USA > Rhode Island > Providence County > Providence > State of Rhode Island and Providence Plantations at the end of the century : a history, Volume 3 > Part 29
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Practically no limitations were put upon its corporate powers, except that within the corporation itself the directors were to do noth- ing contrary to the regulations of the stockholders.
No specific clause conferred the right to issue bank notes, although it was implied in the clauses providing for an official examination of the notes issued and redeemed and in the clause providing a penalty for counterfeiting notes. The issue of bank notes seems to have been 1Providence Gazette, Oct., 1791.
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considered, here as elsewhere, a common law right. The stock was to be paid for in installments covering a period of nine months-two- fifths in silver or gold and three-fifths in funded stock of the United States. The voting power of the stockholders did not correspond to the number of shares held. The holder of one or two shares had one vote, two additional shares were required for every additional vote for holdings between two and ten shares; four additional shares for hold- ings between ten and thirty; six additional shares for holdings between thirty and sixty; eight additional shares for holdings between sixty and one hundred, and ten additional shares for holdings above one hundred shares. Thus the holder of 100 shares had only twenty votes; the holder of 200 shares had thirty votes, which was the maximum number allowed to any one.
The directors had entire charge of the business of the bank "for the interest and benefit of the proprietors", and they were to declare dividends at least once in six months. They were to receive no "pecuniary advantage" for their services unless the profits exceeded six per cent. net.
The bank was required to receive all sums of money for safe keep- ing, and to pay them out on order of the owner without charge. The liability of the stockholder was limited to the amount of the stock held.
The so-called "bank process" was granted to the bank. Under it when an obligation to the bank fell due, the president or three direc- tors gave legal notice to the debtor, and on making oath before the clerk of the court, the latter was required to enter judgment against the defendant and issue execution without the usual intervening legal process of trial; but-and the modifications are important-the debtor was allowed ten days' grace before execution issued, and if upon receipt of legal notice he denied the legality of the debt or any part of it, he was accorded all the privileges of regular trial. The full force of this provision appears when taken in connection with the rule of the Providence Bank that discounts should be offered for thirty days only.
The bank process was peculiar to Rhode Island. It gave to the banks a speedy remedy against debtors not granted to other creditors. It did not provide an equally summary remedy against the bank in case it should default.1
'The provisions of the bank process must not be confused with the pro- visions of the present bankruptcy act, under which all legal procedure look- ing toward judgment obtained by one creditor is voided. The provisions for insolvency were those of the common law. The act of insolvency then in force was that of 1756. Assignment did not void previous legal procedure begun by an individual creditor. Hence the bank process did not confer upon the banks any extraordinary exclusive powers as compared with other creditors. It simply accelerated legal procedure and avoided delay in case of an acknowledged debt.
PROVIDENCE INSTITUTION FOR SAVINGS.
(BEFORE RENOVATION. ) THE FIRST SAVINGS BANK ESTABLISHED IN THE STATE. NEAR THIS SPOT WAS THE GARRISON HOUSE OF WILLIAM FIELD DURING THE KING PHILIP'S WAR.
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In the second bank charter granted by the general assembly, that of the Bank of Rhode Island of Newport in 1795, "the process" con- tained no clause providing ten days of grace before judgment was granted. This more summary power was conferred on all subsequently chartered banks until 1818, and in 1807 the charter of the Providence Bank was amended to the same effect.
This law has been the subject of much criticism. It has, however, an historical setting and some economic relations, without an under- standing of which it has seemed strange to some and exceedingly un- just to others. Its setting and relations were as follows: The spirit which prompted the founding of the Providence Bank was voiced in the letter of John Brown to his brother, Moses, already quoted. It was not an institution for private aggrandizement, although the inter- ests of "the proprietors" was always guarded-and properly so; its stock was not monopolized by a few, but was distributed in small lots among all the members of the community. Twenty years after it was founded its stockholders exceeded 140 in number. The largest indi- vidual stockholder, Thomas L. Halsey, had only 69 shares. Nicholas Brown and Thomas P. Ives held 65 shares each. Welcome Arnold, 58 shares, and besides these there were no large individual holdings. A very great number held from one to five shares, and the list contained the names of "ten charitable societies and fifty-one widows, orphans and fatherless children". At practically the same time that this condition prevailed in the Providence Bank other banks were organ- ized with $200,000 of capital, owned by only four stockholders and represented largely by speculative promises to pay in the form of stock notes. Thus from the point of view of the investor the incor- porators of the Providence Bank were to a predominant degree the trustees of the interests of the community. But their trusteeship had a much broader scope than this-a scope arising from the then preva- lent notions of the functions of banking.
In the face of their bitter experience the leading men in Rhode Island had not entirely escaped from the "currency" hercsies of the period. Even so acute a mind as Hamilton's stumbled on this point. The preamble of the bank announced one of the objects to be the in- crease of "the medium of trade". It was implicitly believed that in every community there is a demand for a certain amount of represent- ative money medium, which will pass from hand to hand at par with coin, and will not be presented for redemption if the credit of the issuers is good. Said a writer in the Providence Gazette in 1784, "Nothing is necessary to make this representative of money supply the place of specie but the credit of that office or company who delivers it; which credit consists in its always being ready to turn it into specie whenever required". "It is not necessary that the bank should
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always have a fund sufficient to discharge all its notes at one time, it being enough if it is capable of answering any demand and paying all notes as soon as presented". The writer calculated that notes equal in amount to twice the capital might safely be issued, "though this depends much upon the nature of the business the notes are to be employed in".1 This was a clear statement of the prevailing thought. It was the currency principle in contrast with the banking principle. It maintained that in connection with the demand of the community for representative money, a certain amount of paper may be issued by a banking corporation, that the amount is not limited by the quick assets of the bank in the form of specie, nor even by its contingent assets in the form of capital ; but that somehow and somewhere in the corporate personalty of a bank is an intangible something called credit, upon which a currency medium may safely be based. When a few years later the excessive issues of paper notes by the banks in one or two instances destroyed their convertibility, the legislators sought the remedy, not in a reduction of the amount of notes issued nor in an increase of the specie reserve of the banks, but in an increase of the intangible credit basis of the notes represented by increased liability of both directors and other stockholders. Later note issues were limited to a certain proportion of the paid-up capital, but no laws of the state ever fixed the amount of the bills issuable by the amount of quick assets or specie on hand. Something of the same thought had been expressed in the general public condemnation of those who had at earlier times presented bills of credit to their issuers for redemption in specie. We now know that these ideas arose partly from custom and tradition and partly from a real scarcity of money media, but their fundamental fault lay in mistaking a want of capital for a want of money media. What they needed most was circulating capital. They thought they wanted a means of making goods circulate more readily, that thus consumer and producer would be brought closer together ; that trade and commerce would be stimulated and, if prices rose somewhat, such a rise would indicate simply a normally increased demand for both products and labor-which demand had not before been normal because of the absence of money media. They did not know that, aided by the forces of nature, capital or wealth can only increase by the action of mind and muscle upon matter. The effective demand for goods comes from a supply of other goods and cannot be created by such money media as are mere counters in a game that in its last analysis is simple barter. Plentifulness of money media was believed to be equivalent to increased activity of it, and to a greater ease in getting it. The same thought has constantly reappeared in our monetary history from that day to this. Their idea, therefore, that
1Gazette, 2-20, 1784.
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there is a demand in the community for representative money media beyond the ability of existing capital to supply, when aided by dis- count banking, was erroneous, as was also the notion that such a neees- sary exeess of money media could be supplied by an intangible and then little understood faetor called credit.
But if there was a fundamental error in their thinking there was also a fundamental truth in it. There is a demand for a representa- tive money media in every community, but it ean be adequately sup- plied by the processes of discount banking and by the eonversion of wealth into the money forms of capital. The difference between a eireulating medium based on the banking prineiple, and a eireulating medium based on the curreney principle, lies not simply in the faet that the one is based on existing eapital, while the other is based on intangible credit, but in the fact that the eirculation of the former eurreney is constantly ebbing and flowing and may at times be all redeemed and entirely disappear, while the latter is a permanently eireulating fund, which is not expected to be redeemed.
The Providence Bank then, in 1791, was to supply a circulating medium to a community believing in the curreney principle. Some of the cireulation was to be convertible and was to be converted from time to time. Some of it was to be convertible but was not to be converted. The determination of the amount that would not be redeemed was the unknown factor in the problem, and it was the dan- gerous faetor. If the promotors of the bank were to furnish a medium that would always be maintained at par with eoin, such factors must be eliminated as far as possible. If the bank was to aet as trustee for the interests of the community in furnishing it a medium as good as real money, it was not too much to ask that the community itself should stand sponsor for the integrity of its individual members. The quick assets of the bank would not suffice to redeem all of the issues at one time. The contingent assets must be brought as near as possible to the condition of quick assets. The bank proeess, by avoiding legal delay on an acknowledged debt, converted all overdue paper into a quiek asset, and the principle of a thirty day diseount eliminated the delays incident to realizing on long time or accommodation paper. The public demanded that the bank notes should be redeemable in eash on demand, the bank in return asked that the publie pay eash on demand to it on its matured notes. Strict punctuality on part of the one could only be maintained by strict punetuality on part of the other. The "bank process" enabled the bank to enforee that pune- tuality upon others which others demanded of it.
It was therefore a device to insure the convertibility of the large issues which the community demanded. It stamps the originators of it and the founders of the Providence Bank as men eapable of adapt-
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ing their institution to its peculiar environment. It marks them as resourceful and as remarkable in banking management as they seem to have been in their other enterprises. They discovered that any system of credit is absolutely impossible without the efficient co-opera- tion of a sovereign government. The bank process provided for this co-operation. It was a new device in the then state of finance and it was effectual.
They did not overlook other means toward the same end. The pay- ment of three-fifths of the value of the stock in United States bonds, and the retention of the bonds for many years in the vaults, were also a part of a plan to maintain a reserve in a form that had both earning power and convertibility. In 1800 wlien, owing to political or other causes, an unusual demand was made on the specie reserve, John Brown, then a member of congress, sent a draft on the United States Treasury for $13,699 in coin to the bank. He ordered $10,000 of the United States bonds to be sold and $20,000 of specie loans to be called in.1
It has been assumed that the bank process was unnecessary, but it is the part of wisdom to forefend necessity by providing for it, and it is not improbable that the lack of apparent necessity for the exercise of the process at first was caused by the fact of its existence. It has also been claimed that it was unjust. But conditions were peculiar. The debtor classes had been taught by cighty years of paper money issues that an evasion of debts was to be made casy; that scaling them was the natural order of things. Within two years the state legislature itself had repudiated fourteen-fifteenths of all its obligations by re- deeming them at a rate of 15 to 1. The sense of honor and of moral obligation of the community had been dulled, not only by the direct acts of the assembly, but by repeated laws for easing debtors and a general system of judicial procedure that approached closely to a travesty on justice and seriously threatened the inviolability of con- tract. Many had become accustomed to do as they pleased in financial matters and lawful restraint to them was synonymous with despotism. Those versed in the political and social history of Rhode Island and the attitude of the people toward the federal constitution will easily understand that the state was a hotbed of such as not only opposed a centralized government, but suffering from debt, poverty and genera- tions of laxity in business matters, opposed it because it stood for that very punctuality of payment and inviolability of written agreement which was foreign to their loose ideas of freedom. Some of them had forgotten that Rhode Island commerce had been threatened with ruin by a continuation of depreciated paper issues in 1751 and that only when, at about the close of the Seven Years' War, all money was kept
1Moses Brown Papers, Dec. 15, 1800.
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at par with silver and moncy contracts had a tangible value, the state regained some of its former trade and entered upon the few years of its greatest business prosperity during the colonial era. The great majority of the people knew no way of paying one obligation but by creating another. They had used the state issue of paper money in 1786 for that purpose, and they were ready to toss up their caps in praise of an incorporated private bank that would aid them in the same way. They did not know that in any community based on the principle of private property the getting out of debt is just as necessary as getting into it. The Browns and their associates did. The bank process was devised to meet this state of habitual negligence in mercantile matters. It simply compelled such men to be punctually honest. Naturally they did not like it.
In some instances it may have worked hardship, but the misfortune of a single individual was by no means comparable to the hardships which might have been entailed upon the whole community by an irredeemable currency. It is seldom an injustice to require a man to keep his agreement. The injustice at that time lay not in the bank process as in the prevalent notion that the bank as a creator of money was a creator of wealth in which all wanted to participate. Few men knew how to use capital; fewer how to use credit. The system of issues of currency a few years later made the obtaining of credit easy. It was to blame for fostering imprudence, not the bank process for insisting that imprudence should reap its just punishment. There is no evidence that the bank process was abused or that numerous cases of hardship resulted from it. On the contrary, the banks fre- quently carried accommodation loans by renewal for many years, rather than distress a borrower.
The law also had its political relations. The peculiar individualism of the state which limited legislative action to a narrow field was illus- trated in all the bank charters. The result was a remarkable absence of any degree of state control or supervision. The state as such never subscribed for bank stocks (it bought some bank stocks for the perma- nent school fund), as was the case with other New England states. No reports were required of the banks for many years. No limitations were placed upon their issues of notes and no bank charter was ever granted for a specific term of years. All were unlimited as to time.1 In every respect the corporations were subject only to individual direc- tion and management. This absence of restrictions was normal to the inherited customs of the people, but it placed a very great degree of responsibility upon the directors of the first few banks. They could not shield themselves by a technical conformity to restrictive
'Only one charter was amended so as to give it a limited life of thirty years, that of the Bristol Commercial Bank, June, 1811. The amendment was soon repealed.
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law. The bank process, however, cnabled them to shift some of their responsibility to the community, to which they were furnishing both a cheap money medium and liberal loans.
Such was the bank process in its origin. The false notions of cur- rency, the demands of the community that the bank should issue it in liberal quantities, the trusteeship for the community's interest in maintaining it at par-all were parts of a system in which the bank process had a proper and necessary place. About 1810, when banks ceased to be trustees for the business interests of the community, when circulation was no longer issued to meet the needs of the community, but for the sole purpose of speculation and gain of a few stockholders -then the bank process became an anomaly, but some years passed before, in 1818, owing to these facts and to the business distress then prevalent, it was modified.
The Providence Bank acted also as a bank of deposit, but rather as a safe deposit vault than according to the modern deposit system. Discounting seems largely to have been done by means of cash pay- inents of bills and coin, or by a check on some other distant bank, rather than by a credit of the proceeds to the account of the borrower.
With these functions and powers the Providence Bank opened its doors for business October 10, 1791, "on the south side of the new paved street commonly known by the name of Governor Hopkins's lanc". In two small rooms on the main floor of the building still standing, this noteworthy institution transacted its affairs more than ten years. From the ceiling of the back room project two huge cye bolts, to which were attached the pulleys for raising from and lower- ing into the cellar underneath, the chests of silver and gold. The only entrance to the cellar-vault was closed at the end of the business day by a trap-door, and there is a tradition that in a chair placed upon it the bank watchman sat from sunset until bank hours in the morning.
Four years after the Providence Bank was organized the Bank of Rhode Island was chartered with $100,000 capital and authority to increase it to $500,000. In 1800 the Washington Bank of Westerly, and the Bristol Bank of Bristol, were chartered with $50,000 and $80,000 capital respectively, and authorized capital of $150,000 and $300,000, and by 1809 the legislature had chartered fourteen banks with capital of $1,535,000 and authority to increase to $5,000,000. The state population was at that time 75,000 and the actual banking capital exceeded $20 per capita.
Banking facilities so ample were of course not wholly an outgrowth of the commercial and agricultural business needs. Here, even more than elsewhere, the political and scetional influences early played an important part in the establishment of banks. Scarcely had the Providence and Newport banks been started when the agricultural
-
THE FIRST OFFICE OF THE PROVIDENCE BANK.
IN TWO ROOMS ON THE SECOND FLOOR OF THIS HOUSE THE PROVIDENCE BANK WAS ESTABLISHED IN 1791. THE STREET UPON WHICH IT STANDS WAS FOR MANY YEARS SUBSEQUENTLY CALLED "BANK LANE." THE ORIGINAL NAME OF HOPKINS STREET WAS RESTORED AFTER THE BANK WAS MOVED TO SOUTH MAIN STREET.
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interests began to demand banking favors of the general assembly. Said the incorporators of the Washington Bank, in June, 1800, "con- sidering that those banks, which are at present established in this state, are too remote or too confined in their operations to diffuse their bene- fits so generally to the country as could be wished; considering the embarrassments into which a farmer is frequently drove for the want of means of stocking his farm at those seasons of the year when money is obtained with the greatest difficulty; considering that in a place particularly fitted by nature to encourage the industry and ingenuity of the mechanic by holding out the sure prospect of a suitable return for his enterprise, nothing is wanting but those little assistances from time to time which banks only can give"-now therefore, etc. Two- thirds of the directors of the bank and the president were required to be residents of Washington county.
The preamble of the Rhode Island Union Bank of 1804 assumed that "a bank in which the agricultural and mercantile interests should be united would be productive of the most beneficial advantages to a state like ours, where those interests are so blended and dependent on each other. In the establishment of banks heretofore the interests of the farmer have not been sufficiently consulted and the pledge of his real estate, the best security in his power to give, is not accepted". The charter prohibited the bank from owning ships or vessels or being directly or indirectly concerned in trading and selling goods, except such as came to it by way of pledge.
Rhode Island bank charters did not, as those of some other states, set aside a specific portion of the capital to be loaned on land security, but the assumed antagonism of interest voiced in the preambles just quoted was repeated in ever broadening circles throughout the country for many years. The balance of trade so to speak, between the farm- ing and commercial sections was more adverse to the former in this state than in many others, because of the poverty of the soil. The disadvantageous situation of the farming population, here illustrated in miniature, had its complete analogue a few years later in the relation between New England as the center of manufacturing and the middle west as the center of agriculture. As the farming section of Rhode Island complained of the towns, as commercial centers to which money media gravitated, so later the middle states and the west complained of New England as the point to which specie was always flowing. As population spread westward other states in turn tried the same bank- ing experiments which had earlier failed in the eastern states; those experiments were always, under different forms, attempts to adopt a banking system to the farmers' needs. The attempt to issue circula- tion in liberal quantities on the mere credit of the issuer, and redeem- able on demand in coin, and at the same time to make loans on farming
18-3
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lands renewable for many years, was to attempt the impossible. The farmer needed loans for a series of years, and such loans being practi- cally permanent investments, were entirely ineompatible with the issue of money media convertible on demand. The absence of any effort on part of the early banks to accumulate a surplus aggravated the inher- ent difficulties of management. It is not surprising, therefore, that the Washington Bank was eompelled at times to suspend dividends and replenish its "impaired capital."
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