USA > Rhode Island > Providence County > Providence > State of Rhode Island and Providence Plantations at the end of the century : a history, Volume 3 > Part 34
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These conditions were partly due to the suspension of specie pay- ments by most of the banks of Rhode Island on September 28, 1857. The banks already weak added heavily to their circulation. The Hopkinton Bank, with a capital of $50,000, had issued $49,223 in bills, the R. I. Central, with $496,000 capital, had $386,700 outstanding, and
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specie of only $7.86. The banks of Providence, thirty-nine in num- ber, had capital $14,489,000, circulation $2,595,900, and specie $211,500. The country banks, fifty-nine in number, had capital $6,367,700, circulation $2,748,700, and specie $118,200. This was in May, 1857.
The banks were thus unprepared for the heavy demands made on them during the summer. The press had been for months warning them of their excessive issue of bills. The bond deposit system of New York maintained its bills in high standing while the mismanagement of the banks above mentioned discredited all Rhode Island bills. The state as a whole thus got the reputation of these institutions, which scattered "among people of other states a circulation which our own people will not take". The New York Herald asserted that Rhode Island was "up to its eyes" in railroad securities, taken for circula- tion to be distributed in the western states. Reckoning the loans on such securities at the par value of the collateral, however, it appeared that Rhode Island banks held $651,000 of them. The real amount, allowing for the margin, was probably about $400,000-a comparative- ly small sum when compared with the total loans of $29,000,000.
On September 21st the bankers met and recommended a slight in- crease in loans. The situation was becoming tense. Two weeks had passed without the sale of a single yard of print cloth. Said the Jour- nal on September 28th, "There never before were two such weeks as closed upon the business of Providence last Saturday. Money con- tinues at unmitigated rates, although the demand slackens under the impossibility of obtaining discounts. There is hardly any cotton in the market. The manufacturers are working down their stocks with no disposition to renew them under present circumstances. It is impos- sible longer to raise money to pay labor and a dreary winter is before us". On December 24th there were 502,291 spindles and 9,661 hands idle in the state. Of the 216,824 spindles and 4,070 hands at work most of them were on from one-half to three-quarters time. Many attributed the severe suffering in Rhode Island to the inferiority of corporate management as compared with personal management. The difference was that between agency and ownership, and doubtless in the then newness of the former system, there was much truth in such assertions.
There had been much opposition to suspending, and when on Sep- tember 28th a meeting was called for the purpose, six of the Provi- dence banks were absent. They were the Merchants, the Providence, the Bank of Commerce, the Union, the What Cheer and the Lime Rock. Most of them were among the strongest of the local institutions. Thirty-three banks met and of those present twenty-one voted for sus- pension. The other banks were forced to follow soon afterwards.
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PUBLIC AND PRIVATE FINANCE.
Providence was a creditor city in the south and west, but the suspen- sion in Baltimore and Philadelphia reduced its available resources, while it owed New York about as much as New York owed it. New York contracted its loans at the rate of $4,000,000 a week. The fail- ures thus caused involved Providence merchants, and Providence banks extended accommodations as far as possible to New York houses, when they could not get loans at home. Despite the large sums due from the south and west, these discounts turned exchange against Providence. On September 30th rates as high as twenty-four per cent. were offered by borrowers and refused. On October 7th it was esti- mated that Providence banks had $8,500,000 due to them and maturing from time to time at specie paying points, and a net circulation in the hands of the public of $1,100,000. It was thought, therefore, that their bills would not fall below one per cent. discount, but the suspen- sion of the New York banks on October 15th ended the hope. Local banks contracted their loans $1,500,000 in less than two months, and by December the reduction exceeded $3,000,000.
Precisely the same expedients were attempted in 1857 as had been adopted in 1837, but the lack of harmony among the banks made it impossible to enforce them. Between the time of suspension of the Providence and the New York banks many of the former which had deposits in New York sold specie checks on such deposits at a good premium.
When the worst of the crisis was over the causes for it were sought, and among those peculiar to local banks that most condemned was the long period of credit. Print cloths were sold on eighteen months' credit. Eight, ten and twelve months' discounts were common, and those under four months were rare. A tacit approval of a six months' period for credits as a maximum was for a time observed. Others found the cause in the association of banks of discounts with banks issuing bills. A meeting at the Providence Board of Trade advo- cated state issues of bills, to be loaned to the banks on deposit of two- thirds public securities and one-third bullion.1
In January, 1858, Rhode Island banks resumed specie payment. At a session of the legislature in the same month some new banking laws were passed. The whole amount of debts that a bank might owe exclu- sive of deposits was restricted to sixty-five per cent. of its capital. Circulation was also limited to sixty-five per cent. of the capital stock. Neither of these restrictions affected the then solvent banks.
In 1860 the only cloud on the horizon was that of secession. Pros- perity had quickly returned, but was almost as quickly dissipated by the outbreak of the war. During the first year of conflict Providence banks took $460,000 of government obligations. In December, 1861,
1Providence Journal, Sept. to Dec., 1857, passim.
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
they followed the New York banks and suspended specie payment. The enabling act, passed March 7th, 1865, prescribed the process of transfer of the state banks from the state system into the national bank system. The act provided for the redemption of their circulation by periods of six months, and they paid a tax of one-half per cent. on all that remained outstanding until the amount was reduced to $8,000 for each bank, when the tax was to cease. Soon afterward a tax of ten per cent. was imposed by national law on all state bank issues after July 1, 1866. In November of 1865, only fourteen of the eighty-six state banks remained. In January, 1867, the local taxes on the capital stock of state banks were repealed. In 1872 the liability of stock- holders was limited to double the par value of the stock held. The state since 1791 had issued 117 charters for new banks with an author- ized capital of $34,750,000.
FOURTH PERIOD-1865-1900.
This period lias certain distinguishing marks through which it stands in sharp contrast to all previous periods. Its two most marked features are the rise and decadence of the national banking system, in so far as it had for its aim banking by means of circulation based on government securities, and the rise and success of the state trust company system, the business of which has been confined almost wholly to banking by means of deposits. A third feature common to both of these systems, but much more clearly marked in the latter than in the former, is the relatively slight importance which capital stock plays in the one and is destined to play in the other, and the correspondingly increased importance which surplus funds must play in both. As in the former period, the origin of these phenomena is to be found both in the nature of banking itself and in the adaptation of it to its changing economic environment. The perspective of these facts perhaps is too short for final conclusions to be reached, and our discussion too limited to permit of a detailed presentation of all the elements which have contributed to the results. The most salient points group themselves naturally around the three topics of circulation, deposits and capital. and are especially concerned with the local industrial conditions which have affected the shifting of the basis of the banking business from capital to deposits.
The amount of circulation of the eighty-six state banks in 1864 was about $7,000,000. This circulation was supplanted by that issued by the national banks. The latter, because of restrictions upon its issue, had less earning power than an equal amount of state bank currency, but the state currency was limited to sixty-five per cent. of the capital stock of the banks, while the national currency was limited to ninety per cent. of the amount of United States bonds deposited as a basis for it. The national currency had an additional merit in that its
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redemption was not a first charge upon the general assets of the banks, but was assumed by the government. The lesser degree of profitable- ness which it offered was thus offset by a possible larger issue of it and an absence of liability for its redemption. The demand liabilities of the banks were thus greatly reduced. Under the combined influence of the suspension of specie payments in 1861, the resulting weakness of the Suffolk System of redemptions and the rapid depreciation of all paper currency, Rhode Island banks became so far inflationists as to more than double their circulation issues between 1861 and 1864. The additional emphasis given to inflation by the character of the national bank currency just noted, found here as elsewhere a ready response. The national banks by 1870 had issued over $12,000,000 of bank notes.
The issue of these notes had an effect upon the amount of available local capital the reverse of that which had resulted from all previous large issues of circulation, because under the national banking system they were offset by the amount of local capital necessarily loaned to the government in the purchase of government bonds. Inasmuch as the bonds were usually at a premium and only ninety per cent. of their par value could be issued in the form of notes, there was even less capital left for local purposes with circulation than without it.1 Be- cause of this fact local banking funds in 1870 were about $8,000,000 less than they had been in 1864. The effect of this contraction in a community, the business of which was so dependent on credit, was marked. It would have been more severe had not local needs been partly supplied by the state banks, the newly organized trust com- panies and savings banks.
When a few years later national bank currency became unprofitable and was gradually retired, the national banks which had large invest- ments in government bonds were compelled to retain the bonds at a low rate of interest, or in selling them to re-introduce into the local field an equal amount of banking capital, the uses for which had already been supplanted by rapidly increasing bank deposits. Such national banking capital therefore appeared to be redundant. And it seemed the more redundant because by 1890 the national banks, with $20,000,000 of capital, on which they must earn dividends, was com- pared with the trust companies, with about $2,000,000 of capital, had less than fifty per cent. more of deposits than the latter.
That portion of bank deposits which consists of small amounts of
1In 1864 the loanable banking fund had consisted approximately of $21,200, - 000 banking capital, $1,500,000 surplus, $6,900,000 circulation and $6,600,000 deposits-total $36,200,000. In 1970 it consisted of $20,300,000 national banking capital, less $13,700,000 invested in government bonds, or $6,600,000 net capital, $3,300.000 surplus, $12,400,00 circulation, and $6,100,000 deposits-total $28,400, - 000. The difference in favor of the state bank system with an equal amount of capital was about $8,000,000.
bele ia le Clothing Roomx
NATIONAL EXCHANGE BANK
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THE HAMILTON BUILDING
FORMERLY OCCUPYING THE SITE OF THE INDUSTRIAL TRUST COMPANY BUILDING, PROVIDENCE. THE HAMILTON
BUILDING WAS BUILT IN 1816 AND DEMOLISHED IN 1882.
FROM A PHOTOGRAPH IN THE POSSESSION OF THE RHODE ISLAND HISTORICAL SOCIETY.
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PUBLIC AND PRIVATE FINANCE.
idle capital or of savings played no important part in Rhode Island banking until after 1850. As late as 1860 such deposits were largely confined to savings banks. At the close of the war they began for the first time to constitute an important portion of the assets of banks of discount and demand deposits.
The trust companies entered the local field at this point in the development of banking. They combine the functions of saving banks with the functions of banks of discounts and demand deposits. They have had in Rhode Island a development paralleled by that in no other state. They were frec from the taxes on deposits and capital which were imposed upon the national banks. Their beginning was opportune, because it coincided with the period of reconstruction. Being at first very shrewdly managed, they escaped the serious losses incident to the panic of 1873. The first charter granted was that of the Rhode Island Hospital Trust Company in May, 1867. Incident- ally we may note that this was the first state charter upon which was imposed, in lieu of a tax, the obligation to devote a certain portion of its profits to charitable purposes. The company was required to pay one-third of its net income over six per cent. to the Rhode Island Hos- pital as long as the legislature should grant no similar charter to par- ties other than its incorporators. It was a bank without the power of issuing circulation. It was authorized to "receive and hold money upon optional terms", "at interest agreed upon", and to invest such money in such ways as the directors deemed "prudent."
It was required to deposit with the state treasurer bonds of the New England states, New York or the United States to the value of twenty per cent. of its capital. This deposit exempted the company from all liability for its acts as executor, administrator, guardian, assignee or receiver, in all of which capacities it was authorized to act. It also exempted individuals acting in such capacities from liability on all deposits left with the trust company. In 1870 the company had $2,000,000 of deposits; in ten years its deposits exceeded $6,000,000. Soon afterward competition began ; in 1900 there were ten active trust companies in the state, although the business was practically confined to six of them.1 Their capitals amounted to $4,107,600; their surplus to $3,400,000 ; their deposits to $40,200,000. In July, 1901, their de- posits amounted to $45,300,000.
The state banks had paid interest on certain portions of their deposits. The trust companies began at once to pay interest on both time and demand deposits. At the same time the national banks were paying a tax of one and one-half per cent. on deposits and continued to do so until 1883. The small banking capital of the trust companies, their liberal charter powers and the facilities which they could offer to
1The Newport Trust Company was organized in 1902.
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
depositors, drew to them a rapidly growing deposit account. The national banks refused to pay interest on demand deposits until they were compelled to do so by their rapidly increasing assets. Indeed, in order to furnish accommodations to their customers, they were fre- quently obliged to borrow from the trust companies, at good rates of interest, the very funds which the latter had attracted from them. Within the ten years from 1890 to 1900 the deposits in the national banks of the state increased from $16,700,000 to $17,500,000, about five per cent. Within the same period the deposits in trust companies increased from $12,000,000 to over $40,000,000, about 330 per cent. Savings banks deposits have increased about 250 per cent. since 1870.
This enormous total of small sums of idle capital in the form of deposits has within the past thirty years taken the place in the field of banking, which for seventy years previous to 1865 was occupied almost wholly by banking capital in the form of capital stock. Within the last thirty years circulation banking has ceased also to be important. The rise of deposit banking, therefore, is clearly the chief cause of the redundancy of national banking capital in Rhode Island, but it is not the only cause. The economic revolution which has been accomplished in the same period has to a peculiar degree emphasized and accelerated that redundancy.
The industrial supremacy which Rhode Island retained until 1870 was dissipated by the panic of 1873, and in the reorganization of industry which has since occurred, the proportion of circulating capi- tal to fixed capital has decreased, and thus the demand for credit in the form of discounts has not increased at the same rate as general business. The period of contraction which began soon after the war expressed itself in constantly falling prices. It found Rhode Island as well as other states doing business on a line of credits inflated to correspond with war prices and an expectation of a continuance of war profits. Declining profits were met by increased borrowings to carry the load of accumulating products. Rates of money advanced rapidly and the crisis was reached in 1873. The failure of Jay Cooke & Co. in September was followed by a period of suspense and uncer- tainty, during which the character of manufacturing paper, based upon the inflated values above noted and carried from year to year, was keenly scrutinized. Rates of interest in the local market rapidly advanced from ten to twenty per cent. In the latter part of October Rhode Island was shocked to its industrial center by the suspension of the A. & W. Sprague Manufacturing Company of Providence, and Hoyt, Sprague & Company of New York.1 The assets of the Spragues
"Various other concerns dependent upon Sprague capital or interests were involved in this suspension.
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were appraised at $19,495,000; the liabilities at $11,475,000.1 The business interests of the Spragues were widely extended. The estate as a whole was put into insolvency, and though some portions of it were solvent the severe contraction of business during the next few years entailed enormous losses upon the creditors.
The Cranston Savings Bank, to which the Spragues owed $1,130,000, closed its doors. The Franklin Savings Bank of Providence, to which they owed $750,000, went down in the ruins. The Sprague obliga- tions to the Globe National, the Second National and the First Na- tional Banks were nearly three-quarters of a million dollars each. The Globe reduced its capital from $600,000 to $300,000. The Second re- duced its capital from $500,000 to $300,000. The First reduced its capital from $600,000 to $500,000, and all of them assessed their stock- holders in order to partly recoup their losses. For more than twelve years the property was the subject of litigation in the courts and dur- ing that time idle mills were sold at prices about one-sixth of their ap- prised value as going concerns.
The enormous sums involved in this failure astounded the whole country. It had no parallel in the industrial history of the United States. It gave Rhode Island a blow from which her industry has never recovered. The subsequent failures which can be traced to this as their primary cause extended over a period of more than twenty years. The unfortunate craze for speculation in land soon after the war began to reap its reward during the years preceding "Resump- tion". It resulted in further losses to the banks. The City Savings causes resulted in further losses to the banks. The City Savings Bank suspended payment for a time. The Rhode Island Savings Bank and the Union Savings Bank went into liquidation. The Paw- tucket Institute for Savings, the Franklin Savings Bank of Paw- tucket and the Providence County Savings Bank were practically reorganized. The Grocers and Producers Bank failed. The State
Bank reduced its capital. The Northern and the Union Banks re- duced their capital and later went into liquidation .? Scarcely a bank in the state escaped serious loss. The whole period was one of note- worthy industrial depression. The demand for capital became less active, and although the banks had suffered so severely they were com- pelled to seek a field for the investment of even their reduced resources outside the state. Litigation and liquidation entailed losses upon them in addition to those which they at first suffered, and from which they have not yet recovered. Between 1889 and 1898 eight failures have occurred in Rhode Island involving liabilities of $10,000,000. A reconstruction and reorganization of the state's bank- ing system has been the slow but sure attendant of these events.
1Journal, Nov. 3rd, 1873.
2R. I. Bank Reports.
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS.
Thus while deposits were supplanting banking capital as a means of discount, while the conditions incident to retiring national bank circu- lation were slightly inercasing the amount of national banking capital available for the local field, and while its earnings were being reduced by the competition of the trust companies, the industrial convulsions of 1873, which had destroyed some of it, was accompanied and fol- lowed by a marked contraction of the field that remained for its use. From a series of cumulative events a large amount of local national banking capital had ceased to have any reason for existence. During a series of years, beginning about 1880, the average return to the stockholders in the form of dividend was less than three per cent. About 1890, Marsden J. Perry, of Providence, recognizing this condi- tion of affairs, began to advocate a system of consolidation and liqui- dation of national banks. Others have aided in the movement. From 1890 to 1901 inclusive twenty national banks have retired from busi- ness. The total capital stock has been reduced from about $20,000,000 to $13,000,000. Local banking has been revolutionized.1
At the beginning of this chapter we saw a community, imbued with inflationist ideas, trying to solve the problem of furnishing a currency both elastic and convertible, adequate to the purposes of discount and circulation and based partly upon nothing and partly upon contingent assets. We saw that John Brown and his associates partly solved the problem by the harsh bank process power and the expedient of short time notes, which converted a large portion of the contingent assets of the banks into quick assets. At the same time we saw that the nature of the industrial organization and the business relations of the banks themselves combined to quickly dissipate the thought of a fiat medium from the minds of business men. Currency problems were then con- fined to the state.
At the close of the century we find the problem transferred to the national field, and although some progress has been made we are still far from knowing how to furnish a currency elastic, safe and adapted to the diverse needs of the country.
We have seen the chief reason for the existence of the national banking system gradually disappear, because bonds which the banks first purchased have been taken by private capitalists, and because the rising prices of them and falling rates of interest have combined to
1As to the inter-bank facilities, it may be noted that the clearing system which had centered around the Merchants National Bank and the National Bank of North America was simplified by the establishment of a clearing house on July 1st, 1888. The Union Trust Company began a system of branch banks in 1891. At present the Industrial Trust Co. has five branches and the Manufacturers Trust Co. has one.
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render national bank circulation unprofitable. The recent modifica- tion of the laws affecting it have as yet scarcely passed beyond the stage of experiment.
We saw discount banking based by force of circumstances almost wholly upon banking capital. After having done its part, both to the state and national bank system we find that capital disappearing be- cause of changed economic conditions. In its place we see an intricate system of credits granted by means of deposits.
We saw at the outset that circulation was a dangerous means of dis- counting, because it was a demand liability based on a non-demand asset. We see to-day precisely the same danger existing in the large use of deposits as a means of discounting because they are a demand liability dependent on non-demand assets. The danger at first was avoided by an artificial method of converting slow into quick assets. Whether or not the present danger will be avoided depends upon the proportion of the banks' investments which can properly be classed as quick assets. But it must not be forgotten that the large accumulation of wealth during the century has become the basis of countless securi- ties of a standard value in an almost worldwide market. These are instantly convertible. Hence while we may compare the demand cur- rency of 1800 and the demand deposits of 1900 as possessing similar elements of danger, no comparison is possible between the means then and now available for providing against such dangers.
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