1. Original Design

The original design of loan and trust companies was to insure lives and grant annuities; the business of holding trusts was a secondary consideration. As they had money to lend, they assumed to some extent banking functions. Gradually their original purpose diminished in importance, until the newer companies do not undertake the business of insuring lives and granting annuities, while the older companies are retiring from it, leaving the field entirely to life insurance corporations.

2. Business Of A Modern Trust Company

-The business of a modern trust company therefore combines that of a bank with the execution of a great variety of trusts. Many of the recent trust companies are nothing more than banks, possessing a capital, receiving deposits, and lending both. Why, then, do the projectors organize as a trust company? Because they have a greater latitude of authority. That possessed by the national banks is comparatively narrow, and is carefully guarded, Indeed, it was at one time questioned whether a national bank could buy paper, and a large number of decisions have been necessary to define their powers. It can not, for example, act at a broker in negotiating the sale of securities, and especially in guaranteeing them. A trust corn-pany is endowed with larger powers, it can transact more kinds of business and earn larger profits.

3. Interests On Deposits

As a bank, the methods of a trust company are somewhat different from those of a purely banking institution. In dealing with depositors the greatest difference is in paying interest to them on their deposits. This has proved a powerful magnet, for though only a few trust companies have been existing many years, they possess in the aggregate a large amount of deposits. Indeed, their popularity is growing so rapidly that discount banks doubtless will be compelled ultimately to pay as high rate of interest in order to retain their customers. If a trust company is as solvent and as well managed, in short, is as worthy of confidence, why should it not be patronized? More and more are depositors led by these considerations to intrust their money to them.

4. Lend On Collaterals

In lending their funds trust companies profess to be governed by somewhat different principles from other banks. They lend only on collaterals. The purchase of paper, or the discounting of notes on the faith of their makers and indorsers, is beyond their province. One reason for thus restricting their loans is to conform to their charters, which, in many cases, forbid them from going farther. The newer trust companies, organized under general laws, in most states, possess larger liberty, and lend their money on essentially the same conditions as other banks.

5. Reserve Not Required

Trust companies, except in a few states, are not required to keep a fixed reserve. This is an obvious advantage to a banker who believes in lending as much as possible and in running his chances with depositors who may call for their money. Many of the state banks have a similar advantage. The national banks have long complained over this untoward condition between themselves and the state banks and trust companies. At times, when business is poor and competition is sharp, the national banks keenly feel their disadvantage. They feel this still more keenly because they know that they are in truth keeping a reserve not simply for themselves, but for their competitors. What is meant by this assertion? An explanation is needful.

When a run is made on a trust company or state bank for money, the national banks come to the rescue and supply the funds. The reader may wonder why the national banks do this. Naturally he would think that if the state banks and trust companies are so short-sighted and keep an inadequate reserve, they ought to suffer when unusual demands arc made on them which they can not meet. But they understand their situation. They know-that the national banks will not suffer them to perish through fear that confidence in themselves may become impaired and result in a run on one or more of their own number. No one can tell how far the confidence of a community may be disturbed by such an event. This is one of the peculiarities of the banking business; the fate of every bank is to some extent bound up with the fate of every other. A bank may dislike another and its ways of doing business; it may wish that it would disappear from the banking world in a peaceful, noiseless manner, but not as a falling, flaming star. Such a disastrous end reacts on every other bank, and no one can tell how far the reaction may go, or where it will cease.

When, therefore, a trust company or state bank is pressed in an unexpected manner for funds, the national banks come to its relief. This they have done again and agaiin, not indeed with a pleasing grace, but as a measure of self-protection.

The president of a state bank in New York city not many years ago kept its entire resources loaned out, as he was not legally required to keep a fixed reserve. There was a run on his bank, and he applied to the clearing house for relief. The members agreed to lend his bank money and it was saved. Within a few years the same thing again happened. Again the clearing house banks advanced all the money needed to save the bank. After the second experience the clearing house committee notified its directors of their unfit president, who was taking advantage of them to make excessive loans, and to whom, should there be another run on the bank, no more aid would be furnished. With this loud and solemn notice, the directors wisely concluded to retire their president and elect another who would not be so intent on making money for his bank by lending everything, trusting to other banks for aid in the event of a sudden call from depositors for their money.

To this illustration another may be set on the opposite side. A few years ago, during a prolonged monetary stringency in New York, the president of one of the large trust companies determined not to be dependent on the national banks should there be a large call for deposits from his customers, so he borrowed several millions of gold in Europe, keeping it and paying interest thereon until the stringency passed away. Such conduct was as far-sighted as it was honorable to the banks with which he was associated.

Various attempts have been made by the state legislatures from time to time to require the state banks and trust companies to keep reserves, and by some of them the requirement has been adopted.