My paper
"Trust Company Failures and Institutional Change in New York, 1875-1925" is now available under First View at
Enterprise and Society.
Here are the first two paragraphs
The State of New York created the
first trust company in 1822, when
it granted a corporate charter to
the Farmers’ Fire Insurance and
Loan Company, later renamed
Farmers’ Loan and Trust Company,
and authorized it to act as a
trustee. As the name suggests, Farmers
and other early trust companies,
like the New York Life Insurance
and Trust Company and the
Massachusetts Hospital Life Insurance
Company, also sold insurance, and
they provided trusts as an alternative
to insurance. Trust companies
later used their trust powers
to facilitate the development of
corporate finance by serving as registrars
and transfer agents for corporate
securities and as trustees for
corporate mortgages. Trust
companies also accepted deposits; by the
middle of the nineteenth century,
some of these deposits could be withdrawn
on demand including by check.
Thus, by the late nineteenth
century, trust companies in New
York occupied a unique position in
the financial system by combining
functions associated with banks
with functions associated with
trustees.
Between 1875 and 1925, the number
of trust companies in New York
State increased from ten to 110,
and the total resources of trust companies
increased more rapidly than those
of state banks or savings
banks. Trust companies have been
characterized as early examples
of “shadow banks,” operating
outside the laws and regulations that
applied to commercial banks. However,
as with other financial institutions,
New York State trust companies
rarely failed. Between 1875
and 1925, the superintendent of
banks only intervened eleven times
to deal with troubled trust
companies, and in several of these cases
the trust company reopened.
Despite this rarity, these failures provide
a path to understanding the
overall success of trust companies.
The path leads through
institutions: failures played a leading role in
shaping the institutions that
governed trust companies. Consequently,
failures shaped the expectations
and actions of everyone involved
with trust companies: depositors,
shareholders, and executives.