USA > Indiana > History of Indiana from its exploration to 1922, Vol. I > Part 34
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§ 73 ORGANIZATION AND POLICY OF THE BANK
IT was impossible at this time to concentrate the trade of Indiana in one center 'as was done in Ohio at Cincinnati, in Kentucky at Louisville, and in New York at New York City.11 The Whitewater valley traded to Cincinnati. The trade of the southern part of the State flowed to the Ohio, but one could not say whether Madison, New Albany, or Evansville would secure the larger portion. New Orleans was the final market, and boatmen shipped indifferently from a dozen river-board ports-Vevay, Jeffersonville, Leavenworth, and Troy sharing the trade with their larger rivals.12 Back from the river small centers of population and business, and especially of politics, were growing up at Brook- ville, Lexington, Charlestown, Salem, Bedford, Bono, Paoli, and Princeton. Vincennes Terre Haute, Lafay- ette, and Logansport were the Wabash towns. Craw-
11 Indiana Journal, Feb. 22, 1834.
12 Lanier, Sketch of Life of J. F. D. Lanier, 17.
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HISTORY OF INDIANA
fordsville, the "town in the big flat woods," was the greatest land market in the United States. There was little commerce at this time at Indianapolis, while Muncietown, Andersontown, Delphi, Peru, and Wabash were blooming out from struggling villages into pre- tentious county seats. Seven out of ten towns chosen as locations of the branches of the bank were on the borders, of the State; only six of the ten contained over two thousand people each. The population of the State was about 500,000. There were about 900 merchants resident in the State, and perhaps an equal number of non-resident traders operating on the Ohio and Wabash.
On the Ohio river the busy pork-packing season was in November and December.13 Drovers traveled through the neighboring counties and bought up large droves of hogs. These were butchered on the river- board as soon as cold weather set in. The products were shipped to New Orleans in the early winter be- fore the ice blocked the Ohio. Thus there was a good demand for money in that section in the fall. The pro- duce of the Wabash was gathered in on flat-boats from the smaller streams. The boatmen had to wait for the thaw in the spring, when the ice was gone, and there was plenty of water. This required capital in Febru- ary and March, and the produce was realized on by June 1.14 What little lake trade there was came in midsummer. At this time the farmers of the interior were buying up hogs and cattle to fatten for the fall market.
On January 30, the General Assembly chose Samuel Merrill, pension agent for the State, president of the bank for a term of five years. By May 10, all stock in the Indianapolis and Lawrenceburg branches was
13 Indiana Journal, Feb. 22, 1834.
14 Wm. F. Harding, "The State Bank of Indiana," a thirty-six page article in the Journal of Political Economy, Dec., 1895.
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INDIANA IN 1833
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HISTORY OF INDIANA
taken, and a meeting of directors was called for May 20, at which time all the branches had made returns showing full subscriptions. At a previous meeting of the bank board, February 13, the branches had been lo- cated.15 A loan of a half million dollars was effected by the loan agents of the State, the fund commis- sioners, August 6, and Governor Noah Noble set No- vember 19 as the day for the bank to open its doors for business. The total cost of organization had been $614.45, and this amount was more than offset by the premium received on the bonds issued.
The bank was prosperous from the start.16 Men had subscribed for stock deliberately and there was lit- tle evidence of speculation. Taken as a whole its offi- cers were beyond criticism. The Whig party controlled the State and kept Samuel Merrill at the head of the bank till 1843. Then his place was taken by a worthy successor, Judge James Morrison, who held office till 1853, when he was succeeded by Ebenezer Dumont. These men, by the policy they established, placed the bank on a firm foundation in the confidence of the people.17
§ 74 THE PANIC OF 1837
THE bank passed through two severe trials. The first of these grew out of the internal improvement activity which began in 1836. While both the bank
15 Indiana Journal, Feb. 22, 1834. Also Journal of the Indiana State Senate, 1834, 59. Also Bank Reports, I, p. 1. The annual reports were made by the cashier of the State Bank, to the legis- lature, and were due in November. J. M. Ray was cashier during the entire life of the bank. The branches were located as follows : The first at Indianapolis, second at Lawrenceport, third at Rich- mond, fourth at Madison, fifth at New Albany, sixth at Evans- ville, seventh at Vincennes, eighth at Bedford, ninth at Terre Haute, tenth at Lafayette, eleventh at Fort Wayne, twelfth at South Bend, thirteenth at Michigan City.
16 Bank Reports, II (1835), 1 ff.
17 Harding, "The State Bank of Indiana," 12.
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PANIC OF 1837
and the internal improvements were closely allied ventures of the State, their affairs were kept sepa- rate as far as possible. The improvement officials kept their funds in the bank and frequently over- drew their accounts. When the State failed in its pay- ments, in 1839, the bank was involved by one of these overdrafts to the amount of $650,000, which seriously crippled it. In 1836 the fund commissioners of the State had been authorized to sell bonds and procure for the bank $1,000,000 more of capital, but through dealings with a corrupt bankrupt concern in New York all was lost but $20,000. There was a great demand at the time for loans and, depending on the extra capital, the bank had discounted heavily. The failure to secure the extra capital, coupled with the failure of the State, came near breaking the bank, and caused several branches to stop discounting for the time and call in all their loans. The State came to its aid in 1840 and issued bank scrip to the amount of $722,640, which it gave the bank to pay the over- draft.
The second trial of the bank's strength came in the Panic of 1837. Its deposits had risen rapidly from the start. The United States deposit was $1,062,238 in 1835, and the next year it rose to $2,267,489. In 1837, however, the United States deposit dropped sharply to $576,277 and disappeared entirely by 1840. President Jackson's specie circular of July 6, 1836, also helped to weaken the bank at this period by forc- ing the government land offices to refuse all kinds of bank notes. Its "quick" liabilities, November 26, 1836, were: public deposits, $2,276,357; individual deposits, $431,703; notes in circulation, $1,927,050; capital stock, $1,585,481; assets, specie, not given but about $1,000,000; discounts, $3,176,613 ; currency, $1,204,737.
It was well that the three years of experience had taught the people the value of the bank. The stages
.
458
HISTORY OF INDIANA
which reached Indianapolis on Thursday evening, May 20, 1837, from Lawrenceburg and Madison, brought the news that all the eastern banks, including the old Bank of the United States, had suspended specie pay- ment. The news was as sudden as it was unexpected. The situation was grave. If the bank suspended specie payment it would forfeit its charter. If it did not suspend, it would be broken and thus ruin the busi- ness of the State. The bank board was, fortunately in session, and, in spite of the law, immediately ordered all branches to stop paying specie.18 The most dan- gerous creditor, of the bank was the national govern- ment, which had $1,500,000 in specie on deposit. Mr. Lanier was posted off at once with $80,000 in gold to see what terms could be made with Secretary of the Treasury Woodbury. Lanier went by boat to Wheel- ing, thence by. stage to Frederick, thence by the Balti- more & Ohio railroad to Washington. His mission was entirely successful. Of all the banks then possess- ing government deposits, the Indiana bank was the only one that offered, or paid and specie. The secretary al- lowed the deposit to remain till drawn in the regular course of business.19 It is also very creditable to the bank that its. bills were regularly received by creditors of the nation. Nearly every bank in the west and southwest broke under this strain, and also many in the east. The Indiana bank, alone, west of the Alle- ghanies did not fail. The Whigs attributed the gen- eral disaster to Jackson's war on the Bank of the United States aided and aggravated by the specie cir- cular.20
The citizens of Indianapolis helped the local situa-
18 Indiana Journal, May 20, 1837.
19 Lanier, Life of Lanier, 15.
20 Indiana Journal, May 6, 1837. "Indiana, in 1837, had the largest amount of circulation and of specie in proportion to its capital, of any state in the Union." George Tucker, The Theory of Money and Banks, etc. (Boston, 1839.)
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SPECIE PAYMENT SUSPENDED
tion by approving in a public meeting the action of the bank board. The merchants of Indianapolis showed their faith in the bank and its directors by giving notice promptly that they would receive State bank notes of all branches at par and by expressing in another resolution full confidence in the bank. In its turn the bank board issued an address to the peo- ple of the State calling attention to the fact that the bank must in self defense, close its doors against specie payment. Agents were in the State from the east who would take away specie by the wagon load, by means of the bank's own currency. The bank had on deposit in eastern banks $1,000,000 of its own notes which could all be used to draw from the various branches the $1,000,000 in specie which was in their vaults. The branches would continue to receive paper currency at par and cancel all indebtedness. The people were warned not to sacrifice their money. The people preserved their confidence and the bank pre- served their money. The suspension was not forced, but was the result of due deliberation. The bank re- ported, and actually had, plenty of specie. A commit- tee of the General Assembly made a thorough investi- tion and approved its conduct.
A meeting of bankers from all parts of the coun- try was called for April, 1838. John Lanier was again called on to represent the Indiana bank. The bankers met in New York, and Lanier surprised the eastern members by making a proposal, in which Al- bert Gallatin concurred, in favor of immediate resump- tion of specie payment. He succeeded in his mission and set August 13, 1838, as the day on which the banks were to begin again the payment of specie. But the banks still feared the specie would all be gathered in the east, and on November 19, 1839, the State bank again closed its specie vaults, not to reopen them until ordered to do so by the General Assembly, June 15,
460
HISTORY OF INDIANA
1842. The bank never defaulted again. No other State in the Union passed through this period with its currency so little deranged.
There was much criticism of the bank during this period of suspension. The bank notes were at a dis- count of about five per cent outside the State. This was an especial hardship on merchants. One of the most lucrative fields of the bank's activity was the purchase and sale of exchange. Bills on New Orleans were bought from shippers in the fall and winter. When these were about to mature, Lanier would go to New Orleans and cash them, using the proceeds in buying exchange on New York and other eastern cities. These bills were sold to Indiana merchants buying in the east and thus the bank turned its money at least three times a year. The discount on these bills, due largely to depreciated currency, was from eight to fif- teen per cent on each transaction. During the panic the bank made ten to fifteen per cent clear profits.21 It took advantage of its freedom from specie payment and expanded its note circulation from thirty to forty per cent.
The report of November, 1840, shows that directors had borrowed from the bank $430,802; other stock- holders, $907,797; thus a total of $1,338,599 of its out- standing debts was, against its own stockholders. All other loans amounted to only $2,339,819.22 It was to this condition that President Merrill alluded when he said many officers of the bank sought the positions only to enable themselves to borrow money. If we add to this amount the $692,433 owed by the State and a suspended debt of over half a million, we realize what a burden the bank was carrying. It had in suit for collection at this time also about $200,000, most of which had to be collected from sureties.
21 Lanier, Life of Lanier, 17.
22 Documentary Journal, 1840, 94.
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SUCCESS OF THE BANK
This, however, was the ebb in the bank's career. Recuperation was as rapid as demoralization had been. Its large suspended debt was nearly all collected, and from this point onward the prosperity of the bank was steady. The flood of gold in 1849-50 brought life to all avenues of business, and the "hard times" of 1837- 43 were speedily forgotten.
Looking back over the whole history of the State Bank of Indiana, one is compelled to say that it was successful. Its success is the more striking because it stands against the sordid background of "wildcat" banking. Its career fell largely in that most unhappy period of our history called the Panic Era of 1837, and it surely had little in its favor as far as the era was concerned. It was, fortunately, well on its, feet when this panic prostrated business throughout the United States. Although it did not earn large dividends dur- ing that period, it protected itself better and took bet- ter care of its customers than any other bank in the west and did equally as well as any bank in the nation. It had scarcely weathered the panic when it found it- self a creditor of a failing State to the extent of over one-third of its capital stock. The sinister hand of party politics is seen here and there, though never deadly except in the Constitutional Convention of 1851 and in the Free Banking Law of 1852. One is tempted to reflect that Jeffersonian politics and laissez-faire economics never won a more regrettable victory than when they overthrew the State Bank of Indiana.28
One of the arguments used by the advocates of the bank charter of 1834 was that the dividends of the bank would pay the ordinary expenses of the State. A com- parison of the statistics will show that the dividends
23 See Charles A. Conant's A History of Modern Banks of Issue (4th Ed., N. Y., 1909), 386; A. M. Davis's Origin of the National Banking System (Senate Doc. No. 582, 61st Congress 2nd Sess.). For a similar experience see Charles Hunter Garnett's State Banks of Issue (University of Illinois, 1898).
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HISTORY OF INDIANA
ran low during the decade from 1838 to 1848. Dur- ing a part of this time it had to suspend specie pay- ments and curtail discounts, especially on eastern bills, on which it made most money. The dividends during 1843-45 inclusive ran low, because over $700,000 of the bank's money was tied up in suspended debts. Again in 1852 the State's expenses ran high, on ac- count of the State constitutional convention of 1850. It must also be kept in mind that during this latter period the bank was piling up in its vaults a surplus of over $1,000,000, besides carrying $300,000 of sus- pended debt. The dividends-after paying interest on the borrowed capital at five per cent-amounted to about $2,000,000 for the twenty-one years. Add to this amount a surplus of $1,434,000, a suspended debt of $216,000, which was practically all collected, and banking property worth $100,000, and the total earn- ings of the bank for the twenty-one years were about three and three-fourths millions. The ordinary ex- penses of the State for the same period were about $1,800,000, or just about one-half of the dividends.
A criticism of the bank, frequently heard from the beginning and growing more frequent throughout the twenty years, was that it failed to supply an adequate currency for the growing commerce of the State. That this criticism was just, will be seen by comparing the capital stock, discounts, and circulation statistics with the number of polls, acres of land assessed, and the total valuation of State properties. The wealth of the State mounted by regular steps, while the capital of the bank, its circulation, and its discounts never ap- preciably increased. In 1836 the circulation was $2,000,000, when the polls numbered 75,000, the acres taxed numbered 5,000,000, and the total property was valued at $67,000,000. In 1854 the circulation was only $3,500,000 when the polls were 160,000, the acres 20,000,000, and the taxables near $300,000,000. This
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FREE BANKS
comparison needs no further comment. The disparity worked a great hardship and injustice on the debtor class, and this class formed a large majority of the people.
§ 75 THE ERA OF FREE BANKS
WHILE the commercial interests maintained a firm faith in the integrity of the State Bank, there gradually grew up a spirit of opposition. The reasons for this were not clearly defined, yet the sentiment was strong enough to control the General Assembly, and espe- cially did it dominate the constitutional convention of 1850-51. When a proposition to extend the State Bank charter was before the convention of 1850 only one of its original supporters, Othniel Clark, voted for it.42
The "hard money" Democrats, who in 1843 had been only an insignificant minority, had increased in numbers till they held the balance of power in 1850. These men, however, were not inflationists. The strong current of public opinion opposed to the State bank came from the inflationists-the men who wanted more money in circulation.
Their chief objections to the State Bank were: (1) It had failed to supply enough currency. (2) It had been partial in lending money to its stockholders, and it had also favored farmers and stock buyers as against merchants. (3) It had refused its assent to the loca- tion of new branches, when business clearly demanded them. (4) It had suspended specie payment twice, and had not resumed the last time till the State forced it. (5) It had used its power as a monopoly and had almost defied the State government. (6) As all sound banks must do, it had made enemies of the large numbers of
42 Debates of the Constitutional Convention of Indiana, 1850-51, 1995. The Debates are printed in two large volumes, paged con- secutively. This work is referred to hereafter as Debates. Where specific reference is not given, any fact may be found readily by use of the index.
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HISTORY OF INDIANA
those who wanted credit and could not give sufficient security.
On the other hand the teachings of Jackson were against paper currency, State banks, and monopolies. Many Whigs were opposed to paper money and voted against the bank, and some Democrats, like Hendricks, favored it. The demand for more money is always popular and crept out in nearly every speech in favor of free banks. It is to be pointed out that the condi- tions of business, and the needs of the day, had more to do with forming the opinion of the convention than an intelligent, statesmanlike understanding of banking.
The thirty-sixth session of the General Assembly met, December 1, 1851. The new constitution had been in operation one month when on January 3, 1852, William Z. Stewart of Cass county moved that a select committee of one from each judicial district be ap- pointed to report a free, or general, banking bill.
On January 12, Chairman John W. Spencer of Ohio and Switzerland counties presented the report of the regular committee on banks. This was in response to a resolution of the House to inquire into the neces- sity of enacting a general banking law. A majority of the committee favored such an act, and recom- mended the following restrictions: (1) All issues of currency were to be secured by an equal amount of United States, or State stocks, and all banks were required to keep on hand in specie twenty-five per cent of their note circulation. (2) Two-thirds of the securities might consist of stocks, one-third of real estate mortgages. (3) A slight discrimination should be made in favor of Indiana bonds. (4) No bank should have less than $25,000 capital. The com- mittee asked that this report be referred to the select committee on banking.43
February 9, 1852, Mr. Stewart of the select com-
43 House Journal, 1851, I, 425.
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CURRENCY INFLATION
mittee reported a bill for general banking.44 It was similar to the New York banking law of 1838. The bill was put on its passage April 30, and failed by a vote of 25 for and 20 against-lacking one of a con- stitutional majority. It was revived by a motion to reconsider, and on May 18, was passed by a vote of 27 to 18.45 Party lines were not strictly drawn in passing the bill, but in general the Democrats favored and the Whigs opposed. Governor Joseph Wright ap- proved the bill, but was not enthusiastic in its support. The act was to take effect July 1, 1852.
The general features of the law have been indi- cated. The State auditor was to be comptroller, issue all bills, and keep all plates. Notes were to run, in the ordinary denominations, from one dollar up to five hundred. Not over one-fourth of the whole amount was to be less than five dollar notes, and the banks were not to handle notes less than five dollars issued outside the State. Notes were to be registered, counted, and countersigned by the auditor, who also stamped them "secured by the pledge of public stocks." Circulation was guaranteed by a deposit of United States, Indiana, or other State bonds equal to Indiana fives. The State was in nowise pledged to redeem the currency. Specie equal in amount to twelve per cent of the circulation had to be kept on hand by the banks, and specie payment must never be refused on penalty of having the bank closed at once. Reports were to be made semi-annually to the State auditor.46
The plan looked plausible, and its authors were proud of the law. There may have been some who were influenced by selfish motives, but the method of its passage cannot be criticized. By December 15,
44 House Journal, 1851, I, 803.
45 Senate Journal, 1851, 1018.
46 Laws of Indiana, 1852.
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HISTORY OF INDIANA
1852, six months after the law went into force, fifteen banks had been organized, and are examples of the seventy-four that followed.47 These had deposited $910,000 worth of stocks face value, and had received currency to the amount of $800,000. They were only an earnest of the deluge. Six of the banks were said to be doing a legitimate local business. Five had put their notes in circulation at New York. No notes had been issued to four of them at the date of the report, December 15, 1852.48 Either State Auditor E. W. H. Ellis felt that he had no authority under the law to restrain the establishment of banks, or else he had no inclination to do so. Governor Wright was inclined to think the latter was the case. In his message of January 7, 1853, the governor, for the first time, men- tioned the subject of free banking.49 Although he had signed the bill, he had not recommended it in any previous message. Like many others at that time, he recognized the insufficiency of the circulating medium, and the inability or refusal of the State Bank to meet this need. The governor was, however, quick to see the failure of the new law. The restrictions were entirely inadequate. Already five banks, of the "Owl Creek" kind, with only a nominal existence, and a capital of $365,000, had been organized. These bank- ers, he thought, had no idea of redeeming their notes. The pledge of the State would give their notes cir- culation, and an unnatural expansion of the currency must result. At one time it would rob the creditors, at another time, the debtor. Under the present sys- tem, he thought, there could never be a sound cur- rency. The speculator came to Indianapolis with a bundle of bonds under one arm and a roll of bank notes under the other. He deposited his bonds, that
47 Documentary Journal, 1853, 98.
48 Documentary Journal, 1853, 150.
49 Senate Journal, 1853.
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FREE BANKS FAILURES
had cost him from fifteen to fifty cents on the dollar, and got for them Indiana currency, dollar for dollar, recommended by the State. Presumably he went to some obscure place and put them in circulation, but in reality he took them to New York. The constitutional convention and the General Assembly of 1851 had, in fact, invited the bondholders to bring their bonds to Indianapolis and cash them at par, and perhaps, for a few years draw interest on both the bonds deposited and the currency received.
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