the Knickerbocker Trust Company in 1907 and the consequent embarrassment of other banks in New York City. Some states, notably New York, have passed laws requiring trust companies to carry cash reserves in their own vaults and imposing certain other restrictions.
4. State banking states have been slow to change their banking laws since the passage of the National Banking Act. This is especially true in the South, where the whole tendency is for the states to interfere as little as possible with private business. It is highly desirable that certain changes should be made so as to harmonize the state systems with the Federal Reserve system. For the most part, where amendments have been made at all, they have been modeled after the Federal law. Then, one state often copies another. For instance, Kansas followed the example set by Missouri, and Okla homa, in turn, was influenced by Kansas. De spite the common model which all had in the National Banking Act and the tendency to follow one another, the forty-eight states have almost as many different kinds of legislation. We shall consider a few of the more important legal provisions.
5. Incorporation.—The power of chartering banks, as well as other corporations, rests in the legislature unless the state constitution provides otherwise. Most of the states have a general banking law which applies alike to all banks within the state. This is under the administration of some official, generally the superintendent of banking. In a few states a special act of the legislature is necessary for incor porating a bank. In some states the banking law is merged with the general corporation laws. Na tional banks have a strong hold in New England, and the provisions for establishing state banks are so oner ous as to be almost prohibitive. In general, it may be said that the general banking law has proved more satisfactory.
6. Capital.—Nearly all the states require some minimum capital, but in almost every case the amount is less than that required for national banks.