USA > Rhode Island > Rhode Island : three centuries of democracy, Vol. II > Part 33
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EXPANSION OF BANKING-Forty-seven new bank charters were granted by the General Assembly in the years between 1850 and 1857. Several of the projected banks were not organized, and a few banks were discontinued. In 1856 and 1857 ninety-eight banks, the larg- est number in the history of Rhode Island, reported. Banking capital had been nearly doubled, $11,716,000 to $20,857,000 ; circulation had been more than doubled, $2,554,000 to $5,344,000; loans and discounts had been increased from $14,300,000 to $29,094,000. Banks earned and
*Briscoe vs. Commonwealth of Kentucky, 11 Peters 257.
tDartmouth College vs. Woodward, 4 Wheaton 518.
#These became part of the contract entailed in a charter. Ogden vs. Saunders, 12 Wheaton 213. § Providence Bank vs. Billings et al., 4 Peters 515.
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paid dividends of a fraction over seven per cent. annually, and had increased surplus from $740,000 to $1,338,000. Specie had not increased proportionately. The banking facilities, assuming the increase of loans and discounts as a fair measure of necessity, had increased only proportionately to the needs of the state.
The period was marked by expansion of investments in the profitable textile industry ; the introduction of steam power made possible an increase in the number of factories, since water power no longer dictated location beside turbulent streams. There was also an expan- sion of railroad facilities, four new main lines being projected-from Providence to Wor- cester, to Springfield, to Hartford, and to Warren and Bristol, construction being undertaken in part. Population increased steadily, thirty-six per cent. from 1840 to 1850, and twenty per cent. from 1850 to 1860. Inasmuch as Narragansett Bay was not a seaboard terminus for ocean immigration lines, the migration from seaport to Rhode Island that produced large increase in population must be related to opportunity for employment. Speculation there was, of course, in shares of Rhode Island corporations, in the stocks and bonds of local and extra- state railroads, and in companies planned for exploiting the resources of western states and territories.
PANIC OF 1857-The tide turned definitely in the disaster known as the panic of 1857. Whether the panic be attributed to the free trade tariff of 1857, or to deflation following extra- ordinary speculation, or to both combined, its full effects were felt in Rhode Island early in the autumn. The "Journal" of Monday, September 28, 1857, declared: "There never before were two such weeks as closed upon the business of Providence last Saturday. Money con- tinues at unmitigated rates, although the demand slackens under the impossibility of obtain- ing discounts. There is hardly any cotton in the market. The manufacturers are working down their stocks with no disposition to renew them under present circumstances. It is impossible longer to raise money to pay labor, and a dreary winter is before us." The markets for many of the commodities manufactured in Rhode Island had vanished. No printcloths had been sold for two weeks. Bank suspensions began on September 28, and continued until all Rhode Island banks were refusing redemption in coin. Fully two-thirds of the spindles, 502,291 in 719,115, and of the hands, 9661 in 13,731, employed in Rhode Island textile fac- tories were idle in December, and most of the remainder were at work only on shortened ·time. The city of Providence undertook the relief of thousands out of work by employing men to fill in part of the Cove lands and to grade the slopes of the hills to the north and west. The loss of markets could scarcely be attributed to banks, except so far as banks might be blamed for extending credit for construction and expansion in excess of reasonable future demands.
The causes of the panic of 1857 applying particularly to Rhode Island were: (1) An almost complete failure of markets for goods, due to stagnation of business throughout the nation ; (2) possibly less economy in manufacturing, attributable in part to prosperity and in part to unprecedented expansion and the development of units too large for personal man- agement and administration by owners; (3) faults in the selling system, whereby the manu- facturers extended credit to converters and jobbers sometimes for so long as eighteen months on printcloths; (4) continued neglect by banks to relate currency to reserves or specie; (5) continued neglect to limit bank indebtedness to credit resources; (6) in the instance of a few banks an utter disregard for principles of honesty.
The majority of Rhode Island banks were sound; else there could not have been a resumption of specie payment so early as January, 1858, and a quick return of prosperity. The pernicious activity of a few banks gave all Rhode Island banks a bad reputation in states in which bankers were not probably more honest so much as more restricted than in Rhode
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Island. To the latter cause may be attributed the criticism of Rhode Island banking printed in New York newspapers of the period. Withal the panic of 1857 had not occurred without premonition of danger, and Rhode Island banks had failed to maintain adequate reserves, and had not reduced circulation and loans and discounts to reasonably safe limits.
The General Assembly early in 1857 reestablished the bank commission which it had abol- ished in 1842, and the new commission had begun to force unprincipled banks to liquidate before the panic came to Rhode Island. Six banks had been enjoined by February, 1858. On the other hand, only twenty-one of thirty-three banks represented at a conference on Septem- ber 28, 1857, favored suspension, and six strong banks ignored an invitation to send represen- tatives to the conference, which had been called expressly to discuss suspension and other concerted measures to meet the situation. Eventually, as in 1837, all Rhode Island banks suspended, but the later situation was precipitated by failures elsewhere, some of banks which were debtors to Rhode Island banks, and some of merchants who were debtors to Rhode Island manufacturers and merchants. Bankruptcy and insolvency elsewhere, rather than unsound- ness in Rhode Island, precipitated suspension of banks and bankruptcy of manufacturers. The firm of Philip Allen & Sons made an assignment as an aftermath of the panic when the latter had passed the crisis. As it was, the Rhode Island situation was hopeful, in spite of business depression and curtailment of sales of goods and orders, until Baltimore and Phil- adelphia banks suspended, and the New York banks followed. Rhode Island bankers thus were deprived of credits carried in three large commercial cities, with which trade relations had been most intimate. Besides the banks ordered by the banking commission to liquidate, which reduced the number of active institutions from ninety-eight in 1857 to ninety-three in 1858, other banks retired and ninety reported in 1860. Banking capital remained practically unchanged, but circulation had been reduced from $5,344,000 to $3,773,000, and loans and discounts from $29,000,000 to $25,500,000. Specie had undergone little change. Both circu- lation and indebtedness were below the limits of sixty-five per cent. of capital established by statute in 1858. Confidence had scarcely been restored when the Civil War precipitated a new crisis. Rhode Island banks suspended specie payments in December, 1861. In four years, although four banks were closed, banking capital remained close to the $21,000,000 charac- teristic from 1857; circulation was doubled, from $3,773,000 in 1860 to $6,921,000 in 1864; and loans and discounts were increased by $5,000,000, from $25,546,000 to $30,217,000. Within a year, because of the conversion of state banks into national banks, the number of state banks was reduced in 1865 to fourteen, with capital of $3,558,000, circulation of $1,628,- 000, and loans and discounts of $5,699,000.
A SUMMARY -- In review it may be noted that during the colonial period Rhode Island had recourse to public banking with the purposes both of providing liquid capital to stimulate business and of furnishing a medium of exchange. The colony itself was the banker, issuing currency loans on the security of land mortgages, and obtaining an income through interest on loans, whereby for a large part of the colonial period recourse to direct taxation was not necessary. The ratification of the Constitution of the United States definitely terminated the state's right to issue currency. The next venture toward furnishing a medium of exchange and other banking accommodations was the chartering of private banks, which for a time were neither supervised nor restricted by statutory regulation; rather, private banking was encouraged by the grant of "bank process," a drastic device for obtaining quick judgment against debtors. Private banking was profitable. and the system was expanded as it furnished financial accommodations that were essential for the parallel development of industry. In Rhode Island the investment in new enterprises was genuine and profitable, and the state rapidly accumulated an economic capital that would warrant the expansion of bank credits
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and emission of currency for legitimate trade practices. Sound banking in Rhode Island, because of generous prosperity, yielded returns ample to sustain an interest in maintaining good practices ; Rhode Island bankers assured credit for their currency by making provision for prompt redemption, after the currency had passed rapidly around the credit-transfer cycle. Banking was so profitable that additional banks were chartered, and the state by taxing banks made the granting of banking franchises a source of revenue, and by legislation and supervision undertook to limit vicious practices and to assure stability. With banking on a state revenue producing basis and with franchises sought as much for profit in banking as for an assumption of public accommodation, the state was troubled with the problems of regulat- ing this most important public utility, and was hampered somewhat by the constitutional inhi- bition against emitting its own bills of credit.
The genesis of the national banking system, elaborated by Salmon P. Chase as Secretary of the Treasury, appeared in a proposal, originating in the Providence Board of Trade in 1857, that the State of Rhode Island should establish a public-private banking system by printing banknotes to be issued to state banks upon the deposit of approved securities and specie in the state treasury. The system in operation would provide a currency issued under state supervision, and with redemption guaranteed through public possession of ample secur- ity. The national banking system required the deposit of United States bonds as security for circulation, thus accomplishing the two purposes (1) of assuring redemption, and (2) of furnishing a market for bonds. As the national banking system was modified in the develop- ment of the federal reserve banking system, the Providence plan of accepting other securities as part of the redemption reserve was incorporated. The Providence plan, if operated by a state, scarcely would avoid conflict with the federal Constitution, although the Supreme Court in its holding that a state, forbidden to emit bills of credit, could confer the power to emit bills of credit upon a corporation part of the stock of which was held by the state, had whittled away the constitutional inhibition to the point of being almost nominal instead of real .*
SAVINGS BANKS-Another type of bank, the savings bank, "to provide a safe and profit- able mode of enabling industrious persons of all descriptions to invest such parts of their earnings or property as they can conveniently spare," was first incorporated in Rhode Island in the instances of the Savings Bank of Newport, in June, 1819, and of the Providence Insti- tution for Savings, and Bristol Institution for Savings in October, 1819. The early savings banks were intended principally to promote savings among the poor, the charters limiting the amount of individual deposits in such manner as to restrict patronage to the poor. The Provi- dence Institution for Savings recognized its purpose as fundamentally charitable in a state- ment made at the time of incorporation, in part as follows: "Many frugal and industrious persons have laid by small sums which they intend as a relief in sickness, or in old age; but from the failure or death of those in whose hands they placed it, they have lost the whole, or if they have received it again, it has been without interest. In this institution such persons will find a safe place of deposit, and have the satisfaction to know that it is constantly increas- ing." In the extension of the functions of these banks mortgage loans on real estate were favored as investments, and the banks assisted thousands of Rhode Islanders to build and own homes. Seven savings banks were operating in 1850, with total deposits of $1,495,000. In the next ten years the number of savings banks had increased to twenty-one, and deposits to $9,164,000. Ten years later, in 1870, there were twenty-six savings banks in Rhode Island, with deposits of $30,708,000. A number of factors had contributed to the development of savings banks, first of which, of course, were the increase in the number of wage earners accompanying the building and operation of factories, and the facilities for safe keeping of
*Briscoe vs. Commonwealth of Kentucky, 11 Peters 257.
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money afforded by the savings banks. Other reasons were quite as important, these including (I) recognition by the commercial banks of the period of the possibility of using savings banks as devices for gathering into sums large enough for profitable use in banking the small savings of individuals, and (2) recognition by the managers of large corporations of the possibility of using savings banks as devices for gathering up so much of the wages of employes as were not absorbed by the company stores. Many of the later savings banks were definitely associ- ated with commercial banks or with manufacturing corporations, banks or other corporations borrowing from savings banks, the latter sometimes paying depositors by checks drawn on commercial banks with which a large part of the accumulated savings had been deposited. The Sprague failure revealed at least two savings banks holding as assets principally notes of the A. & W. Sprague Company and personal notes of the principal owners of the company. Savings deposits amounted in 1860 to half almost of the total capital stock of the ninety com- mercial banks that reported in that year; in 1870 savings deposited amounted to two-thirds as much as the capital stock, surplus and deposits of state banks, national banks and the one trust company operating in Rhode Island. The proceeds of the state tax on savings banks in 1850, $36,300, were forty-three per cent. of the revenues of the state in that year.
Rhode Island savings banks chartered before 1875 were: Savings Bank of Newport, Providence Institution for Savings, Bristol Institution for Savings, 1819; Pawtucket Insti- tution for Savings, 1836; Warwick Institution for Savings, Woonsocket Institution for Sav- ings, 1845; East Greenwich Institution for Savings, 1849; Wakefield Institution for Savings, 1850; Peoples Savings Bank of Providence, Savings Bank in Tiverton, 1851; Citizens Sav- ings Institution of Woonsocket, Providence County Savings Bank of Pawtucket, 1853; Mechanics Savings Bank of Providence, Westerly Savings Bank, 1854; Franklin Five Cent Savings Bank of Providence (afterward Franklin Institution for Savings), Kingston Savings Bank, Wickford Savings Bank, 1855; Coddington Five Cent Savings Bank of Newport (afterward Coddington Savings Bank), Warren Institution for Savings, 1856; Franklin Savings Bank of Pawtucket (Massachusetts corporation until boundary line was changed), Peoples Savings Bank of Woonsocket, 1857; Phenix Savings Bank of Phenix, 1858; City Savings Bank of Providence, 1859; Pascoag Savings Bank, 1864; Rhode Island Institution for Savings, and Union Savings Bank of Providence, 1866; Producers Savings Bank of Woonsocket, 1868; Cranston Savings Bank of Providence, Hopkinton Savings Bank of Hope Valley, Mechanics Savings Bank of Westerly, Niantic Savings Bank of Westerly, 1870; Ashaway Savings Bank, Citizens Savings Bank of Providence, Merchants Savings Bank of Providence, National Institution for Savings (afterward International Institution for Sav- ings, and later Jackson Institution for Savings) of Providence, 1871; Coventry Savings Bank, Smithfield Savings Bank of Greenville, 1872; Atlantic Savings Bank of Providence (never opened), Island Savings Bank of Newport, Mechanics Savings Bank of Woonsocket, 1873.
After the Sprague failure and the consequent liquidation of two savings banks there was a definite pause in the chartering of savings banks; before confidence had been restored the competition of trust companies and national banks carrying participation accounts discouraged the organization of new savings banks. Savings banks chartered after 1875 were: Bristol County Savings Bank of Bristol, 1876; Union Savings Bank of Pascoag (not organized), 1879; Burrillville Savings Bank (not organized), 1887; Centreville Savings Bank, Slaters- ville Savings Bank (not organized), Narragansett Pier Savings Bank (not organized), 1888; Gorham Savings Bank, 1900. Only three of the savings banks chartered after 1875 engaged in business. Of the Rhode Island savings banks the following are still in active business: Centreville Savings Bank, Citizens Savings Bank of Providence, Gorham Savings Bank of
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Providence, Pawtucket Institution for Savings, Peoples Savings Bank of Providence, Provi- dence Institution for Savings, Savings Bank of Newport, Wickford Savings Bank, and Woonsocket Institution for Savings. The following savings banks were absorbed by national banks or trust companies : Bristol County Savings Bank of Bristol, Bristol Institution for Savings, Coddington Savings Bank of Newport, Mechanics Savings Bank of Providence, Niantic Savings Bank of Westerly, Warren Institution for Savings, all by Industrial Trust Company; East Greenwich Institutions for Savings, by Manufacturers Trust Company ; Franklin Savings Bank of Pawtucket, by Slater Trust Company; Island Savings Bank of Newport, by National Exchange Bank; Mechanics Savings Bank and Producers Savings Bank of Woonsocket, and Providence County Savings Bank of Pawtucket, by Rhode Island Hospital Trust Company ; Peoples Savings Bank of Woonsocket, by Woonsocket Institution for Savings; Smithfield Savings Bank, by Greenville Trust Company; Wakefield Institution for Savings, by Wakefield Trust Company.
The General Assembly, in 1879, enacted legislation authorizing the liquidation of savings banks without receivership, permitting a classification of assets and resources as quick (con- vertible into cash in ninety days without loss) and reserve, and enabling savings banks to require ninety days' notice of withdrawal of deposits and to pay on requests for withdrawals only a proportion of quick assets. The following savings banks went into liquidation and retired from business : Pascoag Savings Bank, and Rhode Island Institution for Savings and Union Savings Bank of Providence, 1883; Coventry Savings Bank, 1886; Jackson Institu- tion for Savings of Providence, 1888; Merchants Savings Bank of Providence, 1893; Hop- kinton Savings Bank of Hope Valley, 1895; Phenix Savings Bank of Phenix, 1897; Mechan- ics Savings Bank of Westerly, 1901 ; City Savings Bank of Providence, 1903; Ashaway Sav- ings Bank, 1912. In several instances savings banks in voluntary liquidation paid dividends exceeding 100 per cent. The Tiverton Savings Bank was transferred to Massachusetts in 1855. The few Rhode Island savings banks that failed were: Citizens Savings Bank of Woonsocket, 1882; Cranston Savings Bank and Franklin Savings Bank of Providence, 1873, because of Sprague failure; Kingston Savings Bank, 1909. In the instance of the Kingston Bank depositors were paid in full or transferred to the Kingston branch opened by the Peoples Savings Bank of Providence; the loss by reason of defalcation was partly reimbursed and partly paid by directors. The liabilities of savings banks in 1929 included: Deposits, $169,- 299,791.24; surplus, $4,777,217.44; profit and loss, $3,323,391.21 ; guaranty fund, $4,874,- 428.50; depositors' interest and taxes, $962,578.59; other liabilities, $48,925.51 ; total, $183,- 286,332.49. The resources of savings banks, equal to liabilities, comprised almost one-third of the banking capital of Rhode Island.
NATIONAL BANKING ACT-At the end of the Civil War the United States had accumu- lated a new national debt, incurred in part through borrowing on bond issues and in part through issuing legal tender notes in payment of obligations. The state of Rhode Island had expended almost $6,000,000 for war purposes, over $4,000,000 of which had been raised by bond issues. The Rhode Island state banks had increased loans and discounts to $30,000,000, and had notes outstanding as currency amounting to $7,000,000. Both nation, by legal tender issues, and banks, by notes, had inflated the circulatory media, and the low estate to which paper money had fallen was indicated by what were called war prices, and the high premium on gold. With the tension of war relieved, the time was ripe for speculation. The General Assembly in May, 1865, almost within a month of Appomattox, granted more than seventy corporation charters, including twelve mining companies to operate in western states; seven- teen coal, oil, petroleum, and iron companies, of which more than half were to operate out- side Rhode Island; thirty manufacturing companies; five public service corporations, three
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insurance companies, building and land companies, publishing houses, a hotel, an academy, and the Rocky Point Company. Not all were new ventures; in many instances incorporation was sought because of limited liability or other advantages of incorporation over partnership or joint stock company. Some of the older organizations sought new capital, and some were engaged in the process whereby the "good-will" of a going business may be transmuted into capital stock with profit to the original entrepreneurs.
The part that state banks might have taken in financing a program of such magnitude was limited for the time being by their own problem of covering themselves into the new national banking organization before they were taxed into bankruptcy by the federal levies upon their outstanding circulation. Treasurer Chase had announced his plan for replacing legal tender currency by national banknotes and for furnishing a market for United States Government bonds that would quickly restore their parity with gold, and afford facilities for refunding issues at high interest rates with bonds carrying lower rates. The proposed heavy taxation of state bank currency must force state banks into the federal system, or so restrict their note issues as to make their competition with national banks almost negligible.
The General Assembly passed enabling legislation March 7, 1865, and the transformation of state into national banks proceeded so rapidly that only fourteen state banks reported in November, 1865, in contrast to eighty-six a year earlier. The result was the retirement almost immediately of $5,300,000 of currency issued by Rhode Island state banks, for which national bank notes secured by the deposit of United States bonds were substituted. Allowing time for readjustments, the bank statements for 1870 afford a basis for comparison. State bank cap- ital and surplus in 1864 amounted to $22,698,000; national bank capital in 1870 was $20,365,- 000, and surplus $3,267,000, a total of $23,632,000, which meant an investment of practically $1,000,000 more in 1870 than in 1864. The total of capital. circulation and deposits in 1864 was $36,249,000, which represented the maximum of possible loans and discounts, of which $30,217,000 had actually been made. The same total for national banks in 1870, $42,086,000, must be reduced by the $13,753,000 invested in bonds to guarantee currency, and was net $28,333,000, of which $22,867,000 had actually been made. For an investment of $1,000,000 more, the service of national banks was $8,000,000 less than that afforded by state banks, in spite of the issue of almost twice as much currency. On the other hand, it should be noted that the $13,753,000 investment in United States bonds yielded an income in interest that more than cared for the tax on circulation to establish a redemption fund, and was profitable for banks in the early period of national banking; but that this profit decreased as bonds were purchased at a premium and earned lower interest when refunding bonds replaced original issues. The greatest advantage from the national banking system accrued to the general pub- lic from (1) the banishment of wildcat state bank notes from circulation; and (2) the sub- stitution therefor of a currency the redemption of which was guaranteed by the federal gov- ernment. The weakness in the national bank system lay in the limitation on the potential efficiency of banking capital suggested above in the comparison of the years of 1864 and 1870. It was this that led to progressive elimination of national banks and the substitution for them of trust companies and similar credit and banking agencies. In the meantime the United States had achieved a national currency which tended to relieve the pressure for bank cur- rency, and to simplify the process of divorcing the currency function from the purely credit functions of modern banking.
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