USA > Rhode Island > Providence County > Providence > State of Rhode Island and Providence Plantations at the end of the century : a history, Volume 3 > Part 31
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The following figures have been selected because of their availa- bility and not for any peculiarity due to a difference in dates. They
1Bank charters were inserted in the Digest of General Laws in 1798. In Connecticut they were incorporated in the General Laws as late as 1821.
283
PUBLIC AND PRIVATE FINANCE.
are typical of the whole period covered. The figures are given in millions and thousands only, 000 being omitted.
Capital.
Circulation.
Discounts.
Deposits.
Percentage
of Circulation
& to Capital.
New Hampshire
1831
2,000,
1,100,
Vermont
1834
920,
1,460,
1,900,
180,
159
Average.
88
Massachusetts
1820
10,600,
2,600,
13,500,
3,200,
25
Rhode Island.
1821
3,200,
675,
3,100,
460,
21
Connecticut
1834
6,800,
2,400,
8,300,
1,200,
35
Average.
32
1855.
Maine
7,300,
5,100,
12,700,
2,500,
70
New Hampshire.
4,400,
3,600,
8,000,
950,
82
Vermont
3,600,
3,700,
6,700,
800,
103
Average.
80
Massachusetts
58,600,
23,100,
99,500,
21,900,
39
Rhode Island.
18,700,
5,400,
26,400,
2,900,
29
Connecticut
17,100,
6,800,
23,700,
3,400,
40
Average.
37
Maine
1820
$1,600,
$1,400,
$ 2,900,
$ 270,
55
The facts here shown with regard to the three southern New England States are more particularly true of Rhode Island than the other two states, its percentage of circulation to capital having been four per cent. less than that of Massachusetts in 1821 and ten per cent. less in 1855. To the extent of its superiority in these respects is it true that Rhode Island banking was based more on real capital than any other state in the Union. The facts are the more remarkable, because the restrictive laws relating to circulation, while different in point of time of enactment in the New England states, were very similar in their provision ; because the Suffolk system of redemptions prevailed throughout all alike, and because precisely the same methods of paying for capital stock by means of stock notes were adopted everywhere. It is further true as regard the laws limiting the amount of a bank's indebtedness and its circulation, that they had little effect, because in none of these six states were the limits set by statute approached by the banks (except of course in a few cases of noteworthy mismanage- ment). From this fact we may also conclude that here the development of banking was to a large degree a normal adaptation of banks to the business needs of their respective communities. And finally, if we accept the fact that inflation was the most common characteristic of all banking at this time, it remains to be explained why the inflation
284
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
of Rhode Island andits two neighboring states to a nearly equal degree, expressed itself in the form of capital stock rather than in the form of note issues. This explanation will be found in local economic condi- tions, of which banking was but a part, and partly in the methods adopted among the banks themselves for restricting currency issues. We shall treat of the latter topic first.
In 1809, when the western state banks were suspending specie pay- ments, the "bank thermometer" of Rhode Island announced that the bills of all state banks were redeemable in specic except the Smithfield Union, which paid with checks at thirty days' sight on Boston, "with interest in advance". The circulation of the banks was not large in comparison with other states and when, owing to the expiration of its charter in 1811, the bills of the first United States Bank were with- drawn, local circulation was issued to take its place.1 The issues in- creased from $460,000 in 1811 to $770,000 in 1813. Circulation was increased in other states in even greater proportion. There was a great redundancy of bills in Boston. They depreciated from one per
cent. to five per cent. The Boston money changers reaped a harvest. The exchanges of bills reached $100,000 a day, and the annual cost to note holders was estimated at $120,000 in that city alone. The condi- tion paved the way for the action of the New England Bank of Boston, which advertised to receive bills at a discount equal to the cost of send- ing them home for redemption. The Rhode Island banks were accessi- ble, and under the influence of the redemption system, their issue decreased from $770,000 to $549,000 in one year. Thus, when in con- sequence of excessive issues, all the banks outside of New England suspended in August, 1814, the local banks had already reduced their circulation to such a point that not only was there no thought of sus- pension, but the circulation was increased $30,000, and this, although at the same time the specie holdings of the banks had decreased $80,000. The New England Bank system, which had reduced rates of discount on bills to about one per cent. from 1814 to 1818, was the cause of the inauguration of the Suffolk Bank System of redemptions in 1819. The Suffolk Bank offered to redeem the bills of any bank, charging therefor the same price which it paid, provided the bank would keep a permanent deposit of $5,000 with it. The deposit of $5,000 was not required of the banks of Providence and Newport, which already had accounts with the Suffolk, provided they would keep all their deposits with it and have money enough to redeem their bills at all times. The Merchants Bank of Providence became the satellite of the Suffolk and handled its Rhode Island business. It made arrangements with most of the state banks to redeem for them
'It was estimated that $24,000,000 of the $50,000,000 circulation in the country was of the United States bank notes.
285
PUBLIC AND PRIVATE FINANCE.
the bills of all other banks except those located in the same town. For this purpose it issued much of its circulation in the form of large bills from $100 to $1,000 and had an understanding, though not an agree- ment, with its associated banks that such bills, when received by the latter in course of their business, would be retained by them and would not be presented for redemption in specie, but only in payment for their own notes, which the Merchants had received from out of town banks for redemption. The Suffolk Bank soon improved upon its original system and agreed to receive at par from its allied banks all the bills of other banks in good standing, modifying at the same time the $5,000 deposit to suit the condition of each bank. The system was received with bitter denunciation by many of the country banks, as it compelled them to keep a larger specie reserve and at the same time reduced their circulation and the profits from it. The association of banks was derided as the "Holy Alliance". Some Rhode Island banks refused to join. They were the Cranston, Kent, Village, and the Fall River Union Banks. As the first three of these banks had, in 1819, a combined capital of $46,600, a circulation of $50,800, the reason for their opposition and that of many like them in other states was mani- fest. A few of the banks had been not only making high profits out of excessive issues of circulation, but they had also raped large gains by buying their own bills, through their agents, at a discount. Their most serious grievance, therefore, was that their paper was raised to par by the redemption system, and they were deprived of their profits on its depreciation.
The sub-system established by the Merchants Bank simplified the redemption of all bank bills by Rhode Island banks, but it had other additional merits over the Suffolk system. It covered a compact and easily accessible territory. Its refusal to receive from any bank the bills of other banks in the same town, left to each bank the care for its own circulation by frequent redemptions of the bills of its immediate local competitors, while it cared for the redemptions of the banks by groups in each town. Like the earliest government in Rhode Island, it provided for complete local autonomy of the banks while it managed their intertown relations. This development of the system was pecul- iar to Rhode Island. Within state limits it facilitated and accelerated redemptions to a degree nowhere else possible. Toward the close of the era of state banks, when nearly one hundred banks were issuing circulation varying from $3,500,000 to $5,300,000, the average local life of a bill did not exceed a fortnight.1 The rapidity of circulation and redemption rendered great inflation impossible. An ardent admirer of the Boston plan says that, starting almost without outside support,
'The author is indebted for this fact, as well as for many others of the great- est value relating to local banking, to George C. Noyes, Esq., for many years associated with the Globe Bank of Providence.
286
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
"assisted by no law, progressing tentatively as each necessity prompted the invention of new means to meet it", the Suffolk Bank evolved a system, "under which, to an extent never approached in its efficiency by any plan elsewhere created by law, the bank note eurrency of New England was made elastic, safe and ideally convenient and inexpensive in use".1 While such a statement may not be received without some limitations, it is nevertheless true that the system reecived its most perfect exemplification in Rhode Island. The bank process had been invented by the projectors of the Providence Bank to eompel improvi- dent individuals to be honest with the bank. The Suffolk system eom- pelled the banks to be honest with each other.
The snecessful operation of the system in the southern New England states as compared with their northern states was largely due to con- centration of the banking institutions in localities reached by easy means of communication, and the very contrast between it and the northern sections in the amount of eirculation which they kept out in proportion to their capital, though all were subjeet to the same general system, would indicate that without important modifieations the Suf- folk plan could not have been projected upon the whole United States. But within its sphere, however, it was an efficient mechanism, and because of it as a purely self-centered expedient and not because of restrietive laws, it was almost impossible for the banks of southern New England to keep in eirculation excessive issues of bills, and there- fore from eanses operating within the banks themselves, the issue of currency on the eirculation principle was impracticable. With a few such exceptions as have been noted of country banks, and they were not types of any importance, the banks of Rhode Island never issued circulation exceeding one-third and on the average not to exceed one- fifth of their nominal capital stock. Reealling the large profits of the business by means of which real eapital was quickly aeeumulated, it is probable that at no time did the note issues exeeed one-half the actual capital stock and at no time approached a condition where it could be said to have been issued on the simple credit of the issuer. In faet, the theory that the amount of circulation safely issuable is governed by the demand of the community, regardless of the assets of the issuer, though avowed by the community in 1791, was never put in praetiee by John Brown or any of his sueeessors in legitimate banking in the state.
While, therefore, the value of the Suffolk system as a check to swindlers may be acknowledged, the real reason for the small issues of circulation in Rhode Island and the large issues of capital stoek must be found in the character of the business which the banks performed. It has been noted that long time loans on land or accommodation loans
1Whitney. The Suffolk Bank.
287
PUBLIC AND PRIVATE FINANCE.
are incompatible with the issue of eireulation. It has also been ob- served that the commercial enterprises of the merchants and the long periods occupied by their sea ventures made their notes very similar to accommodation paper and that much of the paper discounted during the first fifteen years of chartered banking was of that nature. The men, therefore, who projeeted these banks had much more to gain by securing a large line of permanent or renewable discounts than by the issue of large amounts of bills, the redemption of which at any time might necessitate the paying of their loans. The actual payment by specie and bonds for the stoek of the Providenee Bank and others at first formed gave the directors the real eapital with which to make such loans.
The embargo of 1807, the war of 1812, and the tariff aet of 1816 laid the foundation of New England manufactures, and they succceded to the eoimmeree which had been ruined by the embargo. While the consumption of eotton was 10,000 bales in 1810, it was 90,000 bales in 1815. In 1816 the value of cotton goods manufactured within a eircle of thirty miles surrounding Providenee was $3,500,000; about one- fourth of the total consumption of cotton, or 25,000 bales, found a market here. New England, and especially Rhode Island, was manu- facturing for the whole country. Speeie flowed here and the west was drained. In New York exchange on Boston was uniformly at a pre- mium. In 1813 it was one-half per eent., and by January, 1815, it had reached 23 per eent. It fell in 1816 to one and one-half per eent.1 When the Southern Bank of Baltimore, followed by the banks of Phila- delphia and New York, suspended in 1814, they were debtors to the manufacturers of Providence and the territory immediately surround- ing it to the extent of $1,000,000. Owing to the depreciation of their bills and their refusal to pay interest on their obligations, on which payment was deferred, the manufacturers of New England were com- pelled to accept a loss of from 10 per cent. to 15 per cent. on the moneys due them,2 and although for the time being the loss hampered loeal industry, the enormous profits of from $1 to $8 a yard on woolen goods and almost proportional profits on eotton soon reeouped the losses.
For a community thus industrially situated fietitious circulation had no advantage. Real eapital was necessary, and though it was rapidly being created, the manufacturers took advantage of every opportunity to borrow in other markets. The banks in southern Massachusetts and eastern Connectieut were heavy loaners to Providence merchants. When in 1816 the projeet of a United States bank was again broached as a regulator of the eurreney, and the eireulation banks throughout
1United States Treasury Report, 1818.
2R. I. Hist. Society Mss. "Banks."
288
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
the country were opposing it, Providence manufacturers and bankers requested that a branch might be established here.1 The first signa- tures to the request were those of the Browns and their associates. A branch was desired for the facilities which it would offer for dis- eount. It was established in 1817 and Phillip Allen, then elosely asso- eiated with the interests of the Browns, was selected as its president. In September, 1819, it had loeal discounts amounting to $374,000, but
SOUTH
LARKET
OFFICE OF THE SECOND UNITED STATES BANK
The Providence branch of the Second United States Bank was in this building, at number 23 and subsequently at number 25 South Main St. This was the favorite busi- ness street and in 1840 the American, the Globe, the Blackstone Canal and the Mechanics Banks were located in this and the adjoining building.
although it had in its vaults $225,000 of its own notes, the amount of them which it had sueeeeded in getting into eireulation was only $38,300.2
The length of time required for these loans is scarcely now eompre- hensible. This process is thus quaintly but clearly described by an aetive participator in it. The "merchandise being sold on eredit of
1Moses Brown Papers, Oct., 1816.
2United States Treasury Report,¿1819.
289
PUBLIC AND PRIVATE FINANCE.
from four to six months, chiefly tlic latter, the notes which the con- signecs receive for it, when sold, must be discounted at the banks to meet the drafts of the shippers, payable at sight, or at very short dates. And these notes again, such of them as are given for the raw materials for manufacturers, when they fall due, are taken up by further dis- counts of the drafts of the manufacturers on their distant agents, pay- able some months still later than the notes werc. It is this great length of time between the advances made by the banks, for which specie is required in all periods of pressure, and the return of the money to them, that limits the aid they can afford in the transaction of business to less than one-half of what they might give if the notes and drafts discounted by them were payable in sixty days".1 The nature and character of its industry was such that Rhode Island like a sponge sucked up available banking capital from everywhere, and such were the rates of discount, reaching in times of stress as high as 24 per cent. and 36 per cent. and normally averaging 12 per cent., which the manu- facturers could afford to pay, that the profits on banking soon turned stock notes into real capital. Just as the banks were the necessary adjuncts of the insurance companies in the earlier years, so they were from this time forward necessary attendants of the growing manufac- turing industries of the state. If the large profits then received, the nature of the exchanges and discounts and the character of the local industrial organization are considered, it will be seen that, though nominal banking capital seemed to savor of inflation, banking in fact did not absorb more than its due proportion of the increase in real capital. In the absence of any deposit banking, in the present use of the term, and because of the unfitness of circulation banking, banking on capital stock was the only means by which industry could secure its necessary discount accommodation. On the other hand the very pros- perity of that industry kept the balance of trade in favor of New Eng- land and drew to Rhode Island banks, until 1850, an abundant stock of coin, which at no time fell below 40 per cent. of their circulation, and was usually much above that proportion.2
1Report on Banking Capital, 1826.
2It has been assumed that a large amount of capital from outside the state was invested in bank stock in Rhode Island because of its peculiarly liberal banking laws. There are now few available evidences of such investments. In so far as the practice is known to have prevailed it was almost wholly confined to a few of the "circulation" banks of the country towns, the con- trol of which was sought for fraudulent purposes. The stock of the commer- cial and profitable banks was jealously guarded, for the obvious reason stated in the text; that they were the fiscal agents of the industrial corporations and were largely owned by the men whose enterprises they aided. The capital of Rhode Island banks, at least until 1850, was created by their earnings.
Nevertheless the liberality of Rhode Island banking laws was notorious. Connecticut bank charters were always subject to amendment or revocation; they usually contained clauses reserving to the state and charitable institu- tions the right to subscribe to bank stocks. The state distributed among its
19-3
290
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
The success of the banks led to their rapid increase from thirteen in 1809, with a capital of $1,535,000 and discounts of $2,000,000, to forty-four in 1826, with a capital of $5,570,800 and discounts of $6,217,800. So many charters were applied for in the latter year and the attendant circumstances were so suspicious that a committee was appointed to report on the question of the increase of banking capital in the state. A brief account of the laws and charter provisions to 1826 will aid in understanding their report.
The charter of the Union Bank, dated 1814, was the first to increase the stockholders' liability beyond the amount of his investment. By its terms stockholders were personally liable if the directors violated the bank process act of 1809. At the February session of the legisla- ture in 1818 the bank process act was amended in several particulars, but while the committee was considering the nature of the changes necessary, charters for ten banks were granted, cach containing the original form of the bank process power against its debtors. Two of the banks, the Merchants and Eagle, were to be located in Providence, but most of this batch of charters were granted to country towns and to incorporators who had no other purpose in view than to dispose of them for a good price, because they conveyed valuable privileges. At the October session of the same year two charters were issued whose history illustrates this fact. The New England Pacific Bank of Smithfield was not legally organized, and in 1820, some years after irregularities of its incorporators had voided the charter, it was sold to innocent parties outside the state. The sum paid for it was said to be $1,000. The legislature passed amendments to its charter in 1826, and the bank as the Pacific had a subsequent honorable career. The Burrillville Bank was chartered at the same time. New York parties, in collusion with one of its directors, attempted and nearly succeeded in getting control of it for "circulation" purposes, but the scheme was
banks a large portion of its receipts from the United States in payment of its revolutionary debts, and thus also acquired direct interest in its banks, and they were subject to rigid inspection in consequence in 1803. It taxed them on their capital and charged a large bonus on incorporation. Massa. chusetts also began a system of strict state supervision in 1803. Its banks were prohibited from engaging in commerce and trade. The charters re- served to the state the right to tax them and to increase their taxes. These taxes early (viz. : 1814) were one-half per cent. on the capital stock and a large bonus. Their circulation was limited at about the same time to 50 per cent. of their capital, and a little later the loans to directors were limited to 30 per cent. of the capital, while in 1809 a penalty of two per cent. was imposed on banks for failure to redeem bills on demand in specie. The charters were always terminable usually in twenty or thirty years. The charters of Rhode Island were perpetual. Until 1837 circulation could equal the capital. Taxes of one-twentieth per cent., first imposed in 1822, were increased to one-fourth per cent. in 1836 and one-third per cent. in 1855, but did not at any time exceed that sum. The Rhode Island banks had the bank process power, but a very similar power was enjoyed by the Vermont banks under a law of 1809.
291
PUBLIC AND PRIVATE FINANCE.
discovered and stopped in 1827. It was a typical country bank, show- ing in 1826 capital $31,400, circulation $27,800.
The amendments of 1818 to the bank process of 1809 affected mainly thic debtors of banks. The power of summary judgment and execu- tion, which had been granted to all banks by the terms of their char- ters, was repealed and the collection of the debts due them was con- fined to the regular legal processes, with the exception that while in the ordinary procedure a creditor had recourse first to the person of debtor, then to his personal cstate, and lastly to his real estate, banks were given power to at once attach the property of the debtor. This act had a suggestive history. It was passed at a time when the state was in the midst of an industrial depression, more severe than had been before experienced since the Revolution, and when, therefore, the summary execution of the original bank process power could have caused great injustice. These years were prolific in the discussion and passage of acts for the relief of insolvent debtors. The amend- ments to the bank process power may therefore have been partly the result of peculiar economic conditions. Moreover by this time there was a general sentiment among the stronger banks that the power was unnecessary and they were not unwilling to dispense with it.
In 1819 the Dartmouth College case was interpreted as cndowing a charter of incorporation with the character of contract. The inviolabil- ity of this constitutional right became the basis of court decisions re- lating to banks for many years. The original bank process power was a charter right, and the statute of 1818 repealing it was, therefore, of doubtful legality. This statute contained two clauses relating to this subject. One provided a new form of the bank process, and another repealed all then existing bank process powers. In the revision of the laws in 1822 there was a general act of repeal, and the bank process power, as defined in the law of 1818, was re-enacted, to continue in force until January 1, 1823. It was expressly provided that all char- ters theretofore granted should remain in full force. The revival of the original bank process power in 1823, therefore, seems to have been a concession to the then prevailing notion of the constitutional rights of contract, rather than the result of any effort to re-introduce this provision into actual practice. No charter subsequent to 1818 con- tained the original bank process power. In 1826, as we shall see, it was generally regretted that such a power had ever been granted to the banks. In 1836 another law was passed, repealing all special forms of process against the debtors of banks, and the lack of constitution- ality of such a statute was tacitly ignored in the universal desire to repeal the obnoxious charter right. We may, therefore, conclude that its continuance in nominal force from 1823 to 1836 was the result of the then strong sentiment in favor of upholding every vestige of constitu-
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