it is argued that, considering the nature of the business in which trust companies are engaged, it is a material and unfriendly discrimination in favor of state institutions engaged to some extent in a competing business with that of national banks. Trust companies, however, in New York, according to the powers conferred upon them by their charters and habitually exercised, are not in any proper sense of the word banking institutions." The court then stated their fiduciary powers and added: "It is evident, from this enumeration of powers, that trust companies are not banks in the commercial sense of that word, and do not perform the functions of banks in carrying on the exchanges of commerce. They receive money on deposit, it is true, and invest it in loans, and so deal, therefore, in money and securities for money in such a way as properly to bring the shares of stock held by individuals therein within the definition of moneyed capital in the hands of individuals, as used in the acts of Congress."

After this definition that trust companies were not banks, the Supreme Court failed to find in the record any sufficient ground to believe that the rate of taxation which in fact fell upon this form of investment of moneyed capital, was less than that imposed upon shares of stock in national banks. It is to be noted that this decision was procured in an action, brought by a national bank, in which the status of trust companies, as banking corporations, was very clearly litigated and presented to the court.

Whatever may have been the condition of affairs at that time, in the year 1900 trust companies were throughout the state of New York actively engaged in the banking business, except as they did. not issue bills to circulate as money. The question was again raised as to their status for taxing purposes and as to banking powers in the case of Jenkins v. Neff. Section 5219 of the revised statutes was again contended to have been violated by the tax law of New York. That act permitted certain deductions in the assessment of the capital stock of trust companies organized under the laws of New York, which deductions were not allowed in the assessment of shares of stock in national banks. The Court of Appeals, citing Mercantile National Bank v. Mayor, went back to the origin of national banking and gave us the key to the opinion of the Court of Appeals on what is deemed to be banking within the national view of the subject, saying:

8

"The key to the proper interpretation of the act of Congress is its policy and purpose. The object of the law was to establish a system of national banking institutions in order to provide a uniform and

7163 N. Y. 320 (1900).

Supra, note 5.

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*

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secure currency for the people and to facilitate the operations of the treasury of the United States. It was deemed consistent with these national uses, and otherwise expedient, to grant to the states the authority to tax them within the limits of a rule prescribed by the law. In fixing those limits it became necessary to prohibit the states from imposing such a burden as would prevent the capital of individuals from freely seeking investment in institutions which it was the express object of the law to establish and promote. The business of banking, as defined by law and custom, consists in the issue of notes payable on demand, intended to circulate as money where the banks are banks of issue; in receiving deposits payable on demand; in discounting commercial paper; making loans of money on collateral security; buying and selling bills of exchange; negotiating loans and dealing in negotiable securities issued by the government, state and national, and municipal and other corporations. These are the operations in which the capital invested in national banks is employed, and it is the nature of that employment which constitutes it in the eye of this statute 'moneyed capital'."

The Court of Appeals opinion then quoted that portion of the opinion, that has been quoted above, wherein the United States Supreme Court held that trust companies "are not in any proper sense of the word banking institutions," but the appellant's counsel, in the instant case, contended that since the decision of the Mercantile Bank case the powers of trust companies had been increased by the banking law of 1892. He insisted that that law conferred upon them substantially full banking powers, except the power to issue bills to circulate as money. The court said:

"While this statement is unintentionally much broader than the detailed provisions of the statute referred to warrant, yet it is true that trust companies exercise the powers conferred upon individual banks and bankers by section 55 of the Banking Act and subject to its restrictions.

"This section fixes the rate of interest to be charged and imposes penalty for violation of its provisions.

"It is, however, to be remembered that trust companies are very much limited as to the money they can use for these purposes. Their capital must be invested in United States bonds, state or municipal bonds, or first mortgage bonds on improved real estate, and it is thereby separated from the surplus and deposits of the company that may be used for the purposes to which reference has been made.

"A trust company accepts and executes all trusts of every description committed to it by any person or corporation, or any courts of 'Supra, note 5.

record, receives the title to real or personal estate on trusts created in accordance with the laws of the state and executes such trusts, acts as agent for corporations in reference to the issuing, registering and transferring certificates of stock and bonds and other evidences of debt, accepts and executes trusts for married women in respect to their separate property, and acts as guardian for the estates of infants. "It is very obvious that trust companies are not in the legal or commercial sense engaged in the business of banking.

"A national bank is authorized to issue notes payable on demand intended to circulate as money; and, while compelled to secure its circulation by the deposit of United States securities, it can employ the balance of its capital for business purposes, thereby securing a profitable return for its stockholders. A national bank occupies a distinct field of operation as compared with a trust company, and enjoys privileges that are not accorded to the latter, which are the source of great profit."

In this decision we find again that the fact that trust companies have no power to issue bills to circulate as money is one of the chief elements of distinction on which the courts have found that these fiduciary companies were not engaged in banking. If this is not the case, then there seems to be no reason why the Court of Appeals, with the question squarely presented to it, did not take judicial notice of the fact that trust companies were as fully engaged in the banking business as were the State banks, except as to the complete power to discount.

This case also showed the increasing jealousy of the state court to protect its right to tax its corporations upon an economic theory of its own. In a word it took the position that this was a matter of its own domestic affairs.

The Supreme Court of the United States affirmed this decision,10 but that court disposed of controversies as to the facts by the statement:

"Again it is insisted that that case11 was submitted on an agreed statement of facts which neglected to disclose fully the manner in which trust companies carried on their business, and also that whatever might have been the facts at the time, the testimony here presented shows that almost the entire volume of the business of the trust companies is banking, pure and simple, and but a small fraction of it is the peculiar and ordinary business of trust companies; but that decision rested mainly upon the powers granted by the statutes of New York to trust companies, and it was held that, tested by such 10186 U. S. 230 (1902).

"Referring to Mercantile Bank v. New York, supra, note 5.

powers, they were not in any proper sense of the term banking institutions.

Further, although there is in the record quite an amount of testimony as to the assets and business of trust companies in Brooklyn, yet the case was determined by the supreme and appellate courts of New York upon findings of fact,-which findings do not sustain the contention of plaintiffs in error in this respect, and it is well settled that the findings of fact in the state courts are on a writ of error conclusive with us."

Despite this judicial theory, the year 1900 marked the organization of many trust companies which continued to increase in number and which invaded the most conservative banking fields. Trust companies popularized the banking business by an infusion of new blood, new ideas and a ready acceptance of the most arduous tasks.

The state of New York was particularly the home of these large aggregations of capital and they grew up side by side with national banks, rivaling them on the banking side of the business and having in addition large returns from their trust or fiduciary powers. So vigorous was the competition on the part of trust companies that not only the national banks, but state banks and savings banks made common cause to further regulate their operations.

In the same year in which the Federal Reserve Act was passed, legislation was passed in New York for the appointment of a commission to thoroughly revise the banking laws of the state. We found ourselves in this commission face to face with our domestic problem and with the new problem presented by the Federal Reserve Act.

The Banking Commission did not hesitate to accept the challenge of the Federal Reserve Act. The theory of domestic affairs of states was held by all members of the commission, and the commission's report as finally amended and adopted by the legislature, met the two issues squarely. Chapter 369, Laws of 1914, Section 185, subdivision 12 of that act in terms authorized trust companies to become members of the federal reserve bank. Section 223, however, in a section entitled "Prohibition against encroachments upon powers of trust companies" prohibited a national bank from exercising the full powers which had been conferred upon them by the federal government, except that it permitted a federal reserve bank to exercise certain limited fiduciary powers, conferred by the banking law upon trust companies, when authorized so to do by the laws of the United States. The powers which were thus conferred upon federal reserve banks were as follows:

"To act as the fiscal or transfer agent of the United States, of any state, municipality, body politic or corporation; and in such capacity to receive and disburse money, to transfer, register and countersign certificates of stock, bonds or other evidences of indebtedness, and to act as attorney in fact or agent of any person or corporation, foreign or domestic, for any lawful purpose."

There is no question but that the Banking Commission intended to plainly state that it was "in contravention of state or local law" for a national bank to act as trustee, executor, administrator or otherwise, in the broad field of fiduciary powers conferred on trust companies in New York state.

The states generally viewed the Federal Reserve Act fiduciary provisions with alarm, and Michigan, deeming it a direct invasion of the sovereignty of the state, through its attorney general, in his own. name, filed an information in the Supreme Court of that state, on the relation of various trust companies, in the nature of a quo warranto against a federal corporation-a national bank. A novel procedure indeed, which later led to a strong objection as to procedure in the Supreme Court of the United States.

The First National Bank of Bay City obtained a certificate required by the law, and began to exercise the powers conferred. The information charged that the bank's exercise of this privilege was “in contempt of the People of the State"; charging first, that the exercise of the privilege by the bank was in contravention of the laws of the state, and second, that the act of Congress under which the privilege was claimed, transcended the power of Congress, and was void. The state court dealt with both grounds. The first was overruled; the second was sustained. The judgment rendered enjoined and excluded the bank from exercising the privilege granted.

In stating that Congress had exceeded its constitutional powers in granting to banks the right to act as trustee, executor, administrator, etc., the Supreme Court of Michigan said:12

"If for mere profit it can clothe this agency with the powers enumerated, it can give it the rights of a trading corporation, or a transportation company, or both. There is, as Judge Marshall points out, a natural connection between the business of banking and the carrying on of federal fiscal operations. There is none, apparently, between such operations and the business of settling estates, or acting as the trustee of bondholders. This being so, there is in the legislation a direct invasion of the sovereignty of the State which controls not only the devolution of estates of deceased persons and the conducting of private business within the State, but as well the creation 12 Attorney General v. First National Bank, 192 Mich. 640 (1916).