USA > Massachusetts > Commonwealth history of Massachusetts, colony, province and state, volume 5 > Part 32
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The national banks were given a period of six months to decide as to whether they would become members or give up their charters. Though membership on the part of trust companies in the Reserve System was optional, twenty trust companies became members by the end of 1918. The Federal Reserve Act also made it permissible for national banks to have trust departments and savings departments, thereby placing them on a more even basis with the privileges of the State banks.
About this period a particularly rapid increase took place in the number of trust companies in the State, the number being 114 at the end of 1920. During the same period there were
346 PUBLIC FINANCE OF MASSACHUSETTS
some consolidations among both the trust companies and the National banks and a few National Banks incorporated under Massachusetts laws as trust companies.
The most serious catastrophe in the banking history of the State came with the closing of four trust companies in Bos- ton in 1920, following evidence of gross mismanagement and making of poor loans. A fifth trust company was closed dur- ing the following year. In only one of these closed trust companies did the savings depositors lose any part of their principal, and in that case it was less than 8 per cent.
TRUST COMPANY REGULATION (1865-1930)
The trust companies from the start had been placed under the supervision of the Savings Bank Commissioner, who re- placed the Board of Bank Commissioners, abolished at the end of 1865, when the National Banking Act went into effect. In 1876 a Board of Savings Bank Commissioners was estab- lished, and in 1906 this was replaced by a Bank Commissioner with deputies.
Massachusetts, by its general laws of 1888 to establish con- ditions under which trust companies might be incorporated, was the first State to require trust companies to keep a fixed reserve against deposits. The Bank Commissioner in Massa- chusetts in his annual report for 1907 reviewed all of the rec- ommendations of a committee appointed by the New York banks to survey the causes of the panic of 1907, and discussed their bearing upon conditions in Massachusetts. As a result, legislation recommended by the Bank Commissioner was en- acted, requiring trust companies in Boston to increase their reserve from 15 per cent to 20 per cent of demand deposits. The first trust company failure resulted in the passage in 1892 of a more definite method for enforcement of the lia- bility of stockholders. The experience of 1920 and 1921 was crystallized in the enactment of the recommendations of a special Recess Commission on Revision of Banking Laws, in- cluding a more adequate and complete separation of savings departments and commercial departments of trust companies, a more frequent report to the commissioner of the amount of reserves, more adequate audits, bonding of officers, and more clearly defined penalties for fraudulent action.
347
TRUST COMBINATIONS
In conformance with the trend elsewhere, the period from 1921 on has been marked in Massachusetts by further consoli- dations and concentration of bank capital.
The Atlantic National Bank ( founded in 1828 as the At- lantic Bank) in 1909 absorbed the Metropolitan National; and in 1912 merged with the Fourth National, which had pre- viously absorbed the National Hamilton Bank, to form the Fourth Atlantic National Bank. In 1922 the Peoples National (dating from 1833) was added. The Commonwealth Trust in 1914 had absorbed the Hamilton Trust (a consolidation of the New England National and South End National), and in 1923 merged with the Fourth Atlantic to form the Common- wealth Atlantic National Bank. The Boylston National was absorbed the same year, and, in 1926, the Massachusetts Trust Company (the second of that name) which had pre- viously absorbed the Haymarket National Bank. In 1928 the name was changed to the Atlantic National Bank, and the Commercial Security National was added, thus bringing this bank to the end of 1929 with capital of $8,000,000, surplus and undivided profits of $8,503,882, and deposits of $114,111,190.
FIRST NATIONAL-OLD COLONY TRUST COMBINATION (1929)
The year 1929 was conspicuous for expansion in banking capital and consolidations of banks throughout the country. The most notable event of the year in Massachusetts was the consolidation of the First National Bank of Boston with the Old Colony Trust Company, the largest New England trust company.
The early consolidations of The First National Bank of Boston have already been traced. In 1923, it absorbed the International Trust Company, dating from 1879, which, in the previous nine years, had successively absorbed the Lin- coln, Dorchester, Old South and Hyde Park Trust Companies, and the Market Trust Company of Brighton.
The Old Colony Trust Company had been founded in 1890 and had had a particularly rapid growth, both through its own activities and successive consolidations, starting in 1910 with the absorption of the City Trust Company and the Copley Trust Company, the former of which had previously
348 PUBLIC FINANCE OF MASSACHUSETTS
acquired the Bunker Hill National, Mercantile Trust and the Massachusetts Trust (the first of that name). The Old Col- ony later absorbed the Bay State Trust Company and the Pilgrim Trust.
With the merger, the entire commercial business of the combined institutions was brought together under the Federal charter of The First National Bank of Boston. The Trust and Savings Departments were consolidated under the Massachusetts charter of the Old Colony Trust Company. The First National-Old Colony Corporation was created to bring together the security business which had been devel- oped by both the merging institutions, the ownership of this corporation, like that of the Old Colony Trust Company, be- ing placed in the hands of trustees for the proportionate bene- fit of stockholders of the bank. The First National Bank of Boston thus reached the end of 1929 with capital of $43,500,000; combined capital assets of $115,329,548 (including the capital, surplus and profits of the Old Colony Trust Company and First National-Old Col- ony Corporation) ; combined deposits of $539,384,895; and combined trusts of $309,325,295. Early in 1930 the Amer- ican Trust Company was absorbed, which raised the combined capital assets to well over $118,000,000.
GROUP BANKING
A further feature of interest in Massachusetts banking has been the development of several groups of banks with enough of the stock of each held by a single holding company or trust to create a community of interest between the banks. The most important of these groups is the Old Colony Trust Associates, formed by interests allied with the Old Colony Trust Company before its merger with the First National Bank. This organization has acquired control of nineteen banks, including one in Springfield and one in Lowell, with the remainder distributed through metropolitan Boston territory. The community of interest thus established between these banks and the merged First National Bank and Old Colony Trust Company interests benefits the individual units through exchange of operating information and uniformity of policy, and the development on the whole is in line with the growing
349
WORLD WAR FINANCE
demand which has appeared throughout the country for ex- pansion of banking activities along the line of group banking or branch banking.
FEDERAL RESERVE BANK
The Federal Reserve System and the strength and flexi- bility which it added to our entire banking system have al- ready been mentioned. An important part in its establishment was the activity of John W. Weeks of Massachusetts. Prior to his term as Senator, he had served for many years as a member of the Banking and Currency Committee of the Federal House of Representatives; and was also a member of the National Monetary Commission, which, in the words of Secretary of the Treasury Andrew W. Mellon, "did so much hard and useful work in preparation for the reform of the Banking and Currency System that came later with the pas- sage of the Federal Reserve Act."
Senator Weeks devoted unremitting time and effort to the perfecting of the bill embodying the Federal Reserve System, and he was an active proponent, both in committee and on the floor of the Senate, of the advantageous features of the bill, and equally vigorous in pointing out and helping to eliminate unsound features. The success with which the Federal Reserve System has met the tests of succeeding years is a tribute to his knowledge and judgment in financial matters.
The features of the Federal Reserve System need not be detailed here, but mention should be made of the part played by the Federal Reserve Banks as fiscal agents of the Federal Government in the distribution of the Liberty and Victory Loans during the World War, and especially the part played by the Federal Reserve Bank of Boston.
WORLD WAR FINANCE (1917-1920)
With the offering of the First Liberty Loan in 1917, the minimum allotment of the First Federal Reserve District (New England) was set at $240,000,000. Subscriptions totalled $332,447,000, but the final allotment was $265,017,- 900. For the Second Liberty Loan, $476,950,000 was sub- scribed, the allotment being $408,530,000.
350 PUBLIC FINANCE OF MASSACHUSETTS
Much of the work of the Federal Reserve Bank of Boston during this and succeeding years consisted of financing the great war loans and supplying the needs of industries of the district, assisting member banks of the State and the district through rediscounts. During 1918, the Federal Re- serve Bank of Boston placed more than $1,000,000,000 of government securities, Treasury certificates, Liberty Loan bonds and war savings stamps in New England; and collected more than $300,000,000 in Federal taxes.
For the Third and Fourth Liberty Loans, the New Eng- land quota of $750,000,000 was well exceeded by the $986,- 638,500 actually subscribed and allotted, Massachusetts con- tributing $633,660,650. For the Victory Loan in 1919, $425,159,950 was actually subscribed against the New Eng- land quota of $375,000,000; actual allotments were only $371,910,150, of which Massachusetts contributed $222,114,- 650. For the five loans, Massachusetts was allotted a total of $1,307,069,600.
BOSTON CLEARING HOUSE (1856-1928)
The Boston Clearing House, organized early in 1856, has been an important factor in the functioning of the banks of New England. The clearing house system itself was in- herited from the Old World. The creation of the Boston Clearing House was in recognition of the advisability of es- tablishing an organization for the convenient settling of daily balances.
Shortly after its inception the Clearing House underwent a severe test of its usefulness in the panic of 1857 and the accompanying suspension of specie payments. The Clearing House Association voted "that the bills of any associated banks may be received in liquidation of their daily balances instead of specie, to an extent not exceeding 21/2% to 5% of the capital of such bank." The storm was success- fully weathered after a trying period of two months.
In later times of stress, notably in 1873, 1893 and in 1907, the Clearing House was of substantial assistance through the issuance of "clearing house certificates" for use in the set- tlement of balances. This feature later became unnecessary through the establishment of the Federal Reserve System.
351
SAVINGS BANK PRACTICE
Of especial interest is the following vote of the associa- tion, passed April 24, 1893: "The Associated Banks of Bos- ton, relying upon the ability and the determination of the government to maintain gold payments, hereby tender to the Secretary of the Treasury one-half of the gold reserve held by them, in exchange for legal tender notes, and the Clearing House Committee is directed to carry out the terms of this resolution."
The result was that about $4,000,000 was deposited with the subtreasury.
The Boston Clearing House Association gained country- wide attention, when, in June, 1899, it established a "foreign department," for the collection for its members of checks on banks scattered throughout New England. This later came to be known as the Boston System and was adopted by other clearing houses throughout the country. Upon the inception of the Federal Reserve System in 1914 it was adopted as a whole by the Federal Reserve Bank of Boston for clearing of out-of-town checks for members, and later by the Federal Reserve System.
The Boston Clearing House Association in 1930 numbers 18 members, including 9 national banks and 9 trust compa- nies. In volume of clearings it is exceeded only by New York, Chicago and Philadelphia. Its clearings in 1915 were about $8,000,000; in 1928 they were nearly $26,000,000.
SAVINGS BANK PRACTICE (1865-1930)
Massachusetts savings banks have from the first been mu- tual institutions, operated primarily with regard for the safety of principal of the depositors and without profit to any others than the depositors themselves. Investments are per- mitted in a limited list of securities, which has been further defined and restricted from time to time, including obligations of railroads, municipalities, States and governments, bank stocks, real estate mortgages, and certain loans on personal security. The depositors of banks are on an entirely mutual basis, all earnings (after relatively small management ex- penses) accruing for the benefit of depositors and payable to the depositors in the form of dividends, after setting aside semi-annually a small percentage of deposits toward the ac-
352 PUBLIC FINANCE OF MASSACHUSETTS
cumulation of a guarantee fund, until this fund equals 5% of the deposits.
The law of 1838 included among the duties of the three bank commissioners the visiting of each savings bank at least once each year. Whenever in the opinion of a majority of the commissioners, the institution was insolvent or had ex- ceeded its powers, or it appeared that its further operation would be hazardous to the public, the commissioners were empowered to apply to the Supreme Court for an injunction restraining the institution from further operations. Changes in the make-up of this supervisory agency, covering savings banks as well as other forms of banking under State super- vision, have already been noted.
Legislative enactments in 1908 gave the Bank Commis- sioner power to direct discontinuance of unsafe or unauthor- ized practices; required that the auditing committee of each bank must cause an audit to be made yearly; and redrafted the provisions covering the investment of savings-bank funds. The establishment of branches was also permitted, and sav- ings departments of trust companies were authorized. In 1910 it was required that the annual audits of savings banks should be made by certified public accountants approved by the Bank Commissioner. Early in 1911, savings banks were given the permission to collect savings of school children through the principals or teachers of schools in their respective towns and cities.
SECURITY OF SAVINGS BANKS (1830-1930)
In the history of Massachusetts savings banks, there have been only twenty-three failures in which banks were finally liquidated and passed out of existence. Ten of these failures occurred as the result of the panic conditions of 1873, largely because of mortgages on real estate on a much over- priced basis. Other failures have been due to dishonesty on the part of bank officials or employees. The average amount paid to depositors of the banks which failed has been 82.23 per cent of their deposits, and the total amount of the loss in the period of over 110 years has been less than four tenths of a mill on each dollar entrusted to the savings banks. No
353
COOPERATIVE BANKS
year since 1879 has failed to show a growth in deposits. The growth of the last forty years is shown in the following table :
Year
No. Banks
No. Accounts
Deposits
1889
177
1,029,694
$332,723,688
1899
186
1,477,447
518,202,048
1909
189
2,040,894
743,101,481
1919
196
2,532,036
1,114,313,692
1929
196
2,948,833
2,035,799,106
COOPERATIVE BANKS (1877-1929)
Cooperative banks, which under the name of building as- sociations had existed for some years elsewhere in the United States, were established in Massachusetts in 1877 by legislative authorization of cooperative saving fund and loan associa- tions, a name changed in 1883 to cooperative banks. The purpose of these organizations, as originally stated, was "to enable persons of moderate means depending upon their own savings to provide themselves with homes which they shall own." Loans of these institutions are restricted to first mort- gages on real estate and pledge of shares; and provision is made that a borrower must be a member of the association.
The history of cooperative banks in the Commonwealth has been particularly satisfactory, only seven of them having been closed since cooperative banks were first established. Five of these, liquidating for lack of business in their communities, paid approximately 100 per cent on liquidation; and of the other two, one paid 100 per cent and the other 89 per cent. The growth of these banks is indicated in the following tabulation :
Year
No. Banks
Total Assets
1879
10
$205,235
1889
93
7,106,629
1899
125
26,744,647
1909
140
55,945,634
1919
190
154,879,639
1929
227
543,654,998
354 PUBLIC FINANCE OF MASSACHUSETTS
CREDIT UNIONS (1909-1929)
Massachusetts was the first State to incorporate credit unions (1909). They are to be found in many of the large industrial and mercantile companies, and also as community enterprises. The original act required a character qualifica- tion for membership, loans to be made to members only and to be secured either by property or by additional endorsers; and strict requirements that the objects for which the loans are actually used shall be approved by the credit committee. The credit union laws were strengthened in 1926. The fol- lowing tabulation shows briefly the growth of the credit unions :
Year
No.
Assets
1911
17
$25,942
1919
60
2,791,165
1929
299
16,152,699
REGULATION OF DEPOSIT CONCERNS (1902-1921)
The Bank Commissioner and the General Court have from time to time extended their authority over other individuals or organizations receiving money from the public, such as banking associations formed or incorporated under charters of other States. In 1906 power was given to commissioners to proceed against such organizations if further operations seemed against public welfare.
At about this same period a State survey was made of all individuals or organizations receiving money on deposit, leading shortly to the passage of an act (1905) placing under the supervision of the banking department "all persons en- gaged in the selling of steamship or railroad tickets for transportation to or from foreign countries, or in the supply- ing of laborers, who, in conjunction with this business, carry on a business of receiving deposits of money for safekeeping, or for transmission." This same act provided that persons carrying on business of this type should be placed under a bond to be filed with the State Treasurer and Receiver-Gen- eral, and also provided specific regulations for the conduct of the business. The control thus authorized did not prove adequate, with the result that there were several failures in
355
SUMMARY OF ACTIVITIES
1920 and 1921. Later legislation provides for their gradual elimination.
SUMMARY OF BANK ACTIVITIES (1929)
These steps in improving supervision have enabled the governor of the Commonwealth to say (1929) : "Massa- chusetts has always been in the forefront in the safety of banking institutions. Eight hundred and thirty-four banking institutions were under supervision on June 30, 1929 with aggregate assets of $4,500,000,000, a gain in assets of more than $257,000,000. The last legislature passed an act, which prohibited individuals and others than banks engaging in the business of receiving deposits of money for safekeeping."
SUMMARY OF BANK STATISTICS (1889-1929)
Oct. 31, 1889 No. Assets
Oct. 31, 1929
Savings Banks
179 $350,635,971 196 $2,244,710,667
Trust Companies
Commercial Depts.
12
43,496,158 102
789,325,927
Savings Dept .. . .
. .
87
252,083,730
Trust Depts. .
4
3,253,515
63
732,235,815
Collateral Loan Cos.
2
375,378
.
Mortgage Loan Cos.
2
1,834,738
. .
Mass. Hospital Life
Insurance Co. ....
1 20,853,791
1
36,895,833 543,654,999
Cooperative Banks .
93
7,106,752 227
3
4,491,867
Foreign Banking
Corp .- Branch
1
2,269,591
Credit Unions
299
16,152,699
Persons, etc. receiv-
14
2,277,183
Total under State
Supervision
. $427,556,303
. . $4,624,098,311
National Banks
256
372,189,000 154
1,603,371,000
Total Banking Re-
sources
$799,745,303
$6,227,469,311
Sav. & Loan Assns ..
ing deposits
No. Assets
356 PUBLIC FINANCE OF MASSACHUSETTS
FIRE AND MARINE INSURANCE COMPANIES (1795-1930)
The insurance business in Massachusetts and its conduct, both on the part of the home companies and of other compa- nies operating within the State, are under the supervision of the Insurance Department of the Commonwealth. The early maritime activities of Massachusetts developed the need for marine insurance, which was undoubtedly conducted by in- dividuals or informal groups of individuals before the devel- opment of the corporate form of underwriting. A charter was obtained from the legislature in 1795 for the first insur- ance corporation in Massachusetts, the Massachusetts Fire Insurance Company. In 1799 it became the Massachusetts Fire and Marine Insurance Company. Other insurance com- panies followed, both mutual and stock companies, with in- creasing emphasis upon the writing of fire insurance. By 1858, there were 34 stock companies in the Commonwealth and 84 mutual companies writing fire or marine insurance, or both. In addition, 38 companies incorporated elsewhere were writing insurance in the State.
The years 1871 and 1872 were disastrous to Massachu- setts companies. Losses in the Chicago fire in 1871 caused three companies to suspend; and the Boston fire the follow- ing year caused the suspension of 26. By 1890, the Massa- chusetts companies writing fire and marine insurance numbered only 15 stock companies and 51 mutual; while 112 companies incorporated in other States and 27 companies in- corporated in foreign countries were writing insurance in the Commonwealth.
The Massachusetts and other companies profited by the lessons of the fire in increasing the territorial diversification of their risks, so that by 1889 approximately only one half of the premium income of Massachusetts fire and marine com- panies was from Massachusetts business. The total volume of business of the Massachusetts companies, however, had more than doubled in the period from 1858 to 1889, and the amount of insurance written in Massachusetts by companies incorporated elsewhere had reached substantial proportions.
Courtesy of Cram and Ferguson, Architects PROPOSED FEDERAL BUILDING, BOSTON
Courtesy of the John Hancock Mutual Life Insurance Co. JOHN HANCOCK MUTUAL LIFE INSURANCE BUILDING, BOSTON
357
INSURANCE LEGISLATION
LIFE INSURANCE (1818-1930 )
The earliest life insurance company in the Commonwealth was the Massachusetts Hospital Life Insurance Company, incorporated in 1818 to take advantage of an act of 1814 allowing the trustees of the Massachusetts General Hospital to grant annuities on lives. By its charter this company was to pay each year to the trustees of the Massachusetts General Hospital one third of the net profits from the insurance on lives during the preceding year. This obligation was also to be applied to any other person or corporation who should be empowered to insure lives within the Commonwealth. In the charter of the New England Mutual Life Insurance Com- pany (1835) this provision as to profits was included; but as it was a mutual company, the only profit in respect to the provision as to the Massachusetts General Hospital was finally determined as the excess in dividends paid to stockholders over 6 per cent on the guarantee capital of the company. In 1870, the general requirement that life insurance companies pay a portion of profits to the Massachusetts General Hospital was repealed.
The Massachusetts Hospital Life Insurance Company has gradually ceased insuring lives, confined its operation to annuities and trust funds, and now reports to the Bank Com- missioner. Two of the earlier insurance companies incorpo- rated in other States have had a similar history, giving up life insurance underwriting and confining themselves largely to the handling of trust funds, thus leaving the New England Mutual Life Insurance Company as the oldest chartered American life insurance company now operative.
EARLY FIRE AND MARINE INSURANCE LEGISLATION (1807-1860)
Legislation with relation to conduct of the insurance busi- ness began in 1807 with a resolve calling for the publication by each company of a statement of its capital stock paid in, its investments and the amount of its reserves. In 1818 the first State act was passed, defining the powers, duties and restrictions of marine insurance companies. This was fol- lowed by a general law authorizing all companies to insure
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