Rhode Island : three centuries of democracy, Vol. II, Part 32

Author: Carroll, Charles, author
Publication date: 1932
Publisher: New York : Lewis historical Pub. Co.
Number of Pages: 716

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RHODE ISLAND-THREE CENTURIES OF DEMOCRACY

indebtedness, the bank could obtain judgment without trial. Execution on the judgment was issued ten days later unless the debtor meanwhile claimed a trial. The arrest of judgment was repealed by amendment to the bank charter in 1807; it had not been included in the "bank process" granted to other banks. Newport quickly followed the lead in Providence, and the Bank of Rhode Island was chartered in 1795. Twelve other banks were chartered before 1810 as follows : Exchange Bank and Roger Williams Bank, Providence; Newport Bank and Rhode Island Union Bank, Newport; Bristol Bank and Bristol Commercial Bank, Bristol ; Washington Bank, of Westerly; Narragansett Bank, Wickford; Central Bank, East Green- wich; Farmers' Exchange Bank, Glocester ; Smithfield Union Bank, and Warren Bank. The authorized capital of fourteen banks was $5,000,000, of which less than one-third, $1,535,000, had been subscribed. All the banks, without specific provision in the charters, assumed a right to issue paper money, and did so. The "bank process," a novel device invented in Rhode Island, and the practice of short-term discounts-limited to thirty days in the instance of the Providence Bank-increased the volume of quick, convertible assets available for redeeming bank notes.

With generally honest administration there were relatively few losses because of irre- deemable currency in Rhode Island banking before 1850, the exception being the Farmers' Exchange Bank, of Glocester, which fell into the hands of speculators beyond the borders of the state, and failed in 1809. The banks in commercial towns catered principally to mer- chants and manufacturers; the banks in agricultural communities offered banking facilities, including credit loans, to farmers. Close association of banking and insurance, particularly marine insurance, in which the earlier development was most notable, appeared in the stock- holdings of insurance companies in banking corporations, and the assistance rendered by the banks through the credit facilities made available for underwriters. Partisanship in the dis- tribution of patronage of the federal government was shown in the choice of Rhode Island banks as depositories of federal money. The Providence Bank was the first federal depository in Rhode Island ; the directors were principally Federalists. The Republican administration, in power in 1801, with the inauguration of President Jefferson, chose other banks for patron- age-the Roger Williams Bank of Providence, the Newport Bank, and Bristol Bank.

THE DEXTER SWINDLE-The General Assembly, in 1809, undertook to regulate banks and insurance companies, thus concluding a period of almost twenty years in which Rhode Island banking had been reasonably sound and satisfactory principally because of honest administration. The exception that precipitated the legislation of 1809 was the Farmers' Exchange Bank. A committee of the General Assembly, after an investigation, reported that the bank had been opened with $11,806.61 paid in as capital, of which the directors with- drew for their own enrichment $8,725.50 almost immediately. Thereafter the directors divided amongst themselves an issue of notes, which they put into circulation as payment for private purchases. To allay the suspicions of other stockholders, the directors bought back 450 shares of stock, issuing in exchange therefor stockholders' notes for borrowed money, this disposing of most of the bank's remaining assets. The little left was sold by the directors, along with "good will" and the plates for printing notes, to Andrew Dexter, Jr., soon to be revealed as perpetrator of the most gigantic bank swindle New England ever experienced. His activity in Rhode Island was only a minor detail in a widespread plot. Dexter borrowed $845,771 from the bank, on his own personal security. When the bank closed it had specie assets of $86.48, against which $580,000 of its notes were outstanding. The altogether inex- plicable factor in the report was the neglect to take the $86.48 of cash. During the Dexter régime Farmers' Exchange currency was put into circulation by payment over the counters of distant banks controlled by him, while the Farmers' Exchange reciprocated by paying out

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FINANCE AND BANKING

notes of distant banks over its counters. Exchange of notes by widely separated banks was one device resorted to in wildcat state banking days to assure a wider distribution and a longer period between issue and redemption than would ensue were the currency limited to local circulation. The losses in the instance of the Farmers' Exchange Bank rested most heav- ily on holders of the bank's notes residing in other states, although there were Rhode Islanders who lost money by possession of notes issued by other Dexter banks that failed almost as ingloriously as the Farmers' Exchange when the swindle was exposed. The Rhode Island legislation of 1809 made directors individually responsible for bank debts if recourse to assets failed ; limited bank indebtedness to capital plus deposits; and required annual reports of the condition of state banks. The circulation of bank currency was restricted.

SERVICE OF THE BANKS-Additional to generally honest administration of Rhode Island banks, the trade balance in the period, 1791-1809, was favorable for the most part, which had the effect of drawing money to, instead of away from, Rhode Island. Rhode Island manu- facturing had begun in earnest, and there was, therefore, an increase in economic capital. So far as banking was concerned, the territory was small, and notes issued as currency quickly found their way back to the banks for redemption. The use of bank currency, as a rule, tended to serve the purposes principally of extending credit by a simpler process than recourse to individual bills and notes, and of providing a medium of exchange that was satisfactory because its redemption was unquestioned. The first reports filed by the thirteen Rhode Island banks in 1809 showed $434,800 of currency in circulation, for the redemption of which the banks had $410,800 specie, $79,000 bills of other banks, and $88,200 deposited in other banks. The cash resources exceeded circulation by $143,200. Assuming capital actually paid in to be $1,500,000, total liabilities, including circulation and $488,000 of deposits, were $2,422,800. Assets, including $2,037,000 of loans and discounts, plus specie, bills of other banks and deposits in other banks, were $2,614,200, which indicated undivided profits or surplus of $191,400. On the face of the reports, the banks were sound, and currency so well supported by convertible assets was reasonably safe. As a matter of fact, however, the reports of the banks were made for any one of ten days selected by each bank preceding October 3. Under these circumstances, it is but reasonable to conclude that each bank selected for report the day of the ten which was most favorable for itself. Had Rhode Island bankers been dishon- est, limitless manipulation of resources would permit statements far from presenting the real truth. One of the safeguards of modern banking is selection, without preliminary notice to the banks, of a particular reporting day by the supervising agency.

CURRENCY REGULATION -- Private banking in Rhode Island entered a new period with the beginning of supervision, slight as it was for the time being, in 1809. The years immedi- ately following 1809 were disastrous to American commerce. What was to be known in America as the War of 1812 had broken out in Europe sooner, and America followed a blun- dering course of restricting international commercial intercourse and embargo in an effort to avoid being drawn into the struggle. While commerce suffered, and many ships lay idle, American manufacturers found profit in the exclusive access to home markets which was theirs for the time, and Rhode Island shared the advantages of the favorable innovation. No new banks were chartered until 1814. Meanwhile the Rhode Island banks continued their service by increasing loans and discounts, and by issuing currency, the annual reports continu- ing to show generally the same favorable balances reported in 1809. Currency issues increased in 1812 and 1813, as state bank currency replaced the United States Bank notes withdrawn from circulation after the termination of the bank's charter in 1811. Rhode Island banks continued specie redemption even in 1814, when most banks outside New England suspended payment. Most Rhode Island banks participated in the two associations headed, respectively,

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RHODE ISLAND-THREE CENTURIES OF DEMOCRACY

by the New England Bank of Boston in 1814, and by the Merchants Bank of Providence in 1819 as agent for the Suffolk Bank. These combinations of bankers provided facilities for prompt redemption of currency, which had the effect of maintaining circulation at close to face value. In consequence thereof the banks rendered a genuine service to business, which must have suffered inevitably by the circulation of a depreciated and depreciating currency. As it was, the Rhode Island banks furnished a currency with two excellent qualities, first, the possibility of expansion to meet increasing demands, as shown by the total issues of $770,000 reported by Rhode Island banks in 1813; and, second, the equal facility for reduction through prompt redemption, as shown by the almost steady level close to $550,000 in 1810, 1812, 1814, 1815, and 1816. One new bank was chartered in 1814, two in 1815, one in 1817, ten in 1818, and three in 1819, making the total number thirty in 1819. Banking capital was almost doubled, being close to $3,000,000 as reported in 1819. Loans and discounts were $1,000,000 more than in 1809. The increase in loans and discounts was by gradual and consistent accre- tion, extending over the period and not related to the large number of new banks chartered in 1818. In fact, the ten charters of 1818 were issued while the General Assembly was con- sidering amendments to the banking laws that would modify "bank process." Several of these charters were sought with the purpose less of entering the banking business than of selling the franchises.

RHODE ISLAND BANKING GENERALLY SOUND-The abolition of "bank process" was dis- cussed in 1818 as a measure rather for the relief of debtors than for the reform of banking methods. The abundant prosperity of manufacturing promoted by war measures had reached a pause in 1818, as the business depression that had distressed the nation, except New Eng- land, eventually reached Rhode Island. Rhode Island banks rode out the tempest sturdily, but private fortunes were lost, and there was much distress among insolvent debtors. "Bank process" had been considered so valuable a function of banking as to induce the seeking in 1818 of charters, with process included, as a speculation against its probable abandonment ; no charter granted after 1818 included "bank process." With reference to charters obtained before 1818 legislation (of doubtful constitutionality*) tending to limit or modify "bank process" was passed and repealed ; it was not until 1836 that "bank process" was abandoned. As banking in the earliest period had been associated with commerce and insurance, it tended with the development of industry to become associated with manufacturing enterprises. The increasing business in loans and discounts marked the service of the banks in financing pur- chase of raw material, in assisting manufacturers in paying wages, and in marketing the fin- ished product.

With the rise of large factory enterprises the identification of certain banks with specific manufactories was common, and in many instances the same names that appeared as incor- porators of factories appeared also as incorporators of banks. The phenomenon might be explained as purely speculative ; actually it meant that manufacturers were engaged in bank- ing enterprises as devices for furnishing themselves with facilities for extending their own credit. A branch of the second Bank of the United States was established in Providence in 1817, becoming a depository for the United States treasury, and an agency for the redemption of bank notes originating outside Rhode Island. Other state banks were chartered, three in 1820, four in 1823, five in 1824, and one in 1825. The forty-three banks reporting in 1825 had capital totalling $5,292,000, and circulation of $1,021,000. Loans and discounts amounted to $7,253,000. As in the period preceding 1819 the increase in loans and discounts had been steady and gradual. The circulation was extraordinary, compared with $726,000 in 1824, and $713,000 in 1826; it did not exceed $1,000,000 again until 1831.

*Article I, second 10, Constitution of the United States: "No state shall

. . pass any . . . law impairing the obligation of contracts."

NEW MASONIC TEMPLE IN PROVIDENCE AS IT WILL APPEAR WHEN COMPLETED It is still under construction, at an estimated cost of $2,500,000.

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FINANCE AND BANKING

Coincident with the increase in circulation in 1825 was a movement to increase banking facilities that suggested speculation and inflation and led to an investigation by a committee of the General Assembly. The latter rejected petitions for charters for eighteen new banks and for increase in the capital stock of six others. Had nothing else happened following such expansion, the limitation by statute of 1820 of issues of currency to an amount in the instance of each bank equivalent to the capital actually paid in, would have been raised from $10,350,000 to $16,600,000. The committee of the General Assembly, in a report prepared by Benjamin Hazard, pointed out that the statutory limitation was rather fictitious than real, because of the practice of withdrawing specie paid in as capital in compliance with law, and the replacement of specie by notes. "The notes given for the stock and the stock pledged for the notes cancel and annul each other; or rather they are nullities from the beginning," said the committee. "If .... each member should give his note and nothing else to his company for his share of stock, it is evident enough that there would not be one cent of real capital; and that if such a company should proceed to loan out its bills on interest. and put them into circulation, it would be guilty of a gross fraud upon the public." The report of 1826 effectually stayed for the time being the granting of charters, but the General Assembly did not enact into law the recommendations of its committee for regulation of banking. In this result may be read possibly the political influence of the banks, which was urged by the committee as one reason for curtailment of banking capital and banking prerogatives.

The course pursued by the General Assembly-refusing charters to competitors of exist- ing banks and neglect to restrain the latter-would be consistent with an assertion by the banks of political influence, and political influence would explain away the apparent inconsistency of the General Assembly. After a temporary pause other bank charters were granted, the first in 1827 to the Farmers' and Manufacturers' Bank; this charter included a clause reserving a right in the General Assembly to amend the charter or to subject the bank to general banking legislation. Ten banks were chartered in the two years between 1833 and 1835. There were failures and liquidation of banks, but the number steadily increased until sixty-two of sixty- eight chartered after 1791 were operating in October, 1837. The new banks in many instances were definitely associated with new enterprises ; thus the Blackstone Canal Bank, 1831, was authorized to invest $150,000 in the capital stock of the Blackstone Canal Company, and became a fiscal agent for the canal. The Globe Bank was fiscal agent for the Stonington Rail- road. The Farmers' and Mechanics' Bank of Pawtucket was almost completely wrecked by the failure of the Wilkinsonst of Pawtucket in 1829; the stockholders, who had incurred a total loss of their investment, reorganized the bank as the Phenix in 1835. The sixty-two banks reported capital of $9,837,000 in October, 1837, and circulation of $1,864,000; deposits were $1,305,000, and loans and discounts, $13,401,000. Specie in October, 1837, reached $243,000, the lowest figure at any time in the series of bank reports extending from 1809. To protect their specie from utter exhaustion, Rhode Island banks suspended specie payments May II, 1837. It was the year of a financial panic that was nationwide. The panic attended deflation after a period of inflation and speculation that was without precedent.

BANK OF UNITED STATES-The story of the second Bank of the United States and the opposition of President Jackson is familiar history. The bank was chartered by Congress in 1816 with the purpose of meeting problems of federal finance that resembled those of 1787. The bank was opposed at the outset, (I) because the control was principally Federalist, and Federalists were not popular after the Hartford Convention; (2) because so much of the cap- ital stock was held by British capitalists and other foreigners; (3) because it was accused of political activity ; (4) because it became a competitor of state banks. In spite of unpop-

Samuel Slater married Hannah Wilkinson. Her father and brothers were manufacturers with large financial interests.

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ularity elsewhere, Providence manufacturers and bankers requested establishment of a branch in Rhode Island. In Rhode Island the Bank of the United States was conservative ; elsewhere, in many instances, it rivalled state banks in speculation and inflation. Eventually the Bank of the United States became ultra-conservative everywhere, and was influential in ending inflation of currency and speculation. The remedy was drastic and involved many in financial ruin; in this respect the bank merely precipitated at an earlier date what was inevi- table eventually. The bank's activity aroused an opposition that was more vigorous and implacable than had been that at the outset. The constitutionality of the charter was tested and was sustained by the Supreme Court of the United States .* The Bank of the United States was accused of being a "money trust," and the Supreme Court was roundly abused. Ohio defied the court, and was obliged to recede .;

President Jackson, who believed that the political influence of the bank had been exerted to his disadvantage in 1824, welcomed in 1832 the opportunity to veto a bill extending the bank's charter, which expired in 1836. Jackson also believed that the charter was unconstitu- tional, in spite of the Supreme Court's decision ;¿ in defending this position he enunciated his doctrine that the Constitution is binding upon public officers, but that each of these takes an oath to support the Constitution according to his own interpretation of it. Under Jackson's direction, Roger B. Taney, as Secretary of the Treasury, withdrew deposits of federal money from the Bank of the United States and its branches, including the branch bank at Providence. The Arcade Bank of Providence, the Bristol Bank of Bristol, the Newport Bank and the Rhode Island Union Bank, both of Newport, were selected as federal depositories. The Bank of the United States retaliated, if indeed it had not been constrained by the withdrawal of federal patronage, by reducing the volume of its currency and by curtailing loans and dis- counts, the effect being to reduce still further the accommodations for debtors already dimin- ished by the failure of improvident banks. The branch bank in Providence reduced the amount of its loans and discounts, some of which were taken over by state banks. So early as 1834 business, which had been buoyant in the period of speculation, had become depressed, and higher rates of interest reflected the hesitancy of creditors quite as much as a reduction in the volume of the medium of exchange. The stability of Rhode Island banks through the period of business depression, first, and financial disorder and distress, eventually, attests the general efficiency and soundness of practice in Rhode Island banking.

PANIC OF 1837-The financial disturbance that swept the country and marked the panic of 1837 as one of the most pronounced in American economic history reached Rhode Island eventually, affecting manufacturers first because of curtailment of sales, orders and credit, and because of bankruptcy of customers involving large losses; and Rhode Island banks in turn as specie was withdrawn in a frantic effort to stem the tide of disaster. The banks suspended specie payments in May, 1837, as a measure to conserve the interests both of the banks and of their depositors, customers and creditors.

Aside from the troubles of the immediate present, the nation faced another problem in the suggestion that the emission of currency by state banks was unconstitutional. If, as Pres- ident Jackson and others maintained, the chartering of the Bank of the United States was unconstitutional, in spite of the decision of the United States Supreme Court, and if the Con- stitution, as it forbade states to "emit bills of credit," did not permit states to charter banks with power to issue bank notes-what did the future hold for a nation which, from earliest colonial days, never had had an adequate metal currency? Rhode Island had chartered the Providence Bank for reasons that included the furnishing of a medium of exchange to meet

*Mccullough vs. Maryland, 4 Wheaton 316.

+Osborn vs. Bank of the U. S., 9 Wheaton 738.

#Mccullough vs. Maryland, 4 Wheaton 316.

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the emergency of a dearth of money. Eventually the Supreme Court held that bank notes were not "bills of credit."* No Rhode Island bank failed during the panic of 1837, and in August, 1838, specie payments were resumed. Federal deposits were surrendered when specie payment was suspended. When Rhode Island received from the federal treasury its share of the surplus distributed during the Jackson administration-$386,611.33-the money was deposited in state banks at five per cent. interest, but the banks were constrained within a short time, by reason of the depression attending the panic, to return the money to the state treasury, because the banks could not afford to pay five per cent. interest.

STATUTORY REGULATION OF BANKING-One effect of the Dartmouth College decision of the United States Supreme Courtt was the writing into statutes everywhere of reservations of rights to amend and to repeal corporate charters .¿ The Providence Bank denied the state's right to tax the bank as not reserved in the charter, but failed to establish its contention.§ As noted above, the General Assembly, while hesitating, apparently, to enact legislation in 1826 which would affect seriously the banks already chartered, reserved in the charter of the Far- mers' and Manufacturers' Bank, in 1827, the rights of amendment and repeal and of enacting general banking laws affecting the bank.

Banks and banking were investigated in 1836 by a legislative committee, of which Thomas Wilson Dorr was a member. The committee supplemented the annual bank report for the year by a statement for each bank made for a day selected by the committee for an unexpected visit, the combined second statements showing liabilities larger by $880,400 and assets smaller by $247,700 than had been reported. The comparison merely proved that the banks made a special effort in the annual reports to present a good showing; in practice the curtailment of loans in October was reflected in the money market. The report also "exposed" the various devices resorted to by bankers to increase their profits on discounts. The General Assembly established a bank commission to examine and supervise banks, abolished "bank process," limited interest charges and discount rates, required the actual paying in of capital and forbade the impairment of it. Other legislation followed, restricting discounts to amounts commensu- rate with resources, and circulation to a graduated percentage relation to capital stock. The commission was active and zealous, and in some instances prevented fraud; it was abolished in 1842. In the meantime it had been an effective factor during the panic of 1837, in pro- moting a cooperative policy among Rhode Island banks that was helpful in conserving common interests. Thus all the banks suspended specie payment on the same day, under an agreement approved by the commission, and the measures taken subsequently to restore the deficiency in specie and to protect debtors and creditors were harmonious. Rhode Island was fortunate for the time being in having an able bank commission. The number of banks remained prac- tically constant under commission supervision, as did also the amount of loans and discounts. The latter fact was due probably as much to the slow recovery from the panic of 1837 as to drastic supervision. Circulation, after reaching $2,000,000 in 1838-1839, was reduced to a general average of $1,500,000.

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Rhode Island : three centuries of democracy, Vol. II, Part 32

Author: Carroll, Charles, author Publication date: 1932 Publisher: New York : Lewis historical Pub. Co. Number of Pages: 716

Author: Carroll, Charles, author
Publication date: 1932
Publisher: New York : Lewis historical Pub. Co.
Number of Pages: 716