CHAPTER IX

ECONOMIC, SOCIAL, AND POLITICAL ASPECTS OF TRUST COMPANY SERVICES

It is the purpose of this chapter to present an analysis of the position occupied by the trust company in the social and economic structure of the United States. New ground is being broken in this attempt, and there are no English or American authorities with which to compare this interpretation of the economic, social, and political aspects of trust company services. However, there is much suggestive material along this line scattered here and there in trust company literature; and references are made to these sources, the study of which has led to the analysis contained in these pages.

Trust Company Services in the Realm of Economic Activity. There are two great factors of production-the material factor which consists of those things and forces contributed by nature, and the human factor which consists of man's activities in

1 But this sort of analysis is contained in Treuhänder und Treuhandgesellschaften, von Walter Nachod, S. 136–44, under the title of "Stellung der deutschen Treuhandgesellschaften im deutschen Wirtschaftsleben." Nachod's analysis attributed two broad economic functions to trust companies: (1) The bulwark of capitalistic development (Charakteristischerweise sind es die Länder des höchst entwickelten Kapitalismus, Grossbritannein und die Vereinigten Staaten, gewesen, welche diese Einrichtung geschaffen haben. S. 136); and (2)—The stabilizer of economic life (Die Treuhandgesellschaften haben also in hohem Grade eine prophylaktische Tätigkeitauszuüben. Sie entwickeln sich dadurch zu Kontrollorganen im deutschen Wirtschaftsleben. S. 137). From this point on, however, his treatment loses its analytical character until he reaches a concluding section. In this final section he gives an analytical distinction between trust companies of the United States, England, and Germany. (S. 142-4.) In his summary of American trust companies he implies a third economic function, that of enterpriser. (Amerika hat in seinen Trust-Companies eine ganz neue Gattung von Unternehmungen geschaffen. Sie stellen die Verbindung des ursprünglich englischen Trustee mit dem UnternehmerBetrieb dar. S. 143.)

his efforts to gratify desire or promote welfare. These human activities support each other and are predicated upon the existence of natural resources.1

Advance of civilization has been characterized by an ever greater complexity of each of these factors. An ever-increasing volume of nature's forces and things comes to be appropriated by man and become economic goods, while the activities of man grow in complexity, giving rise to an ever-increasing number and complexity of services or functions. The human activities in modern economic organization may be classified as follows:

1.-Labor services or functions.

2.-Investment services or functions.

3.-Enterpriser services or functions.

All income is derived from the activity of human beings with relation to natural resources or with relation to each other, and the form of income derived is based upon the type of economic service performed. Thus for labor services or functions, which include mental as well as physical efforts, the form of income is in wages, salaries, or fees. For investment services or functions the return or income is in the form of rent or interest, i.e., contractual incomes. For the enterpriser services or functions the income is called profits, or dividends.

Those who perform the various services come to be referred to by certain names. Those performing labor services are called laborers, clerks, teachers, lawyers, doctors, artists, managers, etc., according to the kind of labor service performed. Those performing the investment service are called capitalists, while those performing the enterprise service are called enterprisers or entrepreneurs. There are two groups of capitalists, the active-capitalist investors and the passivecapitalist investors. The function of the passive-capitalist investor is the investment of funds where the income derived is pure interest. The function of the active-capitalist investor combines that of the passive capitalist with that of the enterpriser so that the income derived by the active-capitalist investor consists partly of interest and partly of profits. The

1 Cf. Fetter, F. A., Economic Principles, passim, and especially pp. 317-26.

active-capitalist investor is an enterpriser as well,-he takes risks; and he is active in the sense that he helps to determine into what channels of industry or production human activities will be supported. The passive-capitalist investor is passive in the sense that he does not do that, but permits the enterpriser and active-capitalist to decide that issuethe passive capitalist standing willing to loan his capital for a contractual return after the direction of enterprise has been determined. The function of enterpriser consists in deciding in what directions human activities may be most profitably supported and in what proportions material agents and human activities can be most profitably combined.

The same individual's activities may include one or all of these types of services, or just one of the services for a particular enterprise may be divided up among several individual persons. One and the same person may at the same time be a laborer, an investor or capitalist, both active and passive, and an enterpriser, each to a degree. In other words, the classification made is a classification of functions, not of individuals. Likewise a corporation may perform any one or all three of these types of services at the same time-providing it has power to do so according to its charter.

It is in the realm of these complex human activities that the services of trust companies belong, and they perform at one time or another all three of the above groups of services. The trust company performs the function of enterpriser when acting as receiver for bankrupt concerns, and some of its services in connection with the reorganization of corporations are of this character. It is an enterpriser to the extent that it determines the direction of the flow of capital in syndicate operations, and it is an enterpriser in the building up of its own organization for the purpose of furnishing a group of coördinated services. The trust company is an active-capitalist investor to the extent that it invests in the equity type of securities and it is a passive-capitalist investor to the extent that it invests in the contractual type of securities. As agent and trustee the trust company performs a large body of labor services, such as research work, determination of investment policies by analysis, accounting services, consulta

tion among experts, conference with clients, and general office routine work for customers such as services of financial secretary.

The Trust Company's Place in the Modern Economic and Social Structure. The evolution of modern economic organization has been characterized by a circle of causal relationships between economic phenomena. The expansion of commerce which was accompanied by a broadening of markets for English trade during the two centuries following the break-up of the feudal system was accompanied by the development of large-scale production and the emergence of the merchant capitalist. Tawney has given a sarcastic and hostile interpretation of this, and says truly: ... Art and scientific curiosity and technical skill, learning and statesmanship, the scholarship which explored the past and the prophetic vision which pierced the future, had all poured their treasures into the sumptuous shrine of the new civilization.

"For it was the mastery of man over his environment which heralded the dawn of the new age, and it was in the stress of expanding economic energies that this mastery was proved and won. Like sovereignty in a feudal society, the economic efforts of the Middle Ages, except in a few favored spots, had been fragmentary and decentralized. Now the scattered raiders were to be organized and disciplined; the dispersed and irregular skirmishes were to be merged in a grand struggle, on a front which stretched from the Baltic to the Ganges and from the Spice Islands to Peru. Every year brought the news of fresh triumphs. The general who marshaled the host and launched the attack was economic power.'

" 1

Large scale production led to greater specialization on the part of individuals, and division of labor. The further division of labor brought out in relief the purely mechanical part of the operations, due to the constant repetition, which in turn led to the invention of machinery. The use of machinery made possible greater production than formerly and this in turn furnished a motive to still greater expansion of commerce. The use of machinery also brought into existence the factory system and

1 Tawney, R. H., Religion and the Rise of Capitalism, pp. 66–7.

there emerges a new kind of capitalist-the manufacturing or industrial capitalist. The further expansion of commerce encouraged by factory production made it profitable and possible to have still further division of labor and specialization. At the same time the development of transportation made possible a territorial division of labor as well as an occupational division of labor, permitting still greater specialization. Once the circle of causes was started the cumulative effects finally resulted in our present vastly complex economic system.1 The factory system means that there came to be concentrated in one building, or group of buildings, operations relating to the production of a certain product. Specialization produced integration. At first this was applied for the most part to the production of material things, such as clothing, foods, tools, furniture, etc. Later came the development into single institutions of groups of related intangible services, which was brought about by a similar sequence of causal events. Specialization, in the field of knowledge in general, led to the development of many new sciences. With the vast accumulation of knowledge it became at once impossible and unnecessary to try to learn all about everything. It was unnecessary, because each could depend upon some other for advice regarding things which he did not have time to learn and spend his time in becoming more expert in his own particular field. All knowledge was called science or philosophy— out of general philosophy has grown the hundreds of specializations in the field of science and philosophy of to-day. The modern university is the factory system applied to the field of knowledge, or science. The modern hospital is the factory system applied to the field of medicine and surgery. Even in the field of medical and surgical practice outside the hospital, there is developing now a tendency for doctors of variety of specialties to group together in a suite of offices. Similarly specialization in the field of law has resulted in the development of experts in certain features of the law. The modern law office is not the one or two rooms with the one lawyer for all purposes; but it is rather a corps of experts, each of whom has his specialty

1 Hammond, J. L., and Barbara, The Rise of Modern Industry, Part II, especially.