USA > Rhode Island > Providence County > Providence > State of Rhode Island and Providence Plantations at the end of the century : a history, Volume 3 > Part 30
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The commercial banks, however, here had little superiority over the agricultural banks with regard to the length of time which their paper might run. Despite the thirty day clause in the rules of the Provi- dence Bank, it could not but happen that a very large portion of its discounts and those of the other banks would be renewed again and again. There were long periods intervening between the beginning and the end of the voyages of the vessels belonging in Rhode Island- and its trade was almost wholly on the seas. Thus the discounts of the merchants approached very closely to long-time aeeommodation paper. The complaints of the farmers at this discrimination against them were, therefore, probably well founded.
Banks formed for the benefit of the agricultural interests, if man- aged properly, might have accomplished some of the ends for which they were organized. Aeeording to their preambles, at least, their object was the best interests of the community. Many banks, how- ever, were chartered without preambles, and the reason for their existence was neither the benefit of the state nor that of the commu- nity. Some of them were purely personal institutions, organized part- ly, at least, as adjunets to other lines of business or for political reasons.
The business most elosely associated with early banking was that of insurance. For many years at first it was largely eoneerned with marine risks, and as the towns of Providence, Newport, Warren and Bristol were all engaged in the shipping industry, and the voyages were in many cases two years in length and involved valuable cargoes, the business was very profitable, though hazardous. Partly from its hazardous character it was necessary that the insurance com- panies should have large capitals. Sueh eapital, however, was merely nominal in most cases, and like that of many of the banks organized soon afterward, was represented by stoek notes payable in installments at various intervals. The insurance companies seem to have had no offices and the banks aeted as their fiscal agents. In case losses necessitated, the stock notes were diseounted by the banks, and a bank became a very neees- sary adjunet to the insurance companies, which had no quiek assets, but were liable to be ealled upon for a large amount of money at any time.
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The business relation between the banks and insurance companies was close in other respects also. The marine risks which the insurance companies carried were large and, as is the custom to-day, the pre- miums were not usually paid by cash, but by notes. These notes were discounted at the banks also, and seem to have been considered a very valuable line of paper. They were long time notes, but not as long as the time of the voyage, and in order to insure the collection, as well as the stock notes of the stockholders, the power of the bank process was granted directly to some of the insurance companies.1 In other cases, it was provided that where the bank acted merely as a collector for an insurance company, it could enforce the powers of the bank process with regard to such paper .? To such uses was the bank pro- cess thus early diverted.
In some cases the profits of the insurance companies began to reach considerable sums, and the money was invested largely in bank stocks. In some cases the insurance companies as corporations seem to have given their corporate notes for stock in banks just as individuals did. Thus the relation between them, which usually first arose because the same men were interested in both kinds of corporations, became an interest of mutual corporate ownership and of profit.
Thus we find the Providence Insurance Company, chartered in 1799,3 bought stock in the Providence Bank. In 1814 it owned 150 shares and was the largest single stockholder of the bank.4 The New- port Bank of Newport was incorporated in 1803. By the terms of its charter its president and directors were authorized to organize the Rhode Island Insurance Company, and the latter was to subscribe for one thousand shares of the bank's stock. As the par value of the bank stock was $60, and the amount of it was $120,000, this subscription amounted to one-half of the total issue of bank stock. The Washing- ton Insurance Company of Providence was chartered in 1800. It seems to have been a competitive institution to the Providence Insur- ance Company and to have been managed by a coterie not altogether friendly to the Browns. Thus far the Providence Bank had had the local field alone. Now, in connection with the Washington Insurance Company, a project for a new bank, the Exchange, was brought for- ward. Brown offered to let the Washington Insurance Company into the Providence Bank on the same terms that the Providence Insurance Company had subscribed, and its promoters were offered the privileges
1Warren Insurance Company. Acts and Resolves, Feb., 1802.
2Charter of Newport Bank, Oct., 1803.
3The charter of the North American Insurance Company of Philadelphia in 1798 was the first charter in the United States.
$It is interesting to note in connection with the Providence Insurance Company, of which the Browns were the leading spirits, that soon after its organization it was voted to take no risks on vessels directly or indirectly engaged in the slave trade.
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of the existing bank. These offers were refused, and the opposition to the new bank was then vigorously maintained in public by the friends of the old bank. Brown wrote to his brother that he feared the evil results of such a multiplex grant of bank charters. He thought "that all the neighboring states will at once put a prohibition, by general consent or otherwise, against any and all bank paper of our state". A reduction of circulation would follow, and small dividends would result. "Thus", said he, "reduced to small business, there may be found among some of the managers such frauds and inaccuracies as to stamp a curse on the whole banks of the state". His brother, Moses, wrote an argument to show that one bank could safely circulate "as much or more bank paper" than two. This argument John approved, but with regard to the personal feeling, which seems to have been engendered by the incident, he said, "though we ought to be careful to give no just offence in threatening to call in all our moncys due from the gentlemen who promote the new bank, it will of course take place". He had made an agreement with Judge Bourn, the promoter of the Bristol Bank the year before, that it should join forces with the Providence and the other existing banks against any new bank corpo- rations. The arrangement did not avail, however, and the opposition failed to hinder the issue of a charter to the Exchange Bank in Feb- ruary, 1801. Perhaps as the Browns and their friends were feder- alists, the republican tone of the state government at the time was not favorable to them.
The charter of the Exchange Bank provided for 4,000 shares par value of $50 cach, and the Washington Insurance Company was au- thorized to subscribe for 1,100 shares. The Bristol Insurance Com- pany was organized in February, 1800; the Bristol Bank, in June of the same year. There was a Warren Insurance Company and a War- ren Bank. Within the period 1799-1807 ten insurance companies were organized in the four seaport towns of the state and nine of them engaged in active business. In the same towns there were nine banks and the insurance companies, so far as observed, owned stock in most of them. A similar relation between the Merchants Insurance Com- pany and the Bank of Commerce, both of Providence, illustrated these facts as late as 1851. It is significant that the first restrictive law as to corporations, passed in 1809, was called a law regarding the "pro- cess against banks and insurance companies."
In the organization of the Roger Williams Bank, chartered in 1803, politics seemed to have had some part. Previous to that time the United States deposits had been carried in the Providence Bank. In 1803 Jefferson wrote to Secretary Gallatin, "as to the patronage of the republican bank in Providence, I am decidedly in favor of making all the banks republican by sharing deposits amongst them in proportion
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to the dispositions they show".1 The Roger Williams Bank soon began to get the public deposits and continued to hold them until the second United States Bank established a branch in Providence in 1817. The Bristol Bank carried the government deposits in Bristol; the Newport Bank in Newport. These three were the only banks in Rhode Island which purchased United States bonds during the war of 1812. Their political affiliations were thus apparent.
The charters granted to the banks beginning in 1800 contain slight but important modifications when compared with the charter of the Providence Bank, such modifications applying chiefly to the terms of payment for the stock. Not infrequently in the case of country banks the requirement that the stock be partly or in whole paid for in specie was omitted. The number of installments upon which payment might be deferred by the directors was increased; in some cases three out of seven were thus deferred. The payments for the stock of the Exchange Bank of Providence extended from February, 1801, to October, 1802, but by an amendment, adopted in October, 1801, the directors were permitted to extend the payment of any or all subsequent installments. The installments of the Farmer's Exchange Bank of Glocester were seven in number. A cash deposit of $1 per share was required with the subscription, and the remaining payments were extended over three years from February, 1804, to March, 1807.
Other modifications in the charters affected the powers of stock- holders and directors. No shareholder in the Newport Bank (char- tered 1803) could transfer his stock while indebted to the bank, and if a stockholder's obligation was not paid at maturity, the directors were authorized to summarily dispose of enough of his stock to cover the bank's claim. Not long afterward it became customary to insert a clause in all charters pledging stockholder's stock for their debts to the bank. The Rhode Island Union (chartered in 1804) was the first bank in which the voting power of the stockholders was equivalent to the number of shares held, and though in most previous charters it had been provided that stockholders' meetings could be held only annually, unless called at other times by the directors, in the Rhode Island Union such meetings must be called on the request of the holders of 300 shares. In the Narragansett Bank of Wickford, char- tered 1805, holders of 200 shares had the power to order a stockhold- ers' meeting. The Smithfield Union Bank charter, 1805, provided that directors must own at least five shares, while in the Rhode Island Central Bank of East Greenwich, directors were required to hold twenty shares. The directors of the Bristol Commercial Bank (char- tered 1809), and others chartered at about the same time, could not hold directorships in other banks.
1Gallatin's Works i, 129, July 12, 1803.
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These restrictive provisions in the charters tell the story of praetiees then beginning to be prevalent. It did not follow, however, that be- eause charters contained certain elauses, those clauses were generally obeyed. In banking, as in other lines of business, in the absence of rigid state supervision honesty of management and suecess as well depend wholly upon the character of the managers. The most unique illustration of the limits to which bank frauds could be carried was that of the Farmer's Exchange Bank of Glocester.
The origin of these frauds was not wholly local. The profits of banking during the first few years of the century eaused the issue of a large crop of charters, especially in Massachusetts, Maine and New Hampshire, between 1800 and 1810. The notes of these banks flowed into Boston as to a elearing house. They quickly fell below par and displaced the issues of the Boston banks in all local transactions be- tween individuals. Money brokers began to deal in them, eharging one-fourth per cent. for exchanges. In 1804 the Boston Exchange Office was incorporated and devoted its attention to the business of exchanging money. About the same time the brokers began to send the excessive issues of the country banks home to be redeemed. The less aeeessible the home bank, the more costly was the process of re- demption to the brokers. Henee speeulators began to charter banks in the most remote and out-of-the-way places of Maine and New Hamp- shire. The chief of these swindlers was Andrew Dexter, Jr. He bought up the stoek of the Boston Exchange Office and of several cross-road banks. Among them was the Farmer's Exchange Bank of Rhode Island. This was in 1808. In March, 1809, "the funeral of the Farmer's Exchange Bank" was "on its way to the general assem- bly in East Greenwich".1
A committee of investigation had been appointed in February and a report was rendered at the Mareh session of the assembly. The legislative halls were crowded with speetators who listened to a story that surpassed their strangest dreams. The committee stated that from the day of the issue of the charter the direetors as a whole had no proper knowledge of the affairs of the bank. Some of the stockholders had no notice of the suspension of payment of the last installment for their stock, and thus paid for their holdings in full in eash. The direetors paid no money whatever. They paid their first installment in specie, but soon afterward took an equal amount of notes, for which they gave no receipt. For part of the first five installments they gave personal notes without indorsers, and for the last two installments they gave nothing. They held 103 shares each. Instead of a sub- seription for 2,000 shares, as required by the eharter, the bank started with only 661 shares subscribed. The paid-in eapital at the outset was
1R. I. American, March, 1809.
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$11,806.61. The installment which the directors withdrew left the bank with an actual cash capital of $3,081.11. In 1805 the directors voted themselves $200 each in bills. They took other bills of the bank into the neighboring states and bought corn and other products with them, making no return whatever to the bank. In February, 1808, they voted to divide the whole assets of the bank among themselves, but they did not carry out the plan. In the following month, how- ever, they bought of sundry stockholders 450 shares and paid for them with the assets of the bank, largely by means of notes of the stock- holders themselves, which had been given to the bank for money bor- rowed and were at this time returned to them. The institution was then ripe for Mr. Dexter. During the year the directors sold out to him or to his agents and themselves received pay from the remaining assets of the bank. The amount of their purchase money was $1,300 each. Dexter paid for the whole bank $3,784.95. The directors had already by vote turned over to him the plates on which the bills of the bank were printed. He had bills printed and sent to the cashier, who was ordered to sign them at night and return them secretly and as rapidly as possible. The cashier obeyed this order. Dexter had at the same time a bank in Berkshire. The bills of the Farmer's Ex- change Bank were paid out over the counters of the Berkshire bank, and those of the Berkshire Bank over the counters of the Farmer's Exchange Bank. As the bills of both banks were redeemable in specic, both banks were thus "specie paying". Dexter had banks all over the country, and among the bills paid out by the Farmer's Exchange Bank were some of the Marietta Bank of Ohio. He borrowed from the bank at various times, in some instances giving notes payable in eight years and in others giving notes of which the following is a copy: "I, An- drew Dexter, Jr., do promise the president, directors and company of the Farmer's Exchange Bank to pay them --- dollars, two years from date with interest at 2 per cent. per annum, it being, however, understood that said Dexter shall not be called upon to make pay- ment until he thinks proper, he being the principal stockholder and best knowing when it will be proper to pay the same". Dexter bor- rowed in all $845,771. The bank, largely through him, had issued $644,843 of currency, of which about $580,000 were still outstanding when the committee made its report. The total assets of the bank consisted of $86.48 in specie. The general assembly had attended the funeral, but there was not even a corpse left to bury. "Such a scene of dishonesty, dissimulation, turpitude and everything that is iniqui- tous", said the American, "was never, we believe, before exhibited to an astonished public".1 A letter to Mathew Carey from Boston said, "It is impossible for us to picture the ruin and distress that followed,
1March 24, 1809.
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the effects of which are still remaining. It is said, and we presume correctly, that in one county of this state there were $100,000 of the bills of the Farmer's Exchange Bank in circulation at the time it failed, and probably in the state (Mass.) there were $400,000 or $500,000, all of which, after being bartered at various discounts, be- came a total loss to the last holder, which in most cases were the poorer and less informed parts of the community. There is no doubt that thousands of farmers will be ruined, and leave their families in pov- erty, in consequence of the facility with which they obtained moncy at the banks by mortgaging their estates".1 The directors escaped from the state and from punishment. The cashier suffered nothing worse than a few months' imprisonment. It was soon afterwards announced that "the bank is shut, probably never to be opened for a similar business. The sign is taken down, and the keys are in the vicinity".2
The case of the Farmer's Exchange Bank was exceptional. A few other instances of gross mismanagement will be noted from time to time, but no note holder or depositor of any other Rhode Island bank ever lost a dollar until after the Rebellion, except during the general suspension of specie payments in 1837-38, and in 1857-58. The whole losses in every case fell on the stockholder, and as in most instances such stock had been fraudulently secured and fraudulently paid for, the result was justice rather than injustice. The Rhode Island banks which were managed and controlled by local interests did not adopt to a great extent the plan elsewhere common of issuing large sums of bills and sending them into other distant states for use by their specially appointed agents. The practice so far as it pre- vailed was almost wholly confined to banks owned by parties outside the state. Outside banks, however, had agents here. The Detroit Bank had an office of discount and deposit in Providence,3 and when it became bankrupt some of the bills were in local circulation. About $200,000 of the notes of the Eagle Bank of Connecticut were in circu- lation in Rhode Island when it failed. Rhode Island suffered not so much from the depreciation of notes issued by local banks as by the notes of banks outside the state. The sellers of lottery tickets became money changers, and the association of the two lines of business had a large degree of fitness.
In 1805 the issue of notes by private parties intended for circula- tion was forbidden. At the same session at which the report on the Farmer's Exchange Bank was presented the legislature, with that post mortem sagacity which had not infrequently characterized its doings, passed a law defining and regulating the "process against
1History of Banking in all the Leading Nations, i, 38.
2American, March, 1809.
8Gazette, March, 1809.
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banks and insurance companies". Directors were made personally liable for all the debts of the bank after the property of the corpora- tion had been exhausted, and such liability was enforceable by writ of scire facias. The amount of debts of a bank on a bond, bill, note or other contract, was limited to the capital stock plus the deposits.1 Under this provision the circulation could not exceed the amount of the capital stock plus the deposits. No bank was to issue a bill or note for a less sum than $50, payable out of the state, and no individual was allowed to pass a bill under $5, issued by a bank outside the state. Returns were required of the banks of their condition on some one of the ten days preceding October 3rd, of each year.
These returns made on a day selected by the banks themselves, and fixed within certain limits for a year in advance, were of course no criterion of the banks' condition, but the system was continued, with some modification of details, until 1836, when returns were to be made on a day set by the bank commissioners.
In October, 1809, thirteen of the banks made their first official report, and although they were on dress parade, some light is thrown on their methods. The full statistics will be found in the table ac- companying this chapter. The statement that with $434,800 bills in circulation, they had in their vaults $410,800 in specie, $79,000 of the bills of other banks and $88,200 deposited in other banks, thus show- ing cash assets of $143,000 in excess of their circulation, evidenced the misleading character of the statement at once. It would indicate that banks which were founded on circulation principle and with the avowed purpose of making profits from such issues, had abandoned their chief reason for existence, had in their vaults more circulating medium than they had issued, and were making their dividends solely from the loan of their capital and deposits. Four of the banks had more specie on hand than the amount of their notes issued. The Prov- idence Bank, for instance, with circulation of $64,800, liad $111,100 specie in its vault, $82,800 deposits and $438,400 of discounts. The Washington Bank had $36,400 bills out and only $6,600 in specie. It had $113 of deposits and $69,000 of discounts. These two banks are typical of the difference between the town and country institutions, and the statement of the latter was probably much more nearly the average condition of the banks with regard to specie and circulation. The proportion of one of specie to six of circulation was not at the time considered excessive. The Rhode Island Union Bank of Newport returned among its liabilities $630 sent to Philadelphia to be put in circulation. The $88,200 of deposits in other banks, reported at the same time, coupled with the thought expressed in the law of March
1The term debts here being used, as indeed was the case usually until 1850, to apply only to obligations due to the public in the form of deposits, circula- tion and small amounts sometimes borrowed from other banks or individuals.
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prohibiting the issue of notes of small denominations payable else- where, would indicate that it was not alone in this practice.
SECOND PERIOD-1809-1840.
The year 1809 marks the end of the period when the establishment of banks can be said to have been the result of a desire on part of their incorporators to promote the interests of the community.1 Bank charters were thereafter liberally granted for personal gain and were tossed back and forth through the two branches of the legislature on the plan of give and take. The second period of banking, lasting from 1809 to 1840, was marked by a gradual increase of supervision by the state, and various restrictive laws as to loans and issues of circulation and, by spasmodic and for brief periods, effective attempts to stop the wholesale issue of charters. Events of national importance had their effect in the local field. The affairs of the United States banks, the war of 1812, the embargo act, the tariff laws, the beginning of the Suffolk system of note redemption-all materially modified the charac- ter and extent of local banking.
It has been customary in writing banking history to treat New England as a whole and compare it with the western states, thus emphasizing only points of difference in the amount of circulation and methods of redemption. In such a treatment, however, much of the economic relation of certain important phases of banking in New England has failed to receive due consideration. A more complete separation of the New England states into groups will illustrate statistically fundamental points of difference. For this purpose the three northern states form one group; the three southern states form another group. A comparison of these two groups shows that in the southern tier of states, during the whole of the period from about 1810 to 1865, the circulation function of banking based on the circulation principle had given way to the circulation function based upon the banking principle. This condition manifests itself in the fact that in these states the amount of the capital stock in banks, and not the amount of their circulating notes, was the most distinguishing charac- teristic. It will be seen from the subjoined statistics that the propor- tion of their circulating notes to their capital stock was very small, when compared with the three northern states; and should a compari- son be made with the western states, the characteristic would even be more marked. It followed, of course, that the function of banking in discounting by means of capital, rather than by means of note issues, was also their distinguishing feature.
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