from national banks and permitting them to exercise the functions referred to, should they be empowered so to do by the Federal Reserve Board. In other states the contest is still in progress and bids fair to continue active for a good while to come. On the other hand, a number of states, particularly in the West and Middle West, have already enacted enabling legislation under which national banks may exercise the functions authorized by the Federal Reserve act, subject to the supervision and control of the Federal Reserve Board.

The trust companies, recognizing that their opposition to the provisons of the Federal Reserve act in this respect has been in part ineffectual, have obtained adverse legal opinions and arranged to file suit designed to test the constitutionality of the provision in the act to which objection is thus taken. Such a suit will be designed to test the question whether Congress has power to grant authority of the kind specified to federal reserve banks or to any other corporation whatever, and, should the decision be adverse to the power of Congress, national banks would be unable to exercise the functions in question even in those states in which local law was favorable, and in which, therefore, it was manifest that the people were desirous that national banks should be empowered and authorized to do such work.

The point at issue is one which involves more than the mere business interests of the trust companies of the country, it being essential to the question whether or not the effort of the framers of the act to obtain a unification of the banking system shall or shall not be successful. The act, as is well known, provided for the admission of state banks as members of the federal reserve system upon a practical equality of privilege with national banks. In order to offset the favorable position thus given to state banks, and thereby to remove any incentive that might otherwise exist for national banks to surrender their charters and recharter under state law (becoming members of the federal reserve system at will, if so disposed), the Federal Reserve act granted them the trust company powers which are now under discussion. It was felt that by so doing national banks would be enabled to exercise some of the profitable functions heretofore exercised only by trust companies, and that under these conditions they could afford to bear the competition to which they would be subjected through the entry of trust companies into the federal reserve system, vested, as most of them are, with full commercial banking powers in addition to their other rights. To hold that the Federal Reserve act is unconstitutional in respect to the provisions cited

would produce a state of affairs in which, while national banks were subjected to the rigid regulations already applicable to them and were prohibited from engaging in trust business, the trust companies (already authorized to exercise so wide a range of functions) would be able to present themselves to the public as qualified to compete on equal terms with the national banks already in the system. This makes it evident that the real question at issue in the trust company discussion is the extent to which the Federal Reserve Board shall be permitted to proceed with its effort to harmonize and unify the banking system of the country by bringing about a general federation of all commercial banks under its jurisdiction. The Federal Reserve Board has, however, taken no part in the actual legislative discussion in the various states, contenting itself with merely announcing that it was in sympathy with the effort to give effect to the trustee and executor provisions of the Federal Reserve act.

167. DEPARTMENT-STORE BANKING'

Is "department-store banking" to be the final outcome of the forces now working toward increasing the functions that may be performed by national banks and the counterforces that would extend the powers of trust companies, if they are unable to keep their monopoly of trust powers? Will each little town that now has only a national or a state bank or a trust company possess in the future a single institution with all the functions of a bank, with those of a trust company added, a savings department, and a safe-deposit vault in the basement? If so, will not the inevitable tendency be to reduce all such institutions to the same basis and perhaps leave only one kind of bank, all in the Federal Reserve system and all under Federal supervision; in a word, all national banks?

These are the questions that some bankers have been turning over in their heads and discussing since the irrepressible conflict between national banks and trust companies over the question of trust powers has come to a head in New York State. Forces are at work, growing out of the enactment of the Federal Reserve Act, which tend to put all banking concerns on an even footing, making each bank not only that, but a savings institution and a trust company as well.

The provisions in the Federal Reserve Act empowering the Federal Reserve Board to grant to national banks trust company and savings bank powers, together with the provision for limited loans on real

Adapted from "Department-Store Banking," The Annalist, V (1915), 234.

estate security, show a strong tendency to put all banks and trust companies on a common level, except for the advantages that inure especially to members of the Federal Reserve system.

Along with these considerations is the problem of getting the State institutions into the Federal Reserve system. Federal Reserve officials have admitted frankly that the system will not be fully successful unless the bulk of the 20,000 state institutions in the country, in addition to the 7,600 national banks, are brought into it.

168. THE FEDERAL RESERVE SYSTEM NOT A HARMONIZING

AGENCY

BY A. D. WELTON

Fifty years of experience under a banking system which confused commercial banking with all other kinds and all other kinds with commercial banking has left what seems to be an ineradicable trace on the new banking system. National banks, facing competition from state institutions not subjected to similar restraints, have declined to welcome the provision which permits the Federal Reserve Board to confer trust company powers on them. State banks have objected to such an expansion of the powers of national banks, not because they have any particular fear that commercial banking will be contaminated, but they desire to keep the advantages they have over their competitors.

In most of the states the laws permit state banks to do all kinds of banking business, including the exercise of trust company functions. How this came about is not material. The important thing is that it came about and that it promotes the confusion of ideas about the various kinds of banking business. Theoretically and ideally commercial banks should confine themselves to commercial banking; trust companies should confine themselves to fiduciary matters, and savings business should be done by savings banks. Again, theoretically, if the various kinds of banking business are done by a single institution the departments should not be mixed up with one another. Practically, and because of the banking laws of the states and the apparent desire of bankers to engage in all branches of banking, reformation seems to be out of the question, but the situation contains no reason for permitting national banks to step outside of the field of commercial banking. The tendency to demand this and to permit

'Adapted from Journal of the American Bankers' Association, VIII (1916),

658-59.

it finds its impulse in the desire of national banks to compete on equal terms with state institutions. Moreover, in the towns and smaller cities there is not enough banking business of a single kind for one bank or trust company. To serve the community adequately one bank must do various kinds of business.

Instead of harmonizing the different kinds of banks and the different kinds of banking the Federal Reserve Act has apparently had the opposite effect. Rivalry between state and national banks is keener than ever and it springs from the difference in the laws under which they are organized. Efforts to have state laws modified so as to remove all doubt of their contravention by the application of section II (k) of the Reserve Act have intensified the condition. The state banks think they have more reason for not joining the system now than they had a year ago.

VIII

CO-OPERATIVE BANKING AGENCIES

Introduction

In previous chapters of this volume we have been considering banking in its relation to the world of business, the national and state banking associations being devoted almost exclusively to serving the interests of men engaged in the management of the larger commercial and industrial enterprises. There remain to be considered the banking requirements of and the banking facilities that have been provided for those classes of people whose incomes are small or who work for wages and who use the funds borrowed mainly for consumptive rather than productive purposes. We have already seen that loans on collateral may be used for consumption purposes, and that such loans are often extended by the regularly organized banks. We are here concerned, however, with loans to a class of people who cannot deposit as security collateral that is acceptable to banksthose who wish to borrow petty sums with which to meet temporary needs or emergencies.

The question of interest on consumptive loans is practically as old as recorded history. The Old Testament condemns all interest, except from foreigners, as being usury, and therefore unjust. The biblical law came to be incorporated into the civil code, and it was not until the beginning of the modern era that interest was legalized. The philosophy underlying this prohibition of interest appears to have been either a sympathetic regard for the poor or a recognition of the economic impossibility of their paying interest. Funds were borrowed at the time almost exclusively for consumptive purposesvirtually to prevent starvation-and such loans were necessarily almost in the nature of almsgiving. At any rate, to exact interest from a poverty-stricken peasant class seemed to violate every principle of common humanity. With the development of the borrowing habit by the capitalist class, however, the situation appeared in a very different light. When a borrower devoted the funds procured to productive industry, it was readily seen that he was making a gainful use of the loan and was therefore able to pay back the principal with a bonus, and also that the lender was foregoing a like