of commercial accounts, in which the business is similar to that of the National bank with the exception of note issue, and with the exception in many States of discounting paper; and the savings department, in which the business is identical with that of the savings department of the incorporated Savings banks of the central States, and not materially different from that of the mutual Savings banks of the East.

In view of the statement just made, the question naturally arises, "What is the difference between the trust company and the bank?" This question has been discussed to some extent in the periodicals and in the circulars of trust companies. In these discussions are represented diametrically opposite views; namely, that there is no difference between the two institutions, and that there is a wide difference. The variety of opinion arises from the fact that different writers tell of the particular trust companies with which they are familiar, and which differ from each other; and also--and more generally-from the fact that some discuss the question from the theoretical side, while others, disregarding the theory, speak of the actual practice as they find it.

So far as concerns business other than that of the banking department, the foregoing discussion of the functions of trust companies reveals an important difference between these companies and banks. While it is true that some of these functions have been and still are carried on to some extent by some banks, the tendency is to leave this field wholly to trust companies, while many of these functions may not legally be undertaken by banks. Allowing for exceptions, it may be said without fear of contradiction that the functions thus far described are distinctively those of trust companies.

As a matter of theory there are important differences between the business of the banking department of trust companies and that of State and National banks. In theory and in early practice the banking department of the trust company was merely incidental to its other functions, being maintained to care for the funds coming to it in trust. The trust company is a depositary for the inactive and accumulating funds of the community, the bank for the active funds-the funds used in business. It follows that the natural depositor of the bank is the business man, or firm or company, whose funds are continually in use, quickly turned over, and who expects in return, not interest, but accommodation in the way of discounts. The natural depositor of the trust company, on the other hand, is the person or concern whose funds are not in active use, and who wishes a place for the safe-keeping and accumulation of same. A prominent writer on trust company subjects has classified trust depositors, as distinguished from bank depositors, as follows:

64 Breckinridge Jones, President of the Mississippi Valley Trust Co., St. Louis. His paper on "The Trust Company Question," delivered before the Missouri Bankers' convention in 1892, and published in pamphlet form by his company, is a masterpiece, and has been widely copied. So far as the writer knows, it was the first published study of the question. The writer acknowledges his indebtedness to this paper for many of the points here given.

"1. The laborer, mechanic, clerk, teacher-all those who work for wages or on salary.

2. The capitalist, the professional man, the married woman who has a separate estate.

3. The business man who wishes to separate his private income or the surplus profits of his business from his general business capital.

4. The corporation, public or private, that is accumulating a sinking fund, or any individual who is husbanding a balance to pay a debt. 5. The executor, administrator, curator, guardian, assignee, receiver, trustee under deed or will or order of court.

In short, all such who wish their daily deposits to draw interest."

A study of this list reveals a class of accounts entirely distinct from those handled by the ordinary bank, and a class of accounts, too, for which little provision is made by National banks or by the old-time State banks.

These trust depositors expect from the trust company in return for their accounts compensation of quite a different kind from that which the bank depositors expect from their bank. Their moneys are placed in the care of the company for accumulation; they want interest on their funds as well as a safe place to keep them. The ability to withdraw the funds on demand is not of pressing importance to them, and they are often willing to give notice some time in advance of intention to withdraw their deposits.

It results that the trust company is in position to invest its funds in ways quite different from the bank. The funds of the latter must be so placed that they can be quickly recovered to meet the needs of customers, being usually invested in paper that will mature in thirty, sixty or ninety days, or four months at the longest. The trust company can safely make long time loans on collateral or on real estate. Moreover, since the trust company pays in full for the use of its depositors' money by allowing interest on such money, it has no obligation to confine its loans to depositors, but may lend to whomsoever offers the best security and the highest rate; or it may invest its money largely in bonds and stocks. The bank remunerates its depositors by offering them a line of discounts, and hence must reserve its money mainly for loans to such depositors.

The necessity of dividing its loanable funds equitably among its depositors who desire discounts requires the bank to confine its loans to comparatively small amounts, while the trust company is in position to make large loans.

As a matter of theory, then, both as regards the classes of customers whom they serve and as regards the uses of their funds, trust companies and banks occupy distinct fields. They are co-ordinate institutions, each supplementing the work of the other, and both necessary factors in carrying on the financial affairs of the community. There is here not competition, but co-operation.

So much for the theory. In actual practice, the differences between the two classes of institutions are much less marked, and the tendency in many communities is steadily to lessen such differences as do exist. As a matter of fact the trust company of to-day has invaded a portion of the field of the bank, while, on the other hand, the bank is invading a portion of the field of the trust company. Most trust companies seek business accounts, payable on demand by check, offering as inducement interest on satisfactory daily balances. In cases where the law does not forbid, some companies also offer lines of discount. On the part of the banks there is a noticeable tendency in many localities to seek inactive accounts on which interest is allowed. This movement is being taken up by National banks, which in some instances maintain savings depart

ments.

The result is that there are communities in which there are only slight differences between the business done by State banks and that done by the banking departments of trust companies. Both maintain commercial banking and savings departments conducted in the same ways. Their loans and investments are of practically the same character.

In other communities, where most of the banks and trust companies follow the lines of business for which each was theoretically established, there may sometimes be found individual trust companies which do a regular banking business, and individual banks which compete for the dormant accounts that naturally belong to trust companies or Savings banks.

65

Taking it the country over, it is safe to say that the difference between the average State bank and the banking department of the average trust company is slight, except in those States where trust companies may not discount commercial paper. Such differences as exist usually concern the proportions of the various kinds of business handled, business accounts as a rule forming the larger, and inactive accounts the smaller part of the bank's business, while the reverse is true of the banking department of the trust company.

Where the trust company is forbidden to discount commercial paper, there results, of course, a distinct difference in the business of the two institutions due to such prohibition. In such cases the trust company still handles a large number of business accounts, as many business men either do not need discounts, or have other means of procuring them. In many places the practice has grown of forming working agreements by which groups of banks and trust companies throw business into each others' hands. By this means a given group of financiers is able to handle financial business of any kind. This plan is a recognition at once of the need of both institutions and of essential differences in their functions.

65 This statement is based on a personal study of trust companies in eight of the largest cities, and upon an examination of the business advertised in the circulars of some three hundred representative trust companies located in all parts of the country.

There is considerable difference between the State laws governing trust companies and those governing State banks. As a rule, the former are much less hampered by restrictions in the character of their business. In a later chapter the laws of the different States will be discussed in detail.

It is evident that there is a close resemblance between the business of the savings department of the trust company and that of the Savings bank, especially of the incorporated Savings bank, which is the usual form of such institutions outside of the Eastern and New England States. Both are after savings accounts. With regard to the mutual Savings banks, particularly, the theory is that such institutions exist especially for the accounts of those whose savings are comparatively small, while the trust companies are supposed to exist primarily for the safe keeping and accumulation of larger accounts. In practice, however, this distinction is not always maintained, although it is probably true that the average savings account of the trust company is larger than that of the mutual Savings bank. But trust companies usually advertise that deposits of more than five or ten thousand dollars will not be received at the regular interest rates. The minimum deposit received by either institution is usually one dollar.

In this connection it is worth while to call attention to the important service that the trust company, as well as the Savings bank, is rendering in the way of adding to the available money supply of the country. Through the medium of a large number of small accounts they gather from the people of their neighborhoods large sums that would otherwise be kept in the traditional stecking or in private safes. These funds are thus placed at the disposal of the community for use in carrying on its business, and make possible enterprises that benefit the whole people, and that would otherwise fail for lack of available funds. Particularly is this the case with reference to those companies in outlying parts of large cities, or in other localities where banks would not find enough business to keep them alive. As an instance of this, the writer knows of a trust company located outside the business district of a large city which in ten years accumulated deposits of over two millions, the larger part of which came from persons who had not theretofore deposited in banks at all. Here was a large sum put into active circulation and so made productive, to the mutual benefit of the depositors, the bank and the community at large.

MISCELLANEOUS FUNCTIONS.

Occasionally trust companies perform functions not mentioned in the foregoing discussion. For instance, some companies, in the far Western States particularly, write fire insurance as agents. The wide powers granted by the laws of most States permit trust companies to undertake almost any kind of financial business, and the result is that companies

in different localities take up special lines of business for which there happens to be a field.

It is usual for trust companies to offer to customers the services of their officers for legal and financial advice on ordinary matters that involve no complicated questions. This does not mean, of course, that the company undertakes to do the lawyer's work in such cases. But many of its customers are wholly ignorant of the most common principles and practices in business and commercial law, and as a result are greatly profited by advice in what seems to the experienced a very simple matter. Much litigation and loss, and many foolish "investments" are prevented by a little advice to such persons. The banker sometimes performs similar services for his customer, but the usual bank customer is acquainted with business procedure, while a considerable number of trust company customers are not so acquainted.

Complaints are heard in some quarters that the trust company is encroaching upon the field of the lawyer. Undoubtedly this is true as regards the handling of estates and the performance of many duties of a fiduciary nature. On the other hand, the trust company gives employment to a large number of lawyers. Every company has its attorney or force of attorneys, and trust officers are usually chosen from the ranks of those who have had legal training. Trust companies make it a practice, when a lawyer brings them a trust, to retain him as attorney for that trust whenever special services are needed. Furthermore, the trust company is a great aid to the lawyer in many ways. He often needs to select for his clients a trustee, guardian, receiver, assignee, depositary, etc. He is often called upon to make investments for his clients—a responsibility that many lawyers do not care to assume. In the practice of corporation law the lawyer finds the trust company of special use to him. Its facilities for the accurate keeping of accounts, preparing reports, caring for securities and managing estates appeal to many lawyers who have not the time or the inclination to assume other than the purely legal part of the work. To a great extent the trust company supplements and assists the lawyer of large practice.

SOURCES OF EARNING POWER.

It is evident that the sources of earning power of the trust company are much more numerous than those of the bank. It may do all that the bank may do, and many things besides. One writer66 has pointed out the fact that the trust company has developed all the earning power of an individual, thus adding greatly to its profits, as well as to its usefulness. To get at the possible earning power of the trust company, therefore, one must remember that it is not confined to the profits from the interest on funds under its care in the form of capital and deposits,

66 Guy Morrison Walker: pamphlet on "Trust Companies."