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Trust Companies

Within a comparatively short period of time the trust company has
developed into an institution of prime importance in the United
States. In the beginning of its history it was, as its name implies,
simply an institution for the administration of trusts of various
kinds, such as the execution of wills, the guardianship of minors and
other dependent persons, the administration of the estates of persons
either unable or unwilling to administer them for themselves, and
trusteeship under corporate mortgages, especially those of railroads.
In the latter capacity they became mortgagees in trust for
bondholders, registering the bonds, collecting the interest as it
became due, paying the bonds at maturity, and in case of default
taking the legal steps which were necessary for the protection of the

The execution of these trusts involved in most cases the custody and
investment of funds, so that investment banking became a part of their
business almost from the beginning, and, in time, in states in which
the laws passed for their regulation did not prevent, they added
commercial banking to their other functions. In some cases they have
also become promoters of enterprises, taking the initiative in the
organization of corporations for various industrial and commercial
purposes. In New York City, and in individual cases in some other
large cities, the commercial end of the business has become the
dominant one; in the former case on account of the ability of these
companies, unrestricted by certain laws applying to state and national
banks, to offer to commercial customers better terms than their
competitors. In most states, however, especially in the large cities
in which they chiefly flourish, trust companies have become primarily
investment banking institutions, their other functions being carried
on as side lines and assuming, of course, in some cases greater
importance than in others.

Since they are still in the early stages of their development, the
status of trust companies in the banking system of the United States
is not yet definitely determined. Legislation concerning them varies
considerably in different states, as do also their relations with
other banking institutions. The competitive character of these
relations has resulted in some cases in legislation which has aimed to
differentiate and define the various functions which all these
institutions perform, and to prescribe the conditions under which each
one or each group must be performed, regardless of the way in which
they are combined, and in others, in their practical consolidation
with national or state banks, or both, through community of stock
ownership, interlocking directorates, etc.

From the point of view of the convenience of the public there are
advantages in the combination of all the banking functions in a single
institution, and the success of trust companies to some extent has
been due to this cause, but they have also profited from the unequal
competition which exemption from certain limitations imposed on state
and national banks has enabled them to enjoy. The removal of the
conditions which result in this unequal competition, a process already
in progress and likely to continue to completion, will reveal the
strength of the advantages of combination versus specialization of
functions. Previous to such a revelation it will be impossible to
determine whether or not the trust company form of organization is
destined to become the dominant one.

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