USA > Connecticut > History of Connecticut, Volume II > Part 9
Note: The text from this book was generated using artificial intelligence so there may be some errors. The full pages can be found on Archive.org (link on the Part 1 page).
Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6 | Part 7 | Part 8 | Part 9 | Part 10 | Part 11 | Part 12 | Part 13 | Part 14 | Part 15 | Part 16 | Part 17 | Part 18 | Part 19 | Part 20 | Part 21 | Part 22 | Part 23 | Part 24 | Part 25 | Part 26 | Part 27 | Part 28 | Part 29 | Part 30 | Part 31 | Part 32 | Part 33 | Part 34 | Part 35 | Part 36 | Part 37 | Part 38 | Part 39 | Part 40 | Part 41 | Part 42 | Part 43 | Part 44 | Part 45 | Part 46 | Part 47
Banks in the small towns were attracted by the eight and ten per cent returns promised by the railroads on their bonds. Those looking for even greater profits were investing in Wall Street securities. The
631
THE AGGREGATION OF CAPITAL
banks contended that their choice of investments was necessitated by the demands of depositors for large returns.1
The banks had contended, too, that credit should seek its own cost level, the need for credit requiring an increase in interest rates. When the rural legislators resisted the demands to change the 1866 laws2 which limited interest to six per cent,3 it became customary to circumvent the law by requiring a bonus of from 45 to 60 dollars on each thousand loaned. It was estimated that by 1871 there were more than fifty million dollars loaned at more than the legal rate.4 Sanction had been secured from the Assembly in 1872 when it determined that the six per cent interest rate would prevail "when there is no agreement for a different rate." At this time, too, the severe punitive measures of the old usury law were eliminated.5
The increase in interest rates had combined with unexpected economic developments to becloud the optimistic outlook. The in- creased rates discouraged building, which, in turn, was reflected in the real estate market. Concurrently, an increase in insurance rates as a re- sult of the Chicago fire caused a restlessness within the business com- munity, which was intensified by losses suffered in the Boston fire the next year. While the general economy was recovering from these dis- asters, the textile industry was shocked by the failure of one of the large commission merchants, Stanfield, Wentworth, and Company, a house which handled many of the textile accounts. Further intimation that all was not well was indicated by the failure of three banks during the Spring and Summer of 1872, the E. S. Scranton of New Haven, the Middletown Savings, and the Hartford County Savings.7
Restlessness became panic in 1873 as New York banks, such as that of Jay Cooke, fell. When the crash involved Fiske and Hatch Company of New York and the Brooklyn Trust Company, many of Connecticut's small towns were directly concerned. Railroads were financing their expansion through bonds guaranteed by municipalities. Both Fiske and Hatch and Brooklyn Trust were large holders of the securities.8 Within the state, the very large Townsend Savings Bank of New Haven illus- trates the practices which helped to produce the panic. Its real estate holdings in Philadelphia and loans amounting to twice the value of the property had presented a false picture of the bills receivable. An effort
632
HISTORY OF CONNECTICUT
(Courtesy "Meriden Record-Journal")
MERIDEN-CITY HALL
to cover up through illegal investments sealed the fate of the institution. The assets of the bank continually declined throughout 1873 and 1874 until the bank closed in the latter year.9
The panic extended beyond the banking institutions. The num- ber of bankruptcies in the state had been increasing since 1870 and rose from 48 in 1872 to 73 in 1873. The seriousness of the situation was indicated when the presumably impregnable Sprague Textile Mills closed their doors in October.10 The effects of the panic were every-
633
THE AGGREGATION OF CAPITAL
where evident. Prices fell and the decline in real estate values was reflected in the decline of the grand list. The state's income was reduced in 1874 by about $50,000.11 The business community recovered slowly, but, despite the signs of economic distress, it was reported that employ- ment had not been seriously affected, and the production of the diversi- fied industries maintained a relatively even pace. The public was admonished "that patient industry alone can satisfy the penalty past excesses are now exacting of our people."12
Protests had mounted to force, in 1873, several pieces of legislation intended to correct some of the "excesses" attributed to the savings banks. Banks were forbidden to invest in railroad stocks or bonds or in any one-name paper. Additional security for all commercial paper, equivalent to an absolute guarantee or endorsement of such paper, was required. The clause which permitted any rate of interest to which the bargainers would agree was eliminated, but the legal rate was raised from six to seven per cent. A restoration of penalty required violators to forfeit the value of any illegal premium involved.13 Investigation of the affairs of the Townsend Savings Bank had revealed its lack of wisdom in having almost ten per cent of its resources in Philadelphia. "If it is wise ... to guard the investments of the rich, why is it not equally our duty to protect the hard earnings of the poor?" asked the Bank Commissioner.14 The legislature responded by requiring that real estate offered as security be appraised by two or more persons from the community where the loan was made and by forbidding savings banks or savings societies, having more than $25,000 in deposits, to lend on personal security to any one person, company, or interest, more than three per cent of its deposits.15
Such restrictions did not curb the speculative spirit of the times. There was merit in the earlier contentions that a fixed interest rate would cause capital to flow to those areas which promised more attrac- tive returns. Some took advantage of the fact that the law of 1867 for- bidding investments in other states carried no penalty and, until penal- ties were imposed in 1874, loaned money on the flimsiest of security and with practically no knowledge of the character or the value of the prop- erty. The out-of-state loans to which the Bank Commissioner objected amounted in value to less than a million dollars as compared to 76
634
HISTORY OF CONNECTICUT
millions loaned within the state. However, investments of the Farming- ton Savings Bank constituted approximately half of these out-of-state loans. The Commissioner bitterly condemned those who disregarded law in search for large returns.16
In fact, demands of depositors for high dividends was a factor press- ing the banks into questionable practices, and both directors and de- positors shared in the responsibility. Savings banks in many instances had ceased to be the institutions for which they had originally been chartered and accepted deposits from individuals far in excess of the $1,000 maximum prescribed by law. During periods of stress, as in the 1870's, when the opportunities for investment were comparatively limited, financiers tended to place their idle capital in the savings banks and draw the certain interest those institutions would presumably re- turn. Banks, on the other hand, frequently sought to attract depositors by offering extraordinary dividends. Then it was found necessary to make the type of investment which promised to provide the necessary return. The situation was made more difficult by the decrease in the rate of interest on United States and municipal bonds. With their ca- pacity to earn markedly lessened, there was a tendency for some banks to meet the promised dividends by using interest paid in advance and by cutting into their capital. The inevitable consequences of such prac- tices to the bank are obvious. In addition, since the savings banks were repositories for most of the liquid funds in the state, such practices also affected the general financial structure of the state.17
During the depressed conditions, the banks did press for a reduc- tion of taxes. When first established as benevolent institutions, they had been exempted from taxation. When new taxes were instituted in 1864 to reduce the war debt, savings banks were assessed at one fourth of one per cent of their deposits. This was subsequently raised to one half per cent, and, since the banks persisted in their commercial ac- tivities, there was merit in the contention that the levy was just. In these circumstances, however, the banks appeared to begin to resist the demands of the depositors for higher interest. Some reduced dividends, some passed one or more, and others suspended dividends for an in- definite time.18 By statute, semi-annual dividends could not be greater than the net income of the banks in the preceding six months in excess
635
THE AGGREGATION OF CAPITAL
(Courtesy Conn. Devel. Comm.)
HARTFORD-WADSWORTH ATHENEUM
of the one-fourth of one per cent of this income which was reserved for contingencies.19 All dividends were suspended by law in 1878 and 1879.20 The banks, it was said, were also attempting to reestablish their original purpose by refusing to allow depositors to increase their ac- counts to any amount and by forcing depositors even to reduce their ag- gregate deposits. In the light of this reported procedure and intent, taxes on savings banks were reduced to one fourth of one per cent.21
The gloom which had settled over the state after the crisis of 1873
636
HISTORY OF CONNECTICUT
had been replaced by confidence by 1879. There had been an increase in deposits in the savings banks in 1879 for the first time in three years.22 In general, deposits barely held their own in the five years preceding January, 1880. In the next five years, however, they rose by twenty per cent.23 The mandatory reserve from earnings before dividends were declared was reduced to one-eighth of one per cent of the bank's de- posits.24 Everyone was confident that the worst had passed. Labor was in greater demand, wages were higher, and the Governor reported en- thusiastically that "stagnation has given way to enterprise, dullness has been succeeded by activity."25
To gain full advantage of the prosperity of the eighties, an effort was made to adjust the tax structure to the demands of wealth and in- dustry. Savings banks were least affected by the revisions, however. They could not object seriously to the one fourth of one per cent levy upon their deposits, which they had been paying since 1878. The pro- portion contributed by the savings banks to the state's receipts fluctu- ated less in the last period of the century than the amounts paid by other industries. Even during the lowest point of the Panic of 1893, there was not an inordinate run on the banks. The number of deposi- tors with accounts of less than $2000 decreased by 172, while the well- to-do added to the total deposits and increased the total number of depositors by 1,375. The savings banks were the first to feel the effects of the revival of business in 1894. Savings banks paid approximately 10 per cent of the state's receipts in 1879, 7.3 per cent in 1885, and be- tween 10 and 15 per cent for the remainder of the century.26
The banks, as well as the insurance companies, were greatly inter- ested in one contention presented to the Commission on Tax Revision, however. It was contended that laws which taxed the returns from investments in property which was itself taxed constituted double taxa- tion. The commission, however, pointed out that legal opinion was divided as to the merits of such claims of double taxation and would go no further than to suggest that there should be no taxation on govern- ment bonds or on real estate bearing local taxes.27 The Governor, how- ever, more sensitive to the wishes of the financial interests, spoke strongly for the elimination of the double tax.28
The pressure to return to a tax structure based entirely on prop-
637
THE AGGREGATION OF CAPITAL
erty persisted. There is no reason, said Governor George P. McLean in 1900, "why the moneyed corporations of the state should not be taxed directly by the state," instead of through their stockholders, and the money returned to the towns where the owners resided. The problem of the "back towns," said the Governor, was a grave one, and the state needed to find a way to aid the communities in bearing the expense of their schools and of caring for their poor, while preserving local au- tonomy. Since railroads paid their tax directly to the state and manu- factories were taxed locally on their property, the shares of both were exempted. The inequitability which prevailed in taxes on real estate was a central problem in dependence upon this tax base. The Governor charged that for years the legislatures, in their anxiety to tax credit and money at interest, had "driven the spear of double taxation safely by the intended victim to the very heart of the suffering borrower."32 As the Governor pressed for tax reform, he brought up issues which con- tinue important and unsolved in contemporary Connecticut.
Notwithstanding panics and cries of social responsibility, financial institutions remained impatient of attempts to control their quests for profits. They circumvented the law against loans on mortgages outside the state and advanced money on endorsed notes.33 The lure of profits from western lands, in particular, continued to attract Connecticut in- vestors. The state was deluged by foreign mortgage and investment companies until 1887, when they were placed under the supervision of the state Bank Commissioner. In 1890, the investments of these com- panies amounted to 16 millions. By 1895, the number of the companies had diminished from a high of 42 to 12. This reduction was the result, in part, of poor management and insufficient capitalization, and, in part, of the declining price of cotton, wheat, and silver, which reduced the security upon which many marginal loans had been made.34
The pressure for dividends continued. Savings banks assumed the functions of banks of discount and a large part of their portfolio came to consist of signed commercial paper. There is, perhaps, nothing more in- dicative of the trend in investments by Connecticut banks than the rise in stock and bond holdings. The nearly 104 millions invested in stocks and bonds in 1900 constituted more than 53 per cent of their total assets, as compared to the approximately 17 per cent of this type of investment
638
HISTORY OF CONNECTICUT
in 1870. Real estate still made up a significant amount of investments, but constituted only 33 per cent of the total in 1900 as compared to 55 per cent in 1870. These changes, coupled with the negligible invest- ments in government bonds of $1,268,000, emphasized the desire for higher profits. To meet the demands for dividends, banks not only in- vested in securities bearing higher interest, but frequently intruded upon their surpluses beyond what was considered the margin of safety.
Hesitantly, uncertain of its effectiveness, legislation was introduced toward the end of the nineteenth century in an attempt to bring savings institutions in line with the rising demands for public institutions to assume a greater social responsibility. Dividends were limited by law in 1897 to four per cent a year, and a Judge of the Superior Court, on petition of the Bank Commissioner, was authorized to issue an injunction restraining savings banks from paying dividends when, in the court's judgment, it would imperil depositors.36 Savings banks were not allowed to place more than 20 per cent of their total investments in stocks and bonds, nor more than 20 per cent in endorsed notes.37
Insurance
The insurance industry, at the end of the postwar period, was ready to take advantage of its fortuitous position. It had survived its tempestuous beginnings in which the industry had been characterized by price cutting, careless divisions of profits, and blind devotion to premiums. It had recovered from the uncertainties of the Civil War and from the restlessness of reconstruction. New opportunities for profits appeared in the growth of the West, in an unprecedented in- dustrial expansion, and in the attending urban development. The fu- ture was so bright that greater success was to result from apparent disaster.38
The disasters of the early seventies were turned into assets by the insurance companies. The companies were stunned by the first news of the Chicago holocaust in 1870. Policy holders had been assured by representatives on the spot that they would be paid in full, and cold and courageous efficiency enabled the companies to fulfill this promise. The fire itself, which had destroyed the records of many policy holders, enabled the companies to delay payments until resources were available
639
THE AGGREGATION OF CAPITAL
(Courtesy Hartford Chamber of Commerce)
HARTFORD-MUNICIPAL BUILDING AT RIGHT, TRAVELERS IN BACKGROUND
to meet them. As funds became available, company records were proc- essed. The Aetna, the Phoenix, and the Hartford Mutual companies all followed the same procedures. To raise funds, capital was immedi- ately cut in half and restored by new subscriptions. The rates were in- creased from one per cent to one and three-fourths per cent. New busi- ness flowed in at an unprecedented rate. Seven hundred thousand in new premiums was contracted with Aetna within 20 days after the fire.
640
HISTORY OF CONNECTICUT
Within six months, these revenues were sufficient to pay for the Chicago losses. The losses had been huge, but the fire had been an object lesson in the value of insurance, in the desirability of cooperation among the insurance companies, and the importance of maintaining uniform rates. When the companies were hit by the Boston fire the next year, they demonstrated their maturity as business organizations and promptly paid the $2,500,000 losses. The companies had learned the necessity of large assets, and the need of dispersing their risks. They assumed privileges commensurate with their strength.
The insurance industry had, however, aroused the ire of the Con- necticut populace. The business community had protested vigorously at the increase in rates and had charged that the insurance companies were shifting the burden of the fires to their shoulders. It was claimed, with a great deal of accuracy, that in previous years, the companies had distributed huge profits to their stockholders and in times of stress went bankrupt or met their obligations through an increase in rates.4ยบ Also, life insurance companies had a reputation for tax evasion. Consistently, both during and after the war, the companies had forced the state to resort to law suits to collect back taxes. The last of these was settled in 1871 with the state receiving a judgment of $241,000. When investiga- tion revealed that the companies had enjoyed an exemption on their premium note business, the Democratic press voiced its protest. The Times, by comparing the tax load of the insurance companies with that of the railroads, banks, and farmers, bared the selfishness of the in- surance companies and appealed for support of legislation which would levy a tax on the premium notes.41 The belief prevailed, too, that the companies had taken advantage of a Connecticut law of 1867 to conceal their wealth. Inasmuch as the companies were not required to swear to the authenticity of their reports they had provided flagrantly inaccurate ones. It was later revealed that they had omitted all but business not done on the mutual plan; all items of interest on premium notes, bonds, and mortgages; and, in Connecticut, had reported all their securities at par value, while, in New York, they had reported them at market value. 42
In bringing the insurance companies under the control of the state, the first step was the requirement, contained in a general insurance
641
THE AGGREGATION OF CAPITAL
law passed in 1871, that officials of the companies should verify the authenticity of the companies' reports. The Insurance Commissioner, who had been dependent on the fees collected by his office for his compensation, was made independent of the companies by the provision
wu-zouco
CREDI
Florsheim SHOEY
JE
(Courtesy Conn. Devel. Comm.)
BRIDGEPORT
that his salary would be paid by the state.43 The Commissioner was permitted to request information necessary to determine the solvency of the companies. The established controls did not portend a circum- scription of the activities of insurance companies and they had sufficient power to block an attempt to levy a tax on premium notes. The greatest threat was the appointment of a special legislative committee to investi- gate the reports to the Insurance Commissioner.44
Damaging evidence was unearthed of the business and political
642
HISTORY OF CONNECTICUT
activities of the insurance companies. The Hartford companies con- ducted their business on both mutual and regular plans. They held that mutual funds, owned by their depositors, should be exempt from taxation. It was revealed, however, that in their operations the com- panies made no distinction between the two funds and that the mutual funds were controlled entirely by the directors acting for the stock holders. In addition, the committee provided positive evidence that the companies had deliberately sought to conceal their wealth.45
Apparently in anticipation of the results of the investigation, the insurance interests marshalled all their resources to return in 1872 a Senate favorable to their cause. It was reported by the strictly Republi- can Norwich Bulletin that the insurance companies would spend $50,000 to achieve their objective. The particular target of their effort was Charles M. Pond, the Democratic nominee for Senator from Hart- ford, who, as state Treasurer, had pushed the tax suit against Con- necticut Mutual. Despite the concentrated efforts of the insurance group, Pond was defeated by only three votes and the election of Charles J. Cole, his opponent, was immediately contested. The investi- gation which followed resulted in the unseating of Cole and elicted damaging proof of the insurance companies' efforts to determine the election and to influence the course of the subsequent investigation. When the insurance companies then challenged the integrity of the investigating committee, they contributed further to the ill feeling which was felt by some of the members of the General Assembly.46
The tax bill offered in this session was hotly contested. The pro- posal for taxing the insurance companies was reported unfavorably by the Finance Committee. The Democratic Lieutenant Governor broke a tie vote on the question of acceptance of the committee's report. The bill was passed and on the next day approved by the House. A rate of one half of one per cent was fixed on all premium notes held by mutual companies and on the market value of all their assets, not including the amount of taxable bonds which they held which were deductible from their assets.47 The tax fight emphasized that insurance companies placed profit before social responsibility and pointed to the necessity of the state's taking a firmer hand in the control of the practices in this in- dustry.
643
THE AGGREGATION OF CAPITAL
A degree of control was achieved through the leadership of John W. Stedman, the crusading editor of the Norwich Advertiser. In re- sponse to public demand, Governor Charles R. Ingersoll appointed Stedman Commissioner of Insurance. The office had been established in 1865, but those who preceded Stedman in the office seem to have defaulted in their responsibilities. The first Commissioner, Benjamin Noyes, was also President of the American Mutual Insurance Company of New Haven and a notorious speculator. In spite of friendship with politicians in high place, he eventually went to prison for fraud prac- ticed as head of his company. The second Commissioner, Dr. Miller, was also actively engaged in insurance and used his office to assist the industry in its attempt to avoid taxes on premium notes.48 In contrast, Stedman entered into his new duties, as he declared, "without fear or favor," and he pursued his examination of the management and investments of the companies with a singleness of purpose. "Scant and shabby" reports were promptly returned to be completed in accordance with the law.49 In his crusade against special privilege, Stedman had the support of Governor Ingersoll, who warned the Assembly that "man- agers of such vast sums of money" are always subject to temptation and the trust invested in them should be protected by the law.50
The insurance laws of the state were literally rewritten during Stedman's administration. The Commissioner was empowered to peti- tion the courts to order companies to cease operations if their assets were less than three-fourths of their liabilities.51 Insurance companies could be consolidated only with permission of a commission consisting of the state commissioner and commissioners of two other states.52 Loans made by a company after 1876 required the unanimous consent of the executive committee of the company or the approval of a majority of its board of directors. They were to be secured by unencumbered real estate having a market value of at least double the amount loaned or by stocks and bonds with a market value of at least 25 per cent in excess of the loan.53 To prevent the all too prevalent practice of paying divi- dends out of capital stock, it was provided, in 1877, that they could be paid only if assets exceeded the amount of capital stock and all liabili- ties.54 False advertising by insurance companies was made punishable by a $500 fine for a first offense and a $1,000 for a second.55 Other in-
Need help finding more records? Try our genealogical records directory which has more than 1 million sources to help you more easily locate the available records.