USA > Rhode Island > Providence County > Providence > State of Rhode Island and Providence Plantations at the end of the century : a history, Volume 3 > Part 32
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
tional right, just as the ready acquiescence in its repeal in 1836 was made possible by the decadence of that sentiment under the Jacksonian democracy. The practical repeal of the bank process power dates in 1818, when the strong and commercial banks in the large towns, both by their own industrial association and because of the results of the currency inflation throughout the west, had already become convineed that the issue of a large circulation on the credit of the issuer or on assets of a contingent character, was not within the scope of their functions. The power which had been evoked for the purpose of pro- tecting eireulation of that character had, therefore, lost its chief reason for existenee.
In June, 1820, banks were prohibited from issuing eireulation in excess of the paid up eapital.
No further legislation of importanee relating to banking was enaeted until after the report on banking capital in 1826.
The numerous petitions for bank charters during the few years pre- eeding 1826 and enlminating in that year-fourteen eharters having been granted by Massachusetts, eighteen having been petitioned for and refused in Rhode Island, an inerease in the capital of six having been also refused-were believed to be the result of world-wide phe- nomena. The eentral fact of these phenomena was a disproportionate eonversion of cireulating eapital into fixed eapital. Subsequent to the Napoleonie wars large amounts of capital were attraeted to many enterprises in South America and Mexico by the increased production of silver. Within the United States the surplus of dormant and circu- lating capital, which had eeased to find an outlet in manufacturing enterprises after the depression of 1818-1819, had ereated a field for itself in fostering large publie improvements and speculative projeets, an illustration of which in Rhode Island was the Blackstone Canal from Providence to Worcester, begun in 1823, the stoek of which was subscribed three times over. To add to these economie facts, owing to an overvaluation of silver as compared with gold, the latter had disappeared from circulation in 1817, and in 1823 the scareity of money metals led to the aet of congress deelaring many foreign coins receivable for public lands. The curreney of the United States Bank, from which so mueh had been expected, had not been received with eagerness by the publie. Everywhere there were evidenees of a change in the form of eapital and a consequent relative absence of real money. Indeed, these were the beginnings of the movement which was temporarily checked by restrictive laws relating to banking, and which, fanned into flame by the eapriee of Jackson in 1832, eulminated in 1837. As usual, the lack of cireulating capital and the high rates of discount were mistaken for a lack of banking capital and of eireulat- ing money media. The forty-four existing banks of Rhode Island had
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PUBLIC AND PRIVATE FINANCE.
authorized eapitals amounting to $10,350,000. The additions to this sum requested May, 1826, by new banks and inereases to the eapital of old banks would have raised the total authorized eapital to $16,600,- 000. A committee, of whiel Benjamin Hazard was chairman, to whieh the petitions were referred by the legislature, rendered a report in June. The document is the ablest contribution to the theory and prae- tice of banking in the state now extant. It appeared that most of the eharters were asked for by those who lived in the agricultural seetions of the state, where loans, if made, must be permanent and could not, therefore, be a safe security for eireulation. Mr. Hazard's elief objeetion to the issue of more eharters was the faet that the subserip- tions for the stoek, being paid for wholly by stoek notes, would add nothing whatever to the real eapital of the state. The extent to which this habit had been earried by this time was remarkable. The charters usually provided that the eapital should be "paid in" speeie, but while these elauses were followed in the letter they were evaded in spirit. The speeie paid in one day, and usually borrowed from some existing bank for the purpose, was withdrawn the next day and the notes of the stockholders substituted. At the payment of each sueees- sive installment the process was repeated. Sueh notes were ealled stoek notes, beeause by general law and by terms of the charters the stoek of a stoekholder was liable for his obligations to the bank. Said Mr. Hazard: "The notes given for the stoek and the stoek pledged for the notes, eaneel and annul each other; or rather, they are both nullities from the beginning. If ten individuals were to form them- selves into a company for the purpose of getting up a bank with a eapital of 50,000 dollars, and each member should give his note, and nothing else, to his company for his share of the stock, it is evident enough that here would not be one eent of real eapital; and that if such a company should proceed to loan out its bills on interest, and put them into eireulation, it would be guilty of a gross fraud upon the publie. But this is precisely the ease with banks, so far as their eapi- tals are made up of stoek notes. Yet they report the whole, real as well as fietitious, as so mueh eapital 'aetually paid in'. Is it not palpable that all the discounts and loans made by a bank, beyond the amount of its real funds kept on hand to answer for the paper it thus issues, are loans of mere paper, not representing any real eapital, the bank reeeiving the indorsed notes of individuals, on interest, for its own notes without interest ?" "It is said that the publie loses noth- ing by this gain to a bank, sinee the paper passes and serves as money. The same might be said if a bank loaned its paper without any eapital at all; the same might be said, if oak leaves, instead of paper, were used as a eurreney. That by far too great a portion of the capitals of the banks already granted eonsists of nothing better than sueh notes,
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
is to be inferred from their reports, by which it appears that nearly a million and a half of dollars is due to them from their stockholders. It is thus that the law pledging their stoek for the debts due from stockholders to their banks is grossly abused". A comparison between the Providenee Bank, organized on a speeie basis when banks were trustees of the community's interests, the Bristol Bank, organized when stoek notes were not very common, and the Mount Hope Bank, organized when stock notes were the whole capital, will illustrate the development of this custom. The figures are from the report of 1821 :
-Loans to
Date of Charter
Capital
Directors
Stockholders All others
Providence Bank
1791
$422,000
$10,300
$40,400
$349,300
Bristol Bank. .
1800
120,000
57,400
32,700
46,000
Mt. Hope.
1818
75,000
72,200
9,800
The Bristol banks, thus precariously organized on paper, had an unhappy and inglorious experienee when, in 1826, the tax on the "paid up" capital of all banks was inereased from 5 to 12 1-2 eents per $100. Five of them, the Eagle, the Freeman's, the Union, the Commercial and the Bristol, petitioned for relief from taxes on the ground that their eapital had been "impaired" by "losses". The first three noted had been chartered in 1817 and 1818. The Eagle, chartered with $200,000 capital, had commenced business with $100,000, and in 1826 redueed it to $50,000.1
Another objection to the inerease of capital was the politieal influ- ence which it might wield. "Some of the banks," said Hazard, "already deny and threaten to resist, the authority of the legislature to regulate or tax them. They consider themselves as so many privileged and unaecountable corporations. And if we reflect upon the powers which have been granted to them, the amount of debts due them, the number and de- scription of their debtors, and the influence they derive from that souree, and especially, if we consider the numbers interested in those corporations throughout the state, and even in this general as- sembly-we shall not feel disposed to make light of their pretensions". The effects of such political influences had already been felt in the liberal provisions of the charters and the absence of effective legis- lative control. Mr. Hazard claimed that the elauses of the laws relat- ing to the issues of circulation and the amount of loans had no real restraining force. A bank eould first loan its whole eapital ; it eould issue notes for as much more and loan them; it could further make loans for the amount of its deposits ; if discounts were left on deposit
1American, June, 1826. Reference to the table at the end of the chapter will show the increase in obligations of directors and stockholders and the amounts loaned on bank stock immediately after a large number of charters had been issued.
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PUBLIC AND PRIVATE FINANCE.
it could make loans with them. The fact here criticised may be put more briefly in the statement that the laws provided for no reserves whatever. As to the indiscriminate extension of such powers he said : "The early banks were instituted by capitalists. Since that time those who have sought after banks have generally been those who themselves were in want of capital". "It is probable that out of a multitude of bank managers there will be some unfit for such a trust."
It was reasoned by the advocates of the charters that the granting of then would stimulate business and thus increase capital. Hazard replied, "The doctrine that a definite amount of money is required for the purpose of business applies to the amount in value, not in quan- tity"; that capital could only increase in natural ways; that the amount of specie in the community was determined by the business of the community in its relation to other communities, and not at all by the banking capital; that to increase the banking capital would simply divide the existing real money (specie) among a greater number of banks, unless the excessive issues of bills made redemptions impossible, reduced the state to a paper standard and drove all real money from its borders.
But the evils which had resulted from the scramble for the flesh pots of fictitious banking fell hardest upon the members of the community who thus apparently had the means of easy borrowing brought to their doorsteps and under the speculative frenzy of the day fell victims to their seeming benefactors. This fact was due both to the inflation theory of banking and to the abuse of the bank process power. It was regretted by all, even by the banks themselves, that the power was ever originated. Its severe pressure upon individuals was the least of its ills. Mr. Hazard, with a leaning toward rhetorical effect rather than conservative statement, thus describes its effects. It drew, said he, "into the banks all the property of insolvent debtors, to the exclu- sion, nearly, of all individual creditors". It led "banks to extend their loans to many" whose ruin was "the inevitable consequence". Between 1816 and 1826 the debts due to the banks had increased from $2,500,000 to $6,970,000. "We cannot tell what portion of the ratable property is owned by stockholders, or members of the banking com- panies ; but we know that nearly all the wealthy men in the State are large stockholders; and if we were to deduct, from the general esti- mate, their portions of the ratable property in the state, and from the amount of debts due to the banks, such part as is due from stockhold- ers, the result would present us with a frightful account of the situa- tion of those who own the residue of the ratable property and owe the rest of the debts to the banks".
This able argument had only a temporary effect. In 1827 the legis- lative mill began to grind again, and though the product was only one
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
charter in that year, by 1837 twenty-two charters had been granted for capital of $2,625,000, and authority to increase to $6,850,000. Sinec 1791 the state had chartered sixty-eight banks with initial capital of $4,610,000, and authorized capital of $11,400,000. Six had eeased business, leaving sixty-two, with nominal paid up capital of $9,837,200.
The excessive capital stock of Rhode Island finds some explanation in the abuses just noted. The truth is that the banks here, as in Massa- chusetts and elsewhere, had no such an amount of capital permanently paid in as the reports would indieate. The Second Bank of the United States, with an assumed capital of $35,000,000, was known to have started in business with not over $5,000,000 in real money. The stoek jobbing countenanced by it was universal at the time. Between 1800 and 1860 it is doubtful if more than one-third, and perhaps not one- fifth, of the nominal capital of the banks in Rhode Island was paid for in any other way than by stock notes. Such real working capital as the banks had was composed of deposits and specie and other aeeu- mulated carnings. The last item alone, owing to the enormous earnings and small losses, would account for nearly the whole of the existing bank capital at any given period.
During all this period the total amount of specie held by the banks in the state had at no time exceeded $660,000, and had not averaged above $350,000. This amount of metallic stock had done duty, if we may credit the reports, in paying the speeie installments of bank capi- tal of over $21,000,000.
The close association of the manufacturing and banking interests subjected banks to severe strains at times, but their limited demand liabilities in the form of circulation and deposits were elements of strength, especially as the deposits were largely made up of discounts, and in so far were a part of the banks' contingent assets. The erisis of 1829 was marked by the failure of some of the state's leading man- ufacturers; among them were the Wilkinsons of Pawtucket, whose family and business associations with the Slaters had been instru- mental in bringing the cotton industry to its then condition of perfec- tion and acknowledged supremaey. The Farmers and Mechanics Bank of Pawtucket was involved in the disaster. An examination of it in October, 1829, showed that, with capital of $200,000, deposits of $14,700, and circulation of $16,900, it had loaned $326,500. Its total quick assets consisted of $1,800, deposited in other banks, $186 of over- drafts, and $22.03 in cash. In order to make loans to carry its eus- tomers it had borrowed $93,556 from banks, and when its credit was exhausted, had placed in the hands of a third party for negotiation for its benefit $4,000 cashier's cheeks. It had furthered the interests of its customers by endorsing and negotiating $45,000 of their paper. Driven to extremes, its cashier had endorsed $22,000 of the Wilkin-
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PUBLIC AND PRIVATE FINANCE.
sons' paper "under circumstances which, he did not conceive, rendered tlie bank liable". It thus had liabilities of $399,400 and assets above noted, plus its loans and discounts; and of these the examiners re- ported "that nearly every one of its debtors had failed and put their property in the hands of assignees".1 Enough was saved from the wreck to pay its creditors, except the stockholders, and in 1835 it was reorganized. From its ashes, with its name appropriately changed to the Plicnix Bank of Providence, rose an institution which still main- tains a prosperous existence.2
The banks did not altogether escape the inflation tendencies of the ยท early 30's, as is shown by the rapid increase in their circulation from $929,500 in 1830 to $1,864,100 in 1837. Pending the final decision by the supreme court of the United States as to the constitutionality of the issue of circulating notes by banks incorporated by the states, the charter of the Globe Bank, issued in 1833, was the first to contain a specific grant of the power to issue "bills of credit".3 And although the United States court decided that the note issues of state banks were not bills of credit, local charters continued to class them as such and to confer the power to issue them.
Despite this apparent association of the banks with the inflation movement, the real origin of many of them can be traced to the cor- porate influences of the times. The Blackstone Canal was not a finan- cial success. In 1831 the Blackstone Canal Bank was chartered and authorized to invest $150,000 of its funds in the stock of the canal company. The New York and Stonington Railroad was chartered in 1832, and the Globe Bank, despite its hitherto unique clause as to bills of credit, was chartered in the next year, partly as its fiscal agent. Its large issues of circulating notes, which exceeded those of any other bank at the time, reaching, in 1835, $97,953, are explained by the pay roll needs of that and other corporations.
The business disturbances which arose in connection with Jackson's controversy with the United States Bank were keenly felt in Rhode Island, because the success of its industries was so dependent on exten- sive credit. In the latter part of 1833 Secretary Taney made an agrce- ment with the Arcade Bank of Providence to receive all the United
1Report, Oct., 1829.
2It is not a little singular that the Albion Company and the Valley Falls Company, both of which were involved in the failure of the Wilkinsons and of the Farmers and Mechanics Bank in 1829, were, in 1900, under the control of Jonathan and James H. Chace, the former of whom was also president of the Phenix Bank.
3The case of Briscoe vs. Bank of Commonwealth of Kentucky, first tried in 1832, was decided by Jackson's packed supreme court in January, 1837. The note issues of banks were declared not to be bills of credit within the mean- ing of the constitution of United States. 11 Peters, 257.
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
States deposits. It was to aeeept at par all the notes of neighboring banks which were specie paying, transfer the deposits to any other part of the country on demand and without charge, and "perform all of the services rendered by the United States Bank". Whenever the treasurer requested, or whenever its deposits exeeeded 50 per cent. of its paid up eapital, without his request, it was to furnish collateral security suitable to him, to eover sueh exeess deposit.1 This business was profitable, for the aeeumulating receipts of the government left large balanees in the banks. In November, 1836, the Areade Bank, with $400,000 capital and only $32,000 general deposits, had $269,000 of the United States funds, and the Rhode Island Union Bank of New- port had $150,000 of like deposits, although its individual deposits were only $16,000. The banks in Rhode Island did not, as was else- where the ease, use these deposits as a basis of eireulation.
The United States Bank, in October, 1833, had a nominal loeal eapi- tal of $800,000 and loeal loans and discounts of $591,700. When Jaek- son began to remove the United States deposits from it, the bank began as a counter stroke a sharp eontraetion of its loans. In January, 1836, they had been reduced to $2,200, but the Providenee Bank had stepped into the breach and bought $474,000 of them.2 This interesting period of about two years is rieh in protests sent by the leaders in loeal poli- ties and industry to eongress. A memorial from Providence, early in 1834, with 1,143 signatures, reeited that "within a short period of four months we have rapidly passed from a state of measurable comfort and security to one of general distress. A panie pervades every portion of the country. Present distrust and a foreboding of the future unnerve and discourage our most enterprising citizens". They complained of a stagnation of business in all forms and a universal deeline in value of all deseriptions of property.
One month previous money had been abundant at 6 per eent., but in- ereased pressure had driven in the eireulation of banks and withdrawn their aeeustomed deposits, and they had taken from them their means of granting aeeommodation by discounts of notes and bills of ex- ehange. Henee "the rate of interest has advaneed to 9, 12, and 18 per eent. It is now diffieult, nay, almost impossible, to negotiate domestie exchange or to obtain money on the best mereantile paper". Providenee county men, 3,500 in number, protested against the "ex- periments" which had been made with the eurreney. There were also some documents endorsing Jackson. Nearly 8,900 signatures of men
1Similar arrangements were subsequently made with the Bristol Bank of Bristol and the Newport Bank of Newport. When by act of June 23, 1836, the deposits in United States depositories were limited to three-fourths of their capital, the Rhode Island Union of Newport was added to the list.
2Report, 1836.
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PUBLIC AND PRIVATE FINANCE.
condemning the President's action were forwarded to congress, while his supporters mustered fewer than 1,800.1
How much of the complaint was real and how much was political may be gleaned by comparing the statements of stringency and con- traction, caused by Jackson's attitude, with the facts that in Rhode Island, from October, 1833, to October, 1835, banking eapital in- creased over $1,300,000, eirculation increased $380,000, deposits in- ereased $240,000, specie reserves increased $163,000, and loans in- creased about $1,900,000. The local contraction of the United States Bank was more than offset by the local expansion of state banks.
When by the suspension of speeie payments in 1837 the banks ceased de facto to be United States depositories, the Rhode Island Union paid to the government $38,586.39-the whole of its public deposits; the Arcade paid $93,999.58-all but $10 of its publie deposits.2 In June, 1836, was passed the act by which about $30,000,000 of the United States surplus was distributed among the states. The portion of Rhode Island was $386,611, and it was at first loaned to the banks by the state at five per cent. interest. It was distributed among forty- nine of the strongest institutions, seemingly according to the amount of their paid up capital.
The receipt by the state of this money was particularly agreeable, because it was largely the proceeds of sales of public lands. Her rep- resentative, David Howell, had argued strongly during the debates on the grant of an impost to the continental congress, that the Revolution- ary debts should be paid for by the sales of the western lands. Thus after over fifty years it almost seemed that his claim had been ac- quieseed in. The state, therefore, in January, 1837, directed its senators to favor expunging the resolution of the United States senate condemning Jackson's action with regard to the public revenues; but the assembly took occasion to say that in so directing its senators it was "desirous of maintaining and reasserting the right to instruct the sen- ators of this state in the senate of the United States".
In 1836, as the result of an investigation into the methods of bank- ing, with special reference to the rates of interest, was passed a re- markable supervisory and restrictive law. The stringent recommend- ations of the committee of 1826 had failed of passage. Meanwhile, however, in one or two charters some important clauses had been in- serted. The charter of the Farmer's and Manufacturer's Bank of 1827, besides providing for a stockholder's liability similar to that of the Union Bank, was by its terms subject to "all general acts applying to banks and to any acts in amendment of or repeal thereof, or in any way affecting the same". The charter of the High Street Bank con-
1Executive Docs. U. S. 1833-34.
2Executive Documents United States, 1837-1838 passim.
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
tained the same provision. These elauses were the result of a contest over the right of the state to tax the banks, a right which was con- firmed to it by the United States Supreme Court.1 The charter of the West Greenwich Farmers Bank (1833) was the first to provide the unlimited personal liability of stockholders. Nearly all subsequent charters contained this provision, as well as the speeifie elause subject- ing them to sueh taxes as the state might impose.
The committee of investigation in 1836 then had found itself sup- ported by a strong undereurrent of sentiment unfavorable to banks, because of their resistance to taxes, and a legislature disposed to insist on curtailing their special privileges and immunities. The notion was still current that the chief funetion of banks was loeal aeeomnoda- tions. Capital was not then mobile, as it now is, and the praetiee of the Mt. Vernon Bank of Foster and the Smithfield Lime Roek Bank in loaning a very large portion of their assets to Providenee was thought to be an injustiee to the respective towns in which they were situated; while the praetiee of the Newport Exchange Bank in loaning one-half its funds in New York subjected it to severe eensure. The legal rate of interest had been fixed at 6 per cent. during the Revolutionary period. It had been openly violated by all sinee the period of the seeond war with Great Britain and even before, a praetiee the pre- vention of which had been one of the objeets of the establishment of the first banks," and now beeame an objeet of publie thought. Besides the wild speeulative tendeneies of the period and the desire to get rieh easily by borrowing money at low rates on western prairie lands at house lot valuations, the Jaeksonian demoeraey, which had perhaps as little eommon business sense as any wave of politieal sentiment that has possessed the country, expressed itself here in an outery against usury. It is signifieant that two of the members of the committee on banking in 1836 were S. Y. Atwell and T. W. Dorr, the one a follower in, the other a leader of, the forees against the privileges of eapitalism and property in Rhode Island. It was eharaeteristie, both of them and of the period, that they should fail to distinguish between that proper degree of supervision of banking, which would proteet the interests of the innocent from fraud, and that supervision which un- warrantably interferes with the eonseious and voluntary relations between banks and individuals and in which they alone are affeeted. With regard to the question of usury, which was the chief subjeet of the investigation, the committee acknowledged that no word of eom- plaint had been made to them, either by the banks or their eustomers, nor had they sought any eorreetive legislation. Indeed, higher rates of interest and exchange had been willingly offered than the banks had
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