USA > Massachusetts > Suffolk County > Boston > Fifty years of Boston; a memorial volume issued in commemoration of the tercentenary of 1930; 1880-1930, Pt. 1 > Part 30
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The years 1889-90 were disturbing ones in Boston financial circles. There were failures of important Stock Exchange houses. The year 1889 was a trying one for Boston banks, which found difficulty in investing their money locally and therefore sought rather speculative loans elsewhere. It became evident that there were too many banks in Boston, for, with a population of 450,000, Boston had now sixty-two banks, with a capital of $76,000,000,
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while New York, with a population of 1,500,000, had only forty-five banks, with a capital of $48,350,000. The increase since 1887 had been in trust com- panies, which continued to increase in number until 1919 and, owing to their broader charter rights, became formidable competitors to the national banks.
On November 7, 1890, came the practical suspension of Baring Brothers of London and the sudden raising of the discount rate by the Bank of England, which gave the first note of alarm. Happily the business world was in a better condition to meet the strain than at former periods of money stringency. A panic was averted only by the prompt and conservative action of banks and bankers abroad and in New York and Boston. The New York banks brought relief by voting to issue clearing house certificates on November 11, a course followed by the Boston banks on November 17. This was the second time clearing house certificates had been issued by Boston banks, the previous issue having been on September 22, 1873.
The year 1891 was marked by the most serious bank failure that has ever occurred in Boston, although for the greater part of the year there had been comparative quiet in banking circles. The Bank of England had reduced its discount rate, the New York banks were maintaining heavy reserves and good crops with a shortage in Europe were bringing gold into the country, railroad earnings began to increase and general improvement had set in. Then with scarcely a word of warning the Maverick National Bank, on November 2, went into the hands of a receiver. This bank had maintained its leading posi- tion as the largest bank in Boston for a decade. It had been one of the most progressive, as well as aggressive, banks in Boston, and as such had created inuch jealousy. It was the first Boston bank to maintain correspondents throughout the country and no doubt had felt the effects of the western land speculation, besides being involved in the affairs of the brokerage house of Potter and Lovell, which had failed the preceding year. This disturbance in local financial affairs was, however, far less serious than might have been the case because of the prompt action taken by the other Boston banks to strengthen themselves.
During the years preceding 1893, as above indicated, Boston capitalists continued to pour their millions into western railroad and other securities. There was also much local development, such as the street railway enterprise of Henry M. Whitney. The American Bell Telephone, later the American Telephone and Telegraph, was coming into its stride, after James J. Storrow, senior, with the help of William H. Forbes, had established the patents and vanquished the claims of the Western Union. On the other hand, this was also the period of the beginning in politics of the "free silver" scare, which continued until after the presidential election of 1896, following the Silver Purchase Act passed in 1890, the speculation in silver, and the fear of bimetallism, which put a damper on financial and business enterprises. Europe became alarmed at the situation and began to sell its holdings of American securities, thus putting added pressure on the United States Treasury and the banks. On June 4, 1892, Boston bank deposits reached $105,950,700, the highest on record up to that time. Although Grover Cleveland, a sound money man, had been elected President in the fall election of that year, the Populist party polled an immense vote on the fiat money platform. The
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speculation in the stock market which had started in July, 1892, following the defeat of the Free Silver Bill and good crop reports, came to a sudden close with the failure of the National Cordage Company in May, 1893, and a general liquidation set in. Runs by depositors of many western banks caused deple- tion of deposits in eastern banks. Call money rose to seventy-four per cent in New York in June. When it became evident that a panic was imminent, the New York and Boston banks issued clearing house certificates, which undoubtedly averted much of the severity of the impending financial disaster. The Boston banks took out clearing house certificates to the amount of $11,695,000 from June 27 to August 23, the last being retired October 20, 1893, or after fifty-eight days. Numerous commercial failures occurred during this year, and six Boston banks passed their October dividends.
The panic of 1893 was less severe, as far as Boston was concerned, than those of 1837, 1857 and 1873, the issue of the clearing house certificates undoubt- edly contributing materially to ease the situation, but the havoc which it caused left its imprint for the next six or seven years not only on the Boston financial situation but on the entire country. In 1915 Henry L. Higginson wrote "of the desperate years of 1891 to 1898" and how there were "constant frights and uncertainties which gave gamblers a great chance, if they could guess right, and which kept decent men in doubt and often in agony." Fol- lowing the panic of 1893, a stock market panic occurred on December 20, 1895, due to President Cleveland's message to Great Britain on the Venezuelan crisis and fear that war with the former country might result. There was heavy selling of securities by London houses in New York, where call money went as high as eighty per cent. The New York Clearing House again, on December 23 of that year, authorized clearing house certificates and the Boston Clearing House followed with similar action on the same day; but the situation soon cleared so that the New York banks were able to operate without any actual issue of certificates and the Boston banks issued only $165,000.
As has been previously mentioned, there had been evidence for some time that there were too many banks in Boston. Keen and unsound competition had been felt to exist for several years. During this period the practice of allowing interest on deposits began to appear in the commercial banks, although as late as 1900 the Merchants National Bank had refused to allow interest on any of its accounts and the Second National Bank had done so only to a very limited extent. The Merchants National Bank, under the presidency of Franklin Haven, Jr., and the Second National Bank under Thomas P. Beal as president, had always followed ultra-conservative policies, and enjoyed and have enjoyed up to the present time a rather unusual position among the banks of the city. Both Mr. Haven and Mr. Beal were outstanding figures in Boston financial circles not only during this period but until their deaths, Mr. Haven passing away in 1908 and Mr. Beal in 1923.
The mutual savings banks, not only of Boston but of Massachusetts, were heavy holders of Boston bank stocks. In 1898 Robert Winsor, a partner of Kidder, Peabody and Company since 1894, Frederick S. Moseley of F. S. Moseley and Company, prominent note brokers, and Colonel William A. Gaston, of the law firm of Gaston, Snow and Saltonstall, obtained control of nine national banks by purchasing large blocks of the holdings of the savings
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banks, and in October of that year merged these nine national banks with the Shawmut National Bank under the name of the National Shawmut Bank. These mergers reduced the number of national banks in Boston to 28. The new bank had a capital of $3,000,000 and deposits of about $20,000,000. The national banks inerged were the Boston, the Columbian, the Eagle, the Hamilton, the Howard, the Market, the North, the Revere and the North America. James P. Stearns was made president, but the active control and the direction of policies were in the hands of Messrs. Winsor, Moseley and Gaston, the last named becoming president after the death of Mr. Stearns. This bank held the foremost place as the largest in resources for the next fifteen years.
From 1895 to well into 1900 there was great activity in Boston in copper and other mining properties, and many fortunes were made and lost in mining companies during this period. This is the period when Thomas W. Lawson and his "Frenzied Finance" were much in the limelight. The effects of the war with Spain in 1898 were very slight, as the war lasted only a few months, but the speculation in mining stocks had disastrous results.
On December 14, 1899, the Globe National Bank, one of the larger banks in Boston, became embarrassed through its president's affiliations with a certain speculative mining group, and although the Clearing House came to its aid through the special issuance of $3,490,000 clearing house certificates, it was obliged to close its doors early in January. The Massachusetts National Bank also became embarrassed, through the financial troubles of its president and his affiliations with the same group. This bank, however, was reorganized by a group headed by John W. Weeks, of Hornblower and Weeks, a brokerage house organized in 1888 and with an established reputation, and, after an assess- ment of fifty per cent on its shares, continued to function, with Mr. Weeks assuming the presidency. At the same time that the Globe National Bank and the Massachusetts National Bank had their troubles, the Broadway National Bank, a small bank, became embarrassed through the failure of a large packing house, but paid its depositors in full on January 15, 1900. The years 1900 to 1907 constituted a period of wild speculation, during which stock prices werc rushed up and land values, both farm and city, boomed. In 1902 the Central National Bank failed and in 1905 the American National Bank, both small banks with weak managements. In 1903 the Massachusetts National Bank purchased the First National Bank, an old conservative institution that had recently fallen under the control of a speculative traction promoter, and took its name.
Following the year 1900 there was a marked increase in the number of trust companies and these began to enter the commercial field, bringing increased competition with the national banks; by 1905 the number of national banks had been reduced to twenty-six, with total resources of $271,000,000, while the number of trust companies had increased to twenty, with total resources of $180,000,000. The Old Colony Trust Company, incorporated in 1890, had passed in size all of the other trust companies by 1900, but up to that time had confined its business largely to fiduciary and personal accounts. It began, however, to extend its activities in the commercial field and other trust com- panies, with the possible exception of the Boston Safe Deposit and Trust Company and the New England Trust Company, adopted a similar policy.
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This brought added competition to the national banks, so that several of the latter felt impelled either to liquidate entirely or to merge with other institutions. The outstanding merger during this period was that of April 30, 1903, when the National Bank of Redemption merged with the First National Bank.
During the period preeeding 1907 Boston capital interested itself in steam- ship lines and eleetrie railroads. The United Fruit Company, incorporated in 1899 under the leadership of Andrew W. Preston as president, developed and expanded its activities, and the United Shoe Machinery Company had beeome a large, aggressive organization under Sidney W. Winslow. Both of these interests beeame identified with the new First National Bank.
Fortunately the banking system of Boston had been strengthened by the · changes that oceurred during the period above reviewed, for it was able to withstand the terrifie foree of the panie which broke out in the fall of 1907 and which earried down numerous large New York banking institutions, as well as banking institutions throughout New England and elsewhere. Prior to this panie most of the eotton mills in New England were doing a very sueeessful business. Industry in general and speculation in securities were going forward at a high pace. Interest rates had been increasing, eommereial paper in Oetober yielding seven to seven and one half per eent and rates on brokers' loans mounting to 125 per eent in New York. Boston, in common with other finaneial eenters, once more deemed it necessary to resort to elearing house certificates during the financial stringeney.
The trouble began on October 22 with the failure of the Kniekerboeker Trust Company of New York, one of the large banks, with deposits of $35,000,000, followed by the failure of several other sinaller banks in New York and elsewhere. Call money on the New York Stock Exchange rose to 125 per eent and the general financial situation spread wide alarm through- out the entire country, with resulting paralysis of trade. In Boston curreney went to a premium as high as four per cent and New York exchange to $2.50 premium. The Boston Clearing House resorted to the use of elearing house certifieates, following similar aetion in New York. Certifieates amounting to $12,595,000 were taken out in Boston between October 28, 1907, and January 3, 1908, and were finally retired on January 24, 1908.
Commereial failures following the 1907 panic were so numerous that recovery from its effeets was slow, and the next five years were trying ones for finanee as well as in business. This was the period of development of the automobile and the moving pieture industries. The automobile industry, which had been in its infaney in 1907, in the immediately suceeeding years developed very rapidly, and here again Boston energy, brains and money were called upon. In 1910 the General Motors Company of Detroit, Michigan, was a great sprawling aggregation of some twenty-odd corporations which competi- tion had brought together. The company found itself in need of ready money, and, after several banking houses had deelined to come to its aid, James J. Storrow, Jr., who had become a partner of Lee, Higginson and Company in 1900, after careful investigation of its affairs, arranged for a loan with his own banking house, together with J. and W. Seligman of New York, and ultimately plaeed the General Motors Company on its feet. Mr. Storrow, until the time of his death in 1926, was one of the most prominent Bostonians in loeal and
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national banking circles and in civic activities. He is described as a man who gave his heart, hand and purse helping others. His record as chairman of the Finance Committee of the General Motors Company and later his success with the Nash Motors Company added prestige not only to his firm but to Boston as well.
Beginning with about the second decade of the century, a new factor in industry, mass production, began to be in evidence, which added greatly to the importance and efficiency of American business, especially during the great World War. From 1910 to 1914 consolidations continued among the Boston banks, especially among trust companies. During this period the Old Colony Trust Company absorbed the City Trust Company, the Copley Trust Company and the Bay State Trust Company, most of these representing con- solidations with other smaller institutions.
A review of the banking situation in Boston for 1910, irrespective of the conditions existing at that time, shows that Boston had been increasing in importance as a financial center. While there were only twenty national banks in Boston, with capital funds of $52,000,000 and total deposits of $249,000,000, the National Shawmut Bank, with a capital fund of about $19,000,000 and deposits of $74,000,000, continuing as the largest bank, there were twenty-three trust companies, with capital funds of $40,000,000 and deposits of $180,000,000, the Old Colony Trust Company, with a capital fund of $3,500,000 and deposits of $20,000,000 leading, and nineteen mutual savings banks, with $16,000,000 surplus and $238,000,000 deposits, with the Provident Institution for Savings, with $3,000,000 surplus and $48,000,000 deposits, the largest. The total banking resources of Boston in that year were $668,000,000 or almost three times the size of those in 1880. Kidder, Peabody and Company, Lee, Higginson and Company, Brown Brothers and N. W. Harris and Com- pany (which later became Harris, Forbes and Company) were the leading banking houses, with Hayden, Stone and Company, Hornblower and Weeks, Blake Brothers, F. S. Moseley and Company and Charles Head and Company leading in the field of brokerage houses.
After the panic of 1907 Congress appointed the National Monetary Com- mission, of which Senator Nelson W. Aldrich of Rhode Island was chairman. Although its proposal for a central banking system was rejected, the studies and findings of this Commission finally led to the plan which resulted in the passage of the Federal Reserve Act on December 23, 1913. The Organization Committee called for under the act to select locations of the different Federal Reserve Banks held a meeting in Boston at the Chamber of Commerce on January 9, 1914. Although the proponents for a central bank were anxious to have New England included in the territory of a reserve bank located in New York City, a large majority of those appearing before this meeting urged that a Federal reserve bank be located in Boston, and the Organization Committee so recommended in its final report. On May 20, 1914, the certificate of incorpo- ration of the Federal Reserve Bank of Boston was executed in the rooms of the Boston Clearing House, the Organization Committee designating as its territory all of New England, although Fairfield County, Conn., was subsequently transferred to the New York Federal District.
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The financial markets during the early part of the year 1914 not only failed completely to forcshadow coming events but did not, even as late as the end of July, anticipate the European war which was soon to break. The first consequences were felt when Germany sent its ultimatum on July 31 to France and Russia and England followed with a declaration of war on August 5. These actions brought about not so much a financial and commercial panic as complete world-wide financial paralysis. On July 31, 1914, the Boston Stock Exchange, following similar action by the exchanges of New York and other cities, closed and remained closed until December 10, when limited transactions only were allowed, although a week later unlimited trading was permitted. On August 1 the Boston Clearing House statement was suspended and the usual form was not issued again until December 19. On August 4, 1914, the Boston Clearing House issued loan certificates and between that date and November 15 $11,385,000 were issued, these being retired on the following November 24, the retirement being effected through the opening of the Federal Reserve Bank of Boston and the release of reserves under the new requirements.
The provisions of the Aldrich-Vreeland Act had been continucd and a national currency association, as called for under that act, was formed in Boston, holding its first meeting at the Boston Clearing House on August 3, 1914. Under this association guaranteed currency to the amount of $28,674,500 was issued to New England banks between the 4th of August and the 19th of October, of which $24,758,500 was issued to the Boston banks, the collateral pledged by the banks as security for the currency being about equally divided between commercial paper and bonds. The last of this currency - the so-called Aldrich-Vreeland notes - was retired on March 19, 1915.
On September 4, 1914, a gold pool of $100,000,000 was organized to meet the clearing of foreign obligations. Something over $108,000,000 in gold was pledged by the banks of the country participating in the pool, of which $7,000,000 was furnished by the Boston banks, but only one quarter of this subscription was called for and only $10,000,000 was actually shipped out of the country. This pool was formally terminated on January 22, 1915.
In order to meet the exigencies of financing the cotton crop a cotton loan fund was also created in 1914 under the general direction of the members of the Federal Reserve Board, acting as individuals. The actual subscription to this fund was $100,000,000, of which Boston contributed but $2,000,000, since the Boston banks were called upon to finance cotton for their own local industry. Of the total fund only $28,000 was ever applied for and loaned.
On November 16, 1914, the Federal Reserve Bank of Boston opened for business with 439 member banks, all national banks. The capital subscribed by the member banks under the provisions of the law was $9,711,900, which. necessitated a payment of $4,855,950 (fifty per cent), of which $1,618,924.99 was paid in the first day. On that same day deposits were made of $15,000,000 by the member banks, representing the first transfer of reserves. As has already. been stated, Boston banks had found it necessary to take out clearing house certificates and emergency currency, but even with this assistance those banks showed a deficit in reserves and the general banking situation was in a most sensitive condition. Money rates were high, demand money to brokers ranging
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from five and one half to seven per cent, commercial borrowers being obliged to pay six per cent and even higher. Within a few days after the opening of the Federal Reserve Bank, call money was lending at four and one half to five per cent and commercial paper was moving fairly freely at five and one half to six per cent. The new reserve requirement of member banks which went into effeet at the time of the opening of the bank and the fact that a rediscount market had been established aided materially in quelling existing apprehension.
Under the Federal Reserve Act new powers were conferred on the national banks. Two of these - the handling of trust business and the recognition of time or savings departments - opened up new avenues of business for them. Another important provision of the Federal Reserve Act was the right conferred on member banks to accept bills of exchange. All of the larger banks in Boston immediately availed themselves of this new privilege and, in close co-operation with the Federal Reserve Bank, gradually developed a market for bankers' acceptances, following closely policies being developed in New York City. New England merchants had for years been importers of large quantities of hides and wool from South America, cotton from the Orient and other com- modities from other sections of the world. These shipments in the past had been finaneed through credits drawn on European centers, largely on London, the credits being arranged with local private bankers, who drew on their foreign correspondents. The exigencies of the war and the general unsettlement in European markets made it possible for this new type of financing to develop speedily. Even before the entrance of the United States into the World War the volume of credits extended in this way, both domestic and foreign, had steadily increased, and these, together with the character of the Boston money market, operated notably, in the years to come, to increase the importance of Boston as a financial center.
During the early months of the war general business as well as finance was unsettled. With the existing situation in the commodity market and the money market the business man was marking time. Shoe manufacturers and cotton mills were operating at only a small part of capacity and as a result Boston banking activity was extremely subnormal. But it was only a few months before orders for foreign consumption began to arrive, increasing each month as the war in Europe progressed. There were demands not only for boots and shoes, leather, arms and ammunition, woolen goods and machinery, but also for huge loans for the warring powers. Demands for domestic goods from all parts of the country increased, owing to the falling off in the importa- tion of foreign-made goods. During the two years prior to the entry of the United States into the World War Boston financial circles felt the effects of this great activity, but the banks were able to meet the demands on them through increased deposits and the large flow of gold from Europe, and were in a strong position to meet the added burden which the entrance of the United States into the war was to bring upon them.
The declaration of war by the United States came on April 6, 1917. At that time the number of national banks in Boston had been reduced to twelve, with capital funds of $70,000,000 and total deposits of $364,000,000, the reduc- tion in number coming from consolidations and conversions into trust com- panies. There were twenty-seven trust companies, with capital funds of
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