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GENEALOGY COLLECTION
ALLEN COUNTY PUBLIC LIBRARY 3 1833 01100 8874
STATE HOUSE
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METROPOLITAN BOSTON
A Modern History
Editor-in-Chief ALBERT P. LANGTRY Ex-Secretary of State of Massachusetts
VOLUME II
LEWIS HISTORICAL PUBLISHING COMPANY, INC. NEW YORK 1929
COPYRIGHT LEWIS HISTORICAL PUBLISHING COMPANY, INC.
1929
1247266
CHAPTER IX. A HISTORY OF BANKING IN BOSTON. By Wendell D. Howie.
Journalist; Author; Secretary, Massachusetts Commission on Revision of Banking Laws, 1921, Joint Legislative Committee on Banking Laws, 1922, and Others.
Introduction-The city of Boston is one of the great financial centers of the United States. Its powerful banking institutions, National and State, and its investment houses are known throughout the world. They have contributed largely to the development of the Nation. From the early colonial days they have had a colorful history. They have been the pioneers in blazing the way in a variety of human endeavors, which have added not only to National prosperity but to individual happiness.
It is impossible to do full justice to their history in the brief record to follow, but it is not difficult to portray the tremendous growth they have enjoyed, particularly in the last quarter of a century. At the time of this compilation, at the close of 1926, the National and State banking institutions of Boston, exclusive of investment houses and other private corporations, had aggregate resources well in excess of $2,500,000,000. By the time this work can be published the total will probably be greater by at least another $100,000,000.
In 1906, twenty years before, the aggregate resources of these institu- tions was $750,000,000. In 1896, thirty years before, the total was about $500,000,000. Thus has the banking power of Boston expanded. With new avenues of trade gradually being opened, with new enterprises com- manding the attention of capital, there is every reason to believe that this growth will continue steadily in the future.
An attempt has been made here to present an outline of the financial development of Boston from its earliest days to the present, and to include the individual histories of some of the largest and most repre- sentative banking institutions. The figures used are those available at the time the work was written. In the case of National banks they are as of the beginning of the year 1927. In the Case of State banks, they are as of June 30, 1926.
Following is a table, as of these dates, showing the aggregate capital, deposits and total resources of Boston's banking institutions :
depend 5,00 -(5ml)
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METROPOLITAN BOSTON
Institutions.
Capital.
Deposits.
Total Resources.
12 National Banks
$46,650,000
$769,186,600
$996,993,800
14 Trust Companies
24,050,000
387,625,653
846,048,430
24 Savings Banks
508,858,691
553,187,740
50 Cooperative Banks
100,764,550
106,129,146
97 Credit Unions
3,059,313
3,331,519
Totals
$70,700,000 $1,769,494,807
$2,505,690,635
NOTE-Since compilation of this record the number of National banks has been reduced to II, by the absorption in 1927 of the Citizens National Bank by the National Shawmut Bank.
Total resources of trust companies includes trust departments.
Deposits of cooperative banks and credit unions includes amount due shareholders.
Boston's Early Banking History-The early history of banking in Boston is a story of attempts by the colonists to relieve distress caused by a scarcity of money, of conflict with the British Parliament, and of the development of an issue which became a contributing cause of the Revolutionary War.
There are few records relating to the actual origin of banking in Mas- sachusetts. It is well established, however, that William Potter, of Lon- don, developed a project of founding a bank on personal credit in that city in 1649, that he mentioned the scheme to Rev. John Woodbridge, of Newbury, Massachusetts, who in 1664 passed the idea along to a Boston merchant, and, therefore, was indirectly responsible for the first agitation for a bank in the American Colonies.
The proposal received wide discussion for a number of years, and several pamphlets on the subject were issued. Although a private bank is said to have been authorized in 1686, no record of any such bank can be found. In 1701 a land bank was suggested, but the plan failed to mate- rialize at that time. Meanwhile the pine tree shillings and the first paper currency of 1690 made their appearance. During this period some of the colonies authorized the issuing of paper money in sums of 50,000 pounds or more, which was to be loaned out to citizens in sums not exceeding 500 pounds, nor less than 50 pounds to one person on mortgage security. The colonies called this the establishment of "Loan Banks," one of which was established in Massachusetts in 1715. Specie banks were also formed in 1733 and 1739 in Boston, issuing bills redeemable in fifteen years in silver to the amount of 120,000 pounds.
The proposal for a land bank, first introduced in 1701, was renewed in 1714, and in the same year reprints appeared in Boston of a pamphlet published in London in 1688, and entitled "A Model for Erecting a Bank of Credit," which was adapted to the use of any trading country where there was a scarcity of money. The Province Council, however, for- bade the establishment of a bank unless authorized by the General Assem- bly, and it was not until 1739 that John Colman, a merchant of Boston,
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A HISTORY OF BANKING IN BOSTON
succeeded in starting what is generally accredited with being the first private bank in Boston.
The stock of this bank was fixed at 150,000 pounds and no one was permitted to subscribe more than 2,000 pounds nor less than 100 pounds. For each 1,000 pounds subscribed, the subscribers were to pay forty shillings in money and for the remainder to pledge securities in lands to the satisfaction of the director. Circulating notes were to be issued pay- able in twenty years in produce or manufacture, and five per cent. of the subscribed capital was to be annually paid in, in notes of the bank, pro- duce or articles manufactured. It is a matter of record, that while this bank was strenuously opposed by the royal Governor, 49,250 pounds of its notes were struck off and 35,582 pounds issued, while the directors employed 4,067 pounds in trade.
The bank's life was destined to be short, however, for in 1740 the British Parliament extended to the American Colonies an act which pre- vented the formation of all companies for the purpose of issuing paper money, and the Massachusetts Land and Specie Banks were compelled to wind up their affairs. In 1751 the British Parliament forbade the use of legal tender paper money issued by the colonial treasuries, although it later permitted the currency of its own issue to be received by each of the treasuries.
Thus, by interfering in the treasuries of the colonies, and by prohibit- ing the establishment of banks, the British Parliament aroused intense indignation in America, particularly in Boston, where a successful start in banking had been made. This action developed into a serious issue and notes were circulated in defiance of the prohibition. Therefore, while historians are prone to make much of the Boston Massacre of 1770 and the Boston Tea Party of 1773, it is a fact that the intolerable banking situation became one of the chief causes that led to the final break in rela- tions and the subsequent Revolutionary War.
Near the close of the war, on March 8, 1782, the State of Massachu- setts granted an act of incorporation to the Bank of North America, of Philadelphia, and authorized the circulation of its bills. This institution, given recognition as the first bank in the United States, was given its Massachusetts charter after it had been in existence for about two months.
Noting the success of this bank, the people of Boston decided to organize a similar institution. Accordingly, in 1783, they sought a char- ter from the General Court, which was finally approved on February 7, 1784. This bank, named the Massachusetts Bank, was the first local bank established in the State, and the second in the United States. The capital was limited to $300,000, of which $253,500 had been paid in when it commenced business on July 5 of that year.
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METROPOLITAN BOSTON
The history of that period shows that the president of the Massachu- setts Bank was a most important figure in the State, and on commence- ment day at Harvard University the Governor, President of the Senate, Speaker of the House, and president of the bank, all sat on the platform together. This famous old institution was merged with the First National Bank in 1903. Up to that time it had passed but three dividends, the first at the close of the War of 1812, the second during the financial crisis of 1837, and the last after becoming a National Bank, which it did in 1864.
"An Act To Prevent Frauds On The Massachusetts Bank," was passed by the General Court shortly after the bank was chartered. This act was approved on March 16, 1784, and as it was the first piece of such legislation ever enacted in the State, it is worthy of mention. The act provided that "if any president, director, officer, or servant of the Massa- chusetts bank, shall secrete, embezzle, or convert to his own use, any note, bill, obligation, security, money, or effects, belonging to the said bank, or deposited there by any other person, every person so offending and being thereof convicted before the Supreme Judicial Court, shall be set upon the gallows with a rope about his neck, or be set in or upon the pillory, for the space of two hours, shall forfeit all his personal estate and the issues and profits of his real estate during life, to the use of the Com- monwealth (after deducting such sum as shall indemnify the bank for the loss they may have sustained by means of the said fraud), and shall ever after be rendered infamous and incapable of sustaining any office either civil or military."
These same penalties, with the addition of seven years' imprisonment at hard labor, were provided in the act for forgery and counterfeiting.
In 1792, the Union Bank of Boston was organized, originating from what was called the "Tontine Association," and being the second bank in Massachusetts to receive a charter. There was considerable opposition to the bank when the petition for a charter was pending before the Gen- eral Court, the Massachusetts Bank taking the position that two banks were not needed in Boston. The vote in the Senate, however, was fifteen yeas to nine nays. The bank started with a capital of $1,200,000, one- third of which was held by the State. In its charter the bank was given the right to use one-fifth of its funds for loans varying from $100 to $1,000 on farms secured by mortgages. In 1817 it purchased the State's interest, reducing its capital to $800,000.
The Old Boston Bank was established in 1803, and under its charter one-eighth of its funds were to be loaned in sums of $100 to $500 on farm mortgages. Its capital was $1,800,000, one-third of which was taken by the State. The Treasurer of the Commonwealth was a director, ex officio, for several years. By its interest in the bank the State had the privilege
335
A HISTORY OF BANKING IN BOSTON
of borrowing from it any sum of money required, not exceeding $150,000 at any one time, at five per cent. per annum, the total loans not to exceed $300,000 without the bank's consent. Like the Union Bank, the Old Boston purchased the State's interests in 1817 and reduced its capital by that amount. At one time this bank made vain efforts to procure from the town of Boston, the old State House, for its use.
Meanwhile, the first United States Bank, established in February of 1791, opened a branch in 1792 in Boston in an old two-story wooden building in State Street. This went out of existence when a renewal of the bank's charter was refused by Congress in 1811. For a period of five years the country was without a National bank, until, in 1816, the Second United States Bank was established. A branch was located in Boston in Congress Street, which, in 1824, erected its own building. When the branches were closed the building was sold at auction, and shortly after- ward purchased by the Merchants' Bank. Congress had voted to renew the charter of the Second United States Bank before its charter expired in 1836, but the bill was vetoed by President Jackson. The bank was rechar- tered by Pennsylvania as a State institution, but failed in 1841, its stock becoming almost a total loss.
Of interest, also, in this same period, was a patent granted by the Federal Government, in 1799, to Jacob Perkins, of Newburyport, Massa- chusetts, for engraving on soft steel and case-hardening the plates after engraving. This method was adopted for bank notes. By 1805 there were twenty-six banks using the Perkins notes, and in 1809 the Common- wealth required all incorporated banks to adopt them. The Perkins process was later improved upon and used for all postage stamp and bank note engraving in the United States and Great Britain.
The fourth bank to be chartered as a Massachusetts bank was the State Bank in 1811. This was followed by the New England, in 1813, which developed a new feature by receiving the deposit of plate and valuables in its keeping. In 1814 the Manufacturers' and Mechanics' Bank was chartered, but this institution changed its name to the Tremont Bank in March, 1830.
The Suffolk Bank came into being in 1818. Its original capital was $500,000, which was increased to $750,000 in 1826. The capital was increased to $1,000,000 by a thirty-three and one-third stock dividend in 1838. In March, 1852, a defalcation of $214,500 was discovered, but the surplus was so large that this did not interfere with the usual ten per cent. dividends. On January 10, 1865, the bank increased its capital to $1,500,000, and at the same time paid a cash dividend of 128 per cent- probably the largest extra dividend ever declared by any bank.
With the State interested to the extent of $1,000,000 in the Union and Old Boston Banks, by the year 1803, and with the business of banking
336
METROPOLITAN BOSTON
being gradually developed, the General Court decided that banking legis- lation had become an important subject for consideration. Accordingly, in that year, it enacted a law requiring banks to make semi-annual returns of their condition to the Governor and Council, signed by the directors, and in 1805 provided that such reports be sworn to. The returns for June, 1805, showed sixteen banks in operation in the State (only three located in Boston) with an authorized capital of $5,760,000, of which $5,460,000 had been paid in. From that year until 1811 only one bank was chartered in the State, and several failures were recorded. In 18II, two banks were chartered, one of them being the State Bank of Boston, as already shown, with an authorized capital of $3,000,000, but with the State reserving the right to subscribe for $1,500,000 additional. This subscription was never made, and when the Union and Old Boston Banks purchased the State's interests in their institutions in 1817, the Commonwealth went out of the banking business. In 1812, however, the State decided to collect revenue from the banks, and enacted a law assessing them one-half of one per cent. on their capital.
Several historical authorities allege that the Boston banks had what amounted to practically a corner on the specie of the country during the War of 1812, and while this is probably an exaggeration, there is ample evidence to show that the amount of specie held in Boston at that time was far above normal. Marion G. Eaton, the librarian of the Boston Federal Reserve Bank, in a special article on the subject, has presented an accurate account of the situation, together with extracts from these various authorities.
The bank's librarian quotes from an anonymous pamphlet published in 1814 in Philadelphia, which gives an idea of the feeling toward the Boston banks at that time, when, with specie payments suspended in most of the country, the Boston banks were at no time during the period forced to suspend. A digest of the pamphlet reveals that :
Boston has brought the Federal government to the very verge of bankruptcy. With a small population and an insignificant commerce, when compared with other ports, Boston has by system acquired a degree of influence beyond all proportion greater than its due. Events have filled the vaults of Boston banks with incomparably more specie than they ever had before, and raised very heavy balances against the banks in New York. Boston, therefore, by demanding payment in specie of the New York notes held in New England, proposes to accomplish a general bankruptcy in the middle and southern States. There have been three wagons loading at one time with specie in Philadelphia, as an outcome of the nefarious operations of Boston speculators.
A rare pamphlet also cited by the librarian, is "a true abstract of the several bank corporations of the Commonwealth of Massachusetts, ren- dered January, 1814," printed by order of the Honorable Senate, and attested by Alden Bradford, Secretary of the Commonwealth. This
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A HISTORY OF BANKING IN BOSTON
pamphlet shows that the amount of specie held by the Boston banks was unquestionably far above normal.
Up to January 1, 1825, forty-nine banks had been chartered in Mas- sachusetts, with an authorized capital of $20,800,000-of which eleven were in Boston, and had a combined capital of $8,550,000. Nine of the total number chartered-one of which was in Boston-had failed, dis- continued business or had never opened, while several had reduced their capital.
The first comprehensive banking law in Massachusetts was enacted on February 28, 1829, and applied to all banks thereafter organized and to those increasing their capital or extending their charters. Under this law banks were required to have fifty per cent. of their capital paid in, in specie, before commencing business. It also prohibited loans to share- holders until their subscriptions were entirely paid in, and limited the amounts of loans on pledges of a bank's stock to fifty per cent. of the capital.
Up to January 1, 1837, there had been organized a total of one hun- dred and thirty-eight banks in Massachusetts, with an authorized capital of $40,830,000-thirty-four of this number, with a capital totaling $21,350,- 000, being in Boston. Four of the 138 never went into operation, and of the remaining number, thirty-two either failed or surrendered their char- ters in consequence of the great financial panic of that year.
During the fifty-two years from 1784 to 1836 only ten banks had failed or discontinued business, and the total losses to shareholders and the public did not exceed $335,000. During the same period the State had permitted many banks to organize with insufficient or no capital. It had been the custom of some of these banks, in order to be permitted to open, to have on hand in specie, one-half the authorized capital on the date it was to be counted by the bank commissioners. Oaths were given by the directors that it was to be held as capital of the bank. This money, how- ever, had been borrowed for the day and was returned to the lender as soon as the bank was permitted to open. These banks would then issue notes, but as these notes were issued against fictitious capital, the banks were in no condition to survive any financial disturbance.
During the period from 1837 to 1844, thirty-two Massachusetts banks failed or were compelled to discontinue business. The capital of these banks was $5,500,000, with liabilities of $11,283,960. The loss to share- holders was estimated at $2,500,000, and to the public at $750,000, making a total loss of $3,225,000. Among some of the important banks which failed or closed, in Boston and its suburbs, during the seven-year period, were the Nahant Bank of Lynn, the Chelsea, Kilby, Lafayette, Frank-
Met. Bos .- 22
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METROPOLITAN BOSTON
lin, Commonwealth, Oriental, Middlesex of Cambridge, American, Com- mercial, Fulton and Hancock. Of this group, the Commonwealth and Middlesex were the largest.
The first of the 1837 failures was in suburban Boston, when in March of that year, the Chelsea Bank crashed. Its liabilities consisted of $III,- 000. Its visible assets, valued at $36.71, were said to have consisted of a counter, an old iron safe, and a bull-dog. The situation was not local, it was general throughout the country. Speculations were rife, especially land speculations. Mill sites, factory lots, town sites, all kinds of real estate were being gambled in-railroads, canals, cotton, city and village lots and even negroes were objects of frenzied speculation. When the crash came, it was country-wide.
The New York banks suspended specie payments on May 10, 1837, and two days later the Boston banks were forced to follow. This was the first time that Boston, or Massachusetts banks in general, had been forced to suspend, although in other parts of the country suspensions were frequent during the War of 1812-and many such banks did not reopen until 1818.
In the summer of 1837, the Franklin and Lafayette Banks, "both rot- ten concerns," located at South Boston, failed. Conditions improved somewhat, and public confidence was becoming restored, when in Janu- ary, 1838, the large Commonwealth Bank suddenly went to the wall with a crash.
The failure of the Commonwealth Bank had much to do with the subsequent failures. It had been a Government depository, and enjoyed a general confidence. Some idea of how it had been conducted can be shown from the fact that while its capital at the time of the failure was $500,000, the debts due from directors amounted to $630,958.71-the lia- bilities of the president as principal and indorser reaching $259,117. The security for these loans was entirely inadequate. A period of consterna- tion followed, and one after another, the several banks referred to were forced to close, carrying with them two banks in what was then the town of Charlestown, and three in Roxbury.
In 1842, five years after it had failed, assets of the Lafayette Bank amounting to $139,267.72 were sold at auction for the trifling sum of $66.25.
As a direct result of this panic, which showed the weaknesses of the Massachusetts banks, a system of official examinations of banks was adopted in 1838, with the establishment of a Board of Bank Commis- sioners, who were required to make annual examinations of every bank and special examinations when required by the Governor. This board was abolished in 1843, but was reestablished in 1851. As a result of this
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A HISTORY OF BANKING IN BOSTON
supervision by the State, it is significant that despite the slow recovery from the crisis of 1837, only two Massachusetts banks failed during the period from 1840 to 1855, both of these institutions meeting their obliga- tions in full.
In 1857, following the failure of the Ohio Life and Trust Company, a second general suspension of specie payment occurred, but the New York and Boston banks resumed after sixty days. In 1861, the first year of the Civil War, after the banks had come forward in aid of the Govern- ment, specie payment was again suspended, not to be resumed for seven- teen years.
Meanwhile, the Massachusetts banking law of 1829 had been amended from time to time, as conditions and experience necessitated, until at the opening of the Civil War it was declared to be one of the best banking laws ever produced. In 1851 a free banking law was enacted, patterned after a similar law in the State of New York, but not more than seven banks were ever organized under it. The banking capital of the State banks reached a maximum in 1862-$67,544,200, distributed among one hundred and thirty-eight banks.
When the National banking system was established, the Common- wealth of Massachusetts did much to convert its State banks into National banks. The first institution to avail itself of the new law was the Safety Fund Bank of Boston, in 1863, under the title of the First National Bank of Boston. By October, 1865, only one bank remained doing business under a State charter, and this bank was not located in Boston.
The Board of Bank Commissioners was abolished December 31, 1865, with the passing of the State banks, and in its final report issued at that time, the board gave a brief history of the situation. A part of this report is as follows :
"We do not find that any general suspension of specie payments by the banks of this State took place before May, 1837. During the war with England, in 1814, the banks of the South and West stopped payment, and many supposed that those of Massachusetts, though they might hold out for a time, would eventually be obliged to do the same; but the prudent management of the directors with regard to loans, and the accumulation of specie to the amount of fifty-five per cent. of all their liabilities, saved them from the painful necessity of refusing to meet their obligations in legal money.
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