USA > Rhode Island > Providence County > Providence > State of Rhode Island and Providence Plantations at the end of the century : a history, Volume 3 > Part 33
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'Providence Bank vs. Billings & Pitman, 4 Peters, 515.
2The charter of the Providence Bank contained the following: "By discount rendering easy and expeditious the anticipation of funds on legal interest".
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PUBLIC AND PRIVATE FINANCE.
charged. The significance of these facts seems to have been entirely unnoticed. As might have been expected, the report in some respects lacked judicial moderation. The commercial banking interest had hitherto been inactive in politics.1 It possessed about one-sixth of the entire wealth of the state. It soon became an active participant in political doings. Its power will be noted in the less stringent laws which soon were cnacted.
The report first indicated the unreliable nature of bank returns which were made on a fixed day in each year. In preparation for their return the banks had annually curtailed their loans, thus causing a forced stringency in the local money market. The official return of October, 1835, and the statement collated by the committee at visits unexpected to the banks, showed as follows :
Deposits
Official Return. $1,472,600 179,800
At Visitation. $1,812,600 586,700
Due banks and others
Circulation
1,160,800
1,294,300
Total demand liabilities
$2,813,200
$3,693,600
Increase
880,400
Specie
486,600
197,500
Bank notes
319,900
322,200
Duc from banks
180,100
219,200
Total quick assets
986,600
738,900
Decrcase
$ 247,700
Total difference
$1,128,100
The proportion of quick assets to demand liabilities liad declined from over one-third at the time of the official returns to one-fifth at the time of the unexpected visitation.
The devices which had been adopted by the banks to get more than the legal rates of interest had been almost universal, among Providence banks the single exception being the Manufacturers Bank. They sometimes favored their own customers, but usually the rates varied with "the avarice of the lender" and "the necessity of the borrower". The custom had its undoubted origin in the cost of collection of drafts, which, in this manufacturing center, constituted a large portion of the discounts. Rates of exchange on them were normally one-fourth per
1It is not clear that they took any part in the contest in 1831 between James Fenner and Lemuel H. Arnold for the governorship. The latter, the candidate of the Jacksonian democracy, was charged by his opponents with intending to abolish the bank tax and impose all taxes on land. To a voting clientage composed of freeholders who had not paid any taxes since 1824 such a proposition was a veritable bombshell. Arnold denied the charge, and a spirited correspondence was indulged in between the rival candidates. Ar- nold was successful in the election.
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS
cent. on Boston and New York, rising to two per cent. on the west and south. The banks charged from one to two per cent. on four months' acceptances on New York in addition to the rate of interest. The total rate of interest, therefore, varied from nine to twelve per cent.
In discounting notes the most ingenious methods were adopted. Discounting was done in various ways. The borrower sometimes dated his note back thirty days and discount was calculated from the date of the note; at times he would agree to leave the proceeds on deposit for thirty days; sometimes he was paid by a check drawn on some other town and exchange was charged on the check ; sometimes he received the proceeds of his discount in current money at par, and when he passed it back over the counter for deposit it was received at one- quarter per cent. to one-half per cent. discount. Perhaps the most common device was to make a note payable at some other bank. It then became a draft and exchange was charged on it. When by the law enacted at this time exchange was declared illegal on notes payable in the same town, a bank in the suburbs was selected and notes were made payable there. The Elmwood Bank of Cranston was used in this way for a decade before the Rebellion. It was the daily custom of the cashier of this bank to come down town and remain in the office of the notary for an hour each afternoon, in order that notes payable at his bank "out of town" could be presented conveniently.
The law passed in June, 1836, provided that no bank should begin business until fifty per cent. of its capital had been actually paid in and such payment certified to by the bank commissioners. Its whole capital must be paid in within one year.
The capital stock of a bank could not be reduced by division without permission of the general assembly ; if it became impaired to the extent of one-fourth part, the deficiency must be made good within one year.
Interest above six per cent. was forbidden, and exchange above one- fourth per cent. for New England and New York city, and increasing to two per cent. in places south of South Carolina and west of Ohio, was also prohibited.
No bank could be moved and no branch established.
Violations of any of the above provisions worked forfeiture of the charter, and a violation of the interest laws was also punishable with a fine of $500 for cach offense.
No one could be a director unless he was a citizen and resident of the statc.
No bank could be chartered with less than $50,000 capital and every bank must be incorporated by its actual stockholders. The subscrip- tions to the stock were to be supervised by the bank commissioners, they giving preference to the residents of the town where the bank was located.
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303
PUBLIC AND PRIVATE FINANCE.
Every director, president and cashier was required to take oath to observe the interest laws under penalty of $1,000.
The bank process act was repealed and all debts were recoverable by the usual legal methods.
Banks were required to return a detailed account of their condition on request of the bank commissioners, and if they delayed for thirty days their charter was forfeited.
Three commissioners were to be elected by the general assembly, who had power to summon officers under oath, and to visit and examine banks, and in general they were clothed with the "visitatorial power of the general assembly" to ascertain the state and condition of banks. If "in their opinion" any bank had forfeited its charter or was "so managing its concerns that the public are in danger of being defraud- ed thereby", they could complain to the supreme court, and the latter must forthwith issue citation to the bank officers to show cause why injunction should not issue against them.
In the same year, although the tax on the increase of capital, whichi had been fixed at two and one-half per cent. in 1831 was reduced to two per cent. and the bonus imposed in 1831 was removed, the annual tax on capital stock was increased from twelve and one-half cents to twenty-five cents per $100.
Many officers of the banks failed to take the oath required in regard to bank interest, and in October the state treasurer was authorized to enforce the penalty. In January, 1837, directors were prohibited from serving on more than one board, and one-third of the stockholders were authorized to call a stockholders' meeting.
The members of the investigating committee of 1836 were elected bank commissioners and zealously entered npon their duties. They reported to the legislature in January, 1837, the results of their in- quiries. It appeared that directors had already begun to evade the law by borrowing money of their banks and loaning it at higher than the lawful rates of interest. The directors of the Merchants Bank were the most conspicuous offenders against the spirit of the law. In discussing the proportion of the loans made to directors and others, they said that it was originally intended that the public should have the benefit of banking institutions. "How much of the blame that belongs to an almost uniform departure from the original design of banks in this respect is justly attributable to those who govern them, and how much to circumstances that the directors cannot well control, it is difficult to decide."
A director could rarely obtain accommodations elsewhere than at his own bank, and must, therefore, depend on it. "If his wants are large, there will be little left for others outside the board". "And so in many instances banks have become to a considerable extent mere
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
engines to supply the directors with money". At two of the banks visited one-half of the discounts, and at another three-fifths of the discounts, were for the accommodation of the directors and co-partner- ships of which they were members.
Such abuses could not be reached by law and nothing was done in regard to them, but from this time we can trace, side by side with the relations of banks to corporations, the development of the bank as a personal machine.
In June of the same year bank officers were required to allow stock- holders access to the account books on penalty of $50 (this did not apply to individual accounts), and at the same time the consent of three directors was required on all discounts.
The commissioners found many unsound institutions. They caught the Scituate Bank in the very act of fraud.1 They entered a com- plaint against a number of other banks and had begun legal proceed- ings against the Rhode Island Central Bank of East Greenwich. But in October, 1837, another bank act was passed. It was partly the result of the zealous activity of the commissioners in performing the duties of espionage which had been imposed upon them.
It provided that discounts should be limited to the amount of capital stock paid in plus the deposits, plus the amounts due from banks bear- ing interest (i. e., borrowing of other banks and individuals), plus an amount determined by a percentage on their capital stock graduated according to its amount from 80 per cent. for banks having $50,000 capital to 30 per cent. for banks having over $400,000 capital.
At the same time the amount of circulation was restricted to certain percentages of the amount of capital as follows :
Capital of
over
$50,000 50,000 and under $120,00,
120,000 and under
200,000 and under 300,000, 30
300,000 and under
200,000, 40 400,000, 25 20 65
60
60
66
400,000 and under
500,000,
75 per cent. in bills
66 66
Bill holders were given priority of claim on all the assets of the bank.
The most important clause of the act related to the method of inter- pretation which the bank commissioners should adopt when deciding
1It had reported in October, 1835, capital, $15,660; due from directors, $13,100; circulation, $334; bills of other banks $425, and specie $10. The commissioners discovered in 1836 that it had been sold to out-of-state parties who had given stock notes to the bank for $49,361, while it held stock notes of residents for only $2,047. Its property had been secretly removed. New plates had been prepared and $43,000 of bills had been printed, of which $36,328 were found in the bank. After liquidation the name of the bank was changed to the Hamilton and it maintained a precarious existence until 1851.
305
PUBLIC AND PRIVATE FINANCE.
as to whether the acts of a bank endangered public interests, and so brought it within the scope of summary injunction. With reference to the clauses as to circulation and discounts, it was provided that no bank conforming to them "should be declared to be conducting its business in such a way that the public was likely to be defrauded thereby".1
The commissioners, in May, 1838, explained that they had with- drawn their suit against the R. I. Central Bank as, under the above act, violations of the usury laws were no longer an actionable offense. A point upon which they did not lay stress was that, while in the exer- cise of their functions, they had included the stockholders among those whose interests they were to serve; the law practically excluded stockholders, the depositors and banks and individuals of whom money had been borrowed .?
Whether the activity of Mr. Dorr and the ill-favor with which his opinions soon came to be viewed was the cause or not, he did not long remain a member of the commission, and in the midst of the conserva- tive reaction of 1842, in June, the bank commissioners act was re- pealed. Semi-annual returns of banks were ordered to be made to the general assembly. In January, 1843, the secretary of state was au- thorized to designate the day on which returns should be made.
Rhode Island banks suffered but little comparatively speaking dur- ing the depression of 1837. When, owing to the fall in the price of cotton, the southern banks suspended specie payments, the manufac- turers sustained heavy losses, but their high profits for the few pre- vious years enabled them to tide over the period. With the advice and consent of the bank commissioners, the banks suspended on May 11-the day after the suspension in New York. Steps were at once taken to protect their bill holders. The banks went into the open market and bought gold, so that while on the day of suspension they hand only $268,800 of specie, one month later they had $350,- 000. It seems at first to have been their policy not to in- crease their loans, and during this first month of suspension less than $10,000 was added to their outstanding lines: In
1"Unless a case of direct and intentional fraud should be suspected or unless the bank should have loaned its money to persons suspected of being insolvent to such an amount as to prevent it paying its liabilities in full, or should sell its specie or otherwise dispose of it than for the redemption of its bills at par."
2 Anent the East Greenwich bank it may be noted that while in April, 1839, it reported capital of $136,600, profits, $9,900, and an otherwise sound condi- tion; in October of the same year it was found to have sustained losses de- stroying its surplus and impairing its capital to the extent of over $54,000. The assembly allowed it to continue and in 1854 it disappeared entirely.
20-3
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
May the general assembly authorized them to issue post notes, running for one year, to the extent of one-fourth their cap- ital, and it was hoped that this would relicve the demands on them. In June, however, the legislature required them to pay five per cent. on the deposits of their own bills, while the bank commissioners ad- vised that they receive their own bills from cach other, paying interest on their debit balances. Their deposits on interest increased from $320,700 to $496,200 during the first month and in a few months in- creased $300,000 more. In a brief period their obligations to banks also increased $213,000. They found it impossible to retain their specie, and they adopted a policy of leniency with their debtors. They began to increase both loans and circulation. By October they had added over $400,000 to their circulation and over $875,000 to their loans and discounts. At the same time they fell heavily in debt to the Suffolk Bank and sent over $100,000 in gold to Boston. The tide then turned and within six months they had nearly doubled their specie, had decreased their loans by about $600,000, and although they had increased their circulation $330,000, they were in as good a position as other banks to resume. Resumption took place in August, 1838. The rate of interest on their bills deposited with them in excess of $1,000 by one depositor was reduced to three per cent. by the general assem- bly in October, 1837, and it thus became possible for them to make profit on such issues. A rapid increase of over fifty per cent. in cir- culation occurred within the first year following suspension. It is interesting to note that their deposits on interest between May, 1837, and May, 1838, increased $770,000, almost the same as the amount of increase in circulation, which was $755,000. The weekly reports, which the commissioners required during the period of suspension, were printed in the public press. In January, 1841, Rhode Island joined other states in a memorial against the sub-treasury system and in favor of the establishment of a national bank.1
Two new features in banking marked the early years of this period. One was the beginnings of the accumulation of a surplus account by the banks about 1815, all earnings having been previously paid out in dividends. Another was the establishment of the first savings institu- tion, chartered as the Savings Bank of Newport in June, 1819.
Its object was "to provide a safe and profitable mode of enabling industrious persons of all descriptions to invest such parts of their earnings or property as they can conveniently spare". Deposits as low as $1 were received, but interest was allowed only on deposits of $5 and above. Dividends were to be paid semi-annually at the rate of five per cent., but no interest was to be allowed on sums drawn between dividend periods. All surplus carnings were to be divided every three
1January session, 1841, pp. 66-67.
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PUBLIC AND PRIVATE FINANCE.
years pro rata among all depositors of over one year's standing. Money could be drawn only after a notice of one week or on specified quarterly days in January, April, July and October. No deposits were received from corporate bodies, and none over $100 from an indi- vidual at any one time, excepting seamen's wages. The directors could pay off in whole or in part the deposit of any individual which amounted to $1,000. The total deposits could not exceed $200,000.
In October of the same year a charter was granted to the Providence Institution for Savings. It was very similar in its provisions to that of the Newport Bank, but the earnings were to be divided semi-annual- ly at a rate to be determined by its directors. Its limit of deposits was $300,000. The restrictions as to the amount of deposits have been removed, and in 1879, pending resumption, savings banks were allowed to require ninety days notice for the withdrawal of deposits. The statistical tables at the end of the chapter indicate the importance and number of savings banks.
THIRD PERIOD-1840-1865.
The period 1840-1865 contained no new phases of banking. There was a continuation and development of previous methods. Between June, 1836, and May, 1850, only two banks were incorporated and the charter of one of them was repealed before it went into operation.1 Meanwhile both the amount of capital and the amount of circulation increased somewhat, while the loans and discounts increased in about the same degree. The noteworthy feature was the constantly decreas- ing amounts of specie held in proportion to the circulation, showing that with the increasing banking capital the real assets of the banks, together with a better understanding of credits, specie had ceased to play an important part as a basis of circulation and had become merely a reserve for it or rather a part of it. The amount loaned on stock notes as well as overdue paper will be seen in the tables as far as they were reported.
The new form of report required in 1843 set forth the largest amount due from any one borrower. The Providence Bank led in the list with $72,175 loaned to one person. The Washington Bank, which had been started in the interests of the farmers, had loaned $25,226 to one individual. The repeal of the bank commission act left banks to organize themselves. The charter of the People's Bank (1846), therefore, provided that the stockholders should not be allowed to dispose of their stock until the whole amount of it had been paid in. In 1849 bank returns were required only annually, and though the
1The North Kingston Exchange. It was discovered that the bank with only $50,000 capital, and that not paid in, had already to issue $42,200 bills and the cashier had signed $26,800 more, making $69,000 in all.
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
amount of bills under $5 was to be reported, many failed to comply with the provision.
In the year 1850 there was renewed activity in bank charters, and by the end of 1856 forty-seven had been granted by the legislaturc. Four of them did not become operative. The capitals of these banks. varied from $50,000 to $500,000. The charter of the Bank of Com- merce (1851) was the first to set its maximum capital at $1,000,000. Seventeen of them, with capital of $3,050,000, were to be located in Providence.
The period was everywhere one of marked industrial development, but in Rhode Island its particular feature was an extraordinary cor- porate activity. The population of the state increased over seventy per cent. between 1840 and 1860, and much of the increase consisted of a foreign element, unaccustomed to our institutions and to banking. Most of such got their livelihood in the factories, and large amounts of circulation were issued for the pay roll purposes. In 1854 of the cir- culation of $5,000,000, about $1,500,000 was of denominations under $5. Very few of the banks speculated in note issues by sending notes out of the state. The worst offenders in this way were the Arcade, the Bank of the Republic, and the Mt. Vernon of Providence, the Com- mercial of East Greenwich, and the Farmers of Wickford. But while the increased circulation herein found its partial explanation, the dis- counts, which increased from $14,300,000 in 1850 to $28,700,000 in 1856, illustrated the local corporate needs. The relation of the banks. and the newly forming corporations was in some respects even more. marked than at any other period. A limited co-partnership act had been passed in 1837, and the first general corporation act of the state bears date of 1847. Seventeen insurance companies secured charters. within a decade immediately following the corporation act. From this time date the Hartford, Providence and Fishkill Railroad Company, the Providence and Worcester Railroad Company, the Providence, Warren and Bristol Railroad Company, and the Providence and Springfield Railroad Railway Company (first incorporated as Woon- asquatucket Railroad Co.). In manufacturing, steam power was sup- planting water and the mills all over the state were enlarging. Many of them were changing from private companies to corporations.
Many of the banks were organized for the distinct purpose of taking- over corporate obligations. Some banks themselves became stockhold- ers or incorporators of other corporations. The Blackstone Canal, the American and the Phenix banks were among the corporators of the What Cheer Company. The association of the Merchants Insur- ance Company and the Bank of Commerce has already been noted. The Spragues, the Knights, the Smiths, the largest manufacturers of the state, had controlling interests in a number of the banks. Such a
309
PUBLIC AND PRIVATE FINANCE.
movement had its excesses, and these were exemplified in the charter of the Atlantic and Mediterranean Banking and Navigation Company of Block Island, with capital of $2,000,000. It was to engage in bank- ing, build and own ships and undertake a world-wide commerce. It did not get beyond the stage of incorporation.
The movement was also attended with numerous banking laws. The first bank chartered in 1850, that of the State Bank, provided for or- ganization by three commissioners appointed by the governor. The stock was to be apportioned "as near as may be to the amount sub- scribed by each person who shall in their opinion have the ability and disposition to make a bona fide investment". Most subsequent char- ters had a like provision. In June, 1853. the issue of fractional bills was prohibited. Beginning in 1854 acts of incorporation were held for consideration until the session following their presentation. Mean- while in 1849 the tax on banks had been increased from twenty-five to thirty cents per $100 of capital stock, and reserved profits. In 1855 the rate was raised to thirty-three cents.
The first act of the January session of the legislature in 1857 re- vived the bank commissioners act of 1836 with slight modifications. Like its prototype, the new act left the whole question of safe banking to the discretion of the commissioners. On the request of three officers, stockholders or creditors, making a statement under oath of their inter- est, they were to examine a bank.
By an act of February, 1858, the reports of banks were to be made to the state auditor and the law still maintains. The bank commissioners in January, 1858, reported that they had enjoined the Tiverton Bank, the Fall River Bank, the Farmers Bank of Wickford, the Bank of South County of Wakefield, the Hopkinton Bank of Westerly, and the R. I. Central Bank of East Greenwich. The first two had gotten into the hands of outside owners, the capital was made of bogus notes and other securities equally unsatisfactory. The Farmers Bank had bills in circulation much in excess of their recorded amount and the bills of both banks seemed likely to be a total loss. The banks of South County and Hopkinton, in an endeavor to make large dividends, had speculated in weak western land securities, and were then totally un- able to redeem their largely inflated circulation, though the commis- sioners hoped to do so in the course of time. The aggregate capital of these banks was $886,311.86, their circulation was $553,500, their specie holdings were $9,150.
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