History of Dakota Territory, volume III, Part 77

Author: Kingsbury, George Washington, 1837-; Smith, George Martin, 1847-1920
Publication date: 1915
Publisher: Chicago, Ill. : S.J. Clarke Publishing Company
Number of Pages: 1146

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prominent men throughout the state were thrown from their mental balance and in a delirium declared that the disaster was overwhelming and crushing. At first the wildest rumors prevailed that other state officials were involved, and events proved that several of them actually had hard work to escape the mesh of Taylor's corrupt net, but in the end all succeeded in substantially clearing themselves.

While it is true that the knowledge of the Taylor defalcation at first greatly depressed the state and particularly those having charge of state affairs, upon whom the responsibility of state management would fall, there came soon after- wards a stirring reaction when it was realized that although the defalcation might reach $350,000 it would scarcely be felt and would not cause the slightest hardship generally in a state so prosperous and so wealthy as South Dakota. A press report issued February 1, 1895, said, "The reaction has come now and it is evident that the state has hardly felt the shock. The total loss means only about one dollar a head for the population. As a matter of fact, the state tax cuts practically no figure with the people and the loss of one year's tax will not affect them. There was a great deal of talk a week ago about closing some of the educational institutions and otherwise adopting a rigid economy. The appro- priations committee and many of the legislators talked seriously of shutting up the State University, the Rapid City School of Mines and the Spearfish Normal School, but this talk has now practically died out." All realized that a little economy and considerable good management, together with a small special tax to meet the emergency, would remove any difficulties in the path of successful state management.

On July 1, 1895, the state treasurer reported that the amount which W. W. Taylor had failed to turn over to his successors was $367,020.59. Much con- fusion had resulted from this defalcation to every department of state govern- ment. From January, 1895, to July Ist, of the same year, there was recovered of this sum, $22,746.39. At the time of the defalcation the state was entirely without funds with which to meet current obligations or any other. There were outstanding warrants called funding warrants to the amount of $220,000. This sum fell due January 1, 1895, a few days before the Taylor defalcation became known. The funds with which to pay these warrants had been dissipated by the treasurer, whereupon the new treasurer, Kirk G. Phillips, sought and suc- ceeded in getting an extension of their time of payment for one year. Thence until July 1, 1895, $100,000 of the warrants were redeemed from revenues col- lected and more could have been redeemed if the holders had been willing to surrender them. There thus remained of the warrants unpaid, $120,000 which were due January 1, 1896. In order to meet the immediate requirements of the state, the Legislature authorized the state treasurer, with the advice and consent of the governor and auditor, to issue funding or revenue warrants based upon revenues assessed and not yet collected. Under this act the treasurer issued $304,600 of such warrants of which sum $204,600 fell due April 1, 1896, and the remainder April 1, 1897. All of these various obligations, the treasurer stated, could be easily met. It was the opinion of the treasurer at this time that this law had proved to be a very wise one in protecting the credit of the state and saving quite an amount in the difference of interest on floating warrants and funding or revenue warrants. He also belived that with a large amount of

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uncollected taxes due the state, it would not be long before he would be able to dispense with the issuance of funding or revenue warrants which were the same as temporary loans. The Legislature of 1895 also provided for the issu- ance and sale of state bonds to the amount of $98,000 to be applied to the pay- ment of the loss to the permanent interest and income school fund occasioned by thie defalcation of Mr. Taylor. These bonds were issued, were sold, bore 41/2 per cent interest and the proceeds were apportioned to the counties of the state as the school fund taken by Mr. Taylor would have been had it not been for the defalcation. The indebtedness of the state, therefore, on July 1, 1885, was as follows : Total bonds $1,138,200, total funding warrants $424,600, total indebt- edness $1,562,800.

The Legislature of 1895 passed an act requiring the treasurer, when moneys were deposited in banks, to see that the deposit was made in his name and fur- ther required him to keep a bank account book to be open at all times to the inspection of the governor or any person entitled to know the condition of the public funds. He was required further to make a sworn statement to the gover- nor at the close of the last business day of each month, showing the condition of the funds in his possession, giving the names of each bank in which he had deposits, and showing the amount in each bank standing to the credit of the state. The act further made it the duty of each bank having state money on deposit to report to the governor showing the amount of public moneys received and the amounts withdrawn during the preceding month and the amount remain- ing to the credit of the state at the close of each month. All of these require- ments effected a thorough checking of the accounts of the treasurer by the governor at the end of each month.

On November 1, 1896, the public examiner asked that a law be enacted giving him authority to take possession of the office of county treasurer in case of irregularities and shortages and to suspend the county treasurer from office if necessary for the protection of the public funds. As the law now existed the examiner could only report to the governor who could suspend the treasurer from office, but if the latter refused to obey the order nothing further could be done by the examiner. This left him with authority to locate irregularities and shortages, but with no power to correct the abuses or protect the public funds. During eighteen months ending June 30, 1896, four state and eleven private banks began business. During the same period there were eleven voluntary liquidations, four state and seven private banks. There had been one failure, a small private bank. On June 30, 1896, there were in operation eighty state and seventy-two private banks. The examiner suggested several changes in the banking law. Under the existing law there was no actual supervision.

It was a question whether the examiner could require private banks under the law to make reports. However all except one did so. As the law existed at this time, banks could begin business without authority from any state officer and without capital and could continue in business. As a matter of fact few without capital had commenced business, nearly all were well supplied with funds and doing a safe and conservative business. The percentage of bank fail- ures in South Dakota during the last two years had been less than in any other state in the Union. The total loss to depositors had been less than $10,000. In 1896 the treasurer complied with the law which required him to report monthly

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to the governor the condition of the funds. As he had no authority over the state institutions, he could not make reports concerning their financial returns and conditions. At this time E. E. Hemingway was public examiner.

Thomas H. Ruth, commissioner of school and public lands, should have made an apportionment of about $75,000 to the schools on July 1, 1893, but he did not do so. By August the amount had increased to $96,744. These circum- stances were not observed at the time, but when in January, 1895, Taylor defal- cation was disclosed, it was recollected that this money had been withheld by Mr. Ruth. In October, 1893, he appropriated $83,760 out of $123,329.69 on hand at that time. It was declared later that State Treasurer Taylor had asked Mr, Bowman, deputy commissioner, to hold up the apportionment as long as possible in order to aid the banks of the state during the panic of 1893. This statement was inade to show the reason why the apportionment was not carried out in July, 1893. It was further claimed that other state officers advised Mr. Ruth to retain the cash in the treasury until the financial flurry had subsided -- for six weeks or two months. Even State Treasurer Thorson told Mr. Bowman that if he were to pay the money in July it would be likely to cause runs on many small banks, owing to the fact that they would be called upon to settle their balances.

At the session of the Legislature in 1895 the state auditor made a number of important recommendations and suggestions. He stated that it would be necessary to pass an assessment law that would be clear and specific in its provisions concerning the listing of property, its classification, reports of assess- ment, etc. The reports should be mandatory and the auditor should have author- ity to enforce them. Abatements and refunds should not be allowed without the approval of the state auditor. He asked for authority to collect state taxes from county treasurers who were short in their accounts. He believed that the auditor should be empowered to visit recreant officials and compel them to com- ply with the law, and expressed the belief that the state auditor should have possession of all the records of the State Board of Assessment and Equalization. He said that the five years' history of the state thus far had shown that a two mill tax under the present valuation would not meet the necessary expenses. He stated that the sole object of the issuance of funding warrants was to prevent state warrants from being discounted by reason of lack of funds to redeem them upon presentation at the state treasury. In this manner the state authorities, through much difficulty, had maintained the credit of the state, and its war- rants now were equivalent to cash. Every year there had been a deficiency, and every year funding warrants necessarily had been issued. This deficiency on June 30, 1893, was $194,181. To meet this sum a two mill deficiency tax was levied, and there had been collected from this source by July 1, 1894, $146,550. Furthermore the valuation of 1894 was $8,000,000 less than it was in 1893. This reduced the receipts accordingly. He said that three methods of meeting the biennial deficiency presented themselves: (1) Cutting down appropriations to meet the receipts; (2) raising the valuation so that a three mill levy would be sufficient ; (3) amending the constitution so as to permit a higher levy. Other methods suggested themselves. At this time there was a large amount of delin- quent taxes due, over $371,000 in July, 1894. He said again that the assess- ment of unorganized counties was a very perplexing one because the levy there still failed to meet the expenses of assessment.

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By the Sundry Civil Act of August, 1895, an appropriation of $20,000 was made for the survey of the boundary line between Nebraska and South Dakota. Joseph H. Jenkins, of Minnesota, was awarded the survey contract in May, 1893, at 11700. His returns were made in May, 1894.

In the summer and fall of 1897 the alleged shortage of Auditor Mayhew and Ex-Auditor Hipple was announced. This case created quite a flurry at the time, but in the end amounted to little because it was shown that the law permitted the auditor to take certain fees which on the face of facts did not seem to be due him. It required a long time to settle the matter. Maurice Taylor and Attor- ney-General Grigsby looked into the case on behalf of the state. It was claimed that Mr. Hipple was short over $2,000 and Mayhew short about the same amount, but in the end these gentlemen were cleared of any wrong. The State Board of Equalization at this time consisted of Governor Lee, Attorney-General Grigsby, Auditor Mayhew and four others.

By the year 1896 insurance in South Dakota had become a subject of great importance. The matter of organizing home fire insurance companies had been given much consideration, but no prejudice was permitted to rule against out- side companies desiring to do business in this state. At this time the laws which were in effect permitted companies to write fire insurance with the following capital: (1) Companies organized under the original territorial law authorizing the organization of the insurance companies with a stated capital, the articles of incorporation to state how much was paid in cash, how much secured and how much unsecured. There was no provision of how much should be paid in actual money. This kind of company did not prove satisfactory. (2) Companies organ- ized under the territorial law which allowed them to do business when they had 20 per cent of their cash capital on hand and no liabilities. There were a few char- ters still alive under this law. (3) Companies organized under the laws of other states or countries which had $100,000 cash capital. (4) Companies organized under the laws of this state with $150,000 cash capital actually paid in, $100,000 being in bonds deposited with the state treasurer. Up to 1896 no companies had been organized under this law. This was a discriminating law in favor of for- eign corporations. It prevented the formation of stock companies unless they should comply with the act. (5) Mutual Companies which organized under the law of 1895. This law was denounced by the state auditor who called it a reck- less measure. It provided that any number of persons, not less than twenty-five residing in the state, who collectively should own unincumbered personal prop- erty of not less than $50,000 in value and also real estate to the amount of $50,000 over and above all incumbrances, might form themselves into an association to write policies of insurance. There was no provision that the organizers should satisfy the authorities that they owned anything and a man who did own prop- erty could associate himself with twenty-four others who did not own anything and still the law would be complied with. Most of the companies were required to prove the amount of property they subscribed. One company refused, were threatened with mandamus proceedings, whereupon the attorney general decided that it could not be required to justify. The law possessed other serious faults. The state auditor asked the Legislature to provide ample safeguards in case this class of companies was permitted to do business in South Dakota. All stock companies, it was argued, should be placed on an equal footing and no dis- crimination should be made as to capital of home or foreign companies.

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It was a question at this time whether policies should be paid in full or only for the amount of the actual loss. Many favored the enactment of a valued policy law, but the state auditor opposed such a step. He pointed out that no state which had adopted such a law had ever secured satisfactory results, and in nearly every instance the moral hazard increased the rate of insurance and the number of fires. The valued policy law was based on the theory that if an insurer puts a policy of insurance on a building or stock of goods of a certain valuation and the building or stock is destroyed, he ought to pay the whole amount, since he received premiums on the whole face of the policy. The opposite view was that the premium was regulated by the cost of doing the insurance business, and if the companies were required to pay the face of policies their rates must be increased. The state auditor stated that in Wisconsin the valued policy law had raised the rate and increased the number of fires, because it invited care- lessness and was a temptation to dishonest persons. Fire insurance companies were not blameless, had invited much of the opposition and created the popular prejudice against the other side. At this time there were thirty-seven foreign fire insurance companies operating in South Dakota, and the business of 1895 was above the general average. Several of the companies had paid fire losses exceeding 100 per cent of their income, exclusive of 35 per cent required for operating expenses.

It was learned by 1896 that neither state, mutual nor stock companies could meet the demand of the whole insuring public and that therefore farmers' mutual companies were frequently a wise expediency if not a necessity. The Legisla- ture of 1895 passed laws providing for the organization of county mutual insur- ance companies. Their solidity and effectiveness generally were made to rest upon the upright character of the membership. The state auditor had no author- ity nor jurisdiction over them. He recommended that these companies should be placed under the supervision of the state insurance department and be re- quired to make annual reports and pay moderate fees. He believed that the publication of the success of mutual companies would serve to eradicate much of the false sentiment for valued policy legislation which was then being agitated.

Life insurance at this time had grown to such importance that there was a strong demand for it in many parts of the state. This condition required care- ful investigation of the surroundings of such insurance. It was demanded that the insurance authorities should investigate the solvency of the companies pat- ronized, and that honest agents should be secured to handle the business.

Assessment insurance also had greatly increased within a few years, due to the fact probably that the hard times caused many investors in tontine insurance to limit their expenditures. Life policy provisions were satisfactory to the policy holders, yet complaints arose over the failure of the companies to perform all thie obligations incurred. An investigation showed that generally policy holders did not understand their contracts. The auditor declared that the policy con- tracts issued by the life insurance companies operating in South Dakota could be relied upon to the letter. He pointed out that the majority of people plunged blindly into insurance and did not understand the nature of their policies. As this was a money-making age it was necessary to employ business principles in the matter of insurance. The auditor warned the people throughout the state to gain a better knowledge of the comparative value of the different forms of policies

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and to learn more of the merits and demerits of the insurance companies. The fault was not with the insurance companies, he declared, but with the patron who carelessly from the start obtained a wrong idea of the policy and its obli- gations. The auditor recommended that all persons who attempted to do fraudu- lent business should be promptly and duly punished. The insurance department had turned into the treasury from $21,000 to $29,000 during the years from 1890 to 1896. The auditor insisted that the Legislature should give the insurance department that attention and consideration demanded by the importance of the business in this state.

For the fiscal year ending June 30, 1896, the state auditor reported many im- portant changes in the methods of his office. He said that the universal experi- ence of all people was that the disbursement of public funds was a subject which needed the closest attention and demanded direct legislative restriction. He further stated that the last Legislature had endeavored to limit the matter of expenditures to the extent that no funds should be paid out except for appropri- ations in specific amounts which had first been sanctioned. by the Legislature. The auditor, following this direction, refused to approve bills against the state, except such as were provided by the Legislature of 1895 and such specific appro- priations by former sessions as had not been repealed. As a result he was served with two writs of mandamus by fire departments of the state and the Supreme Court decided that the warrants should be issued. These suits placed the office of state auditor in an unsatisfactory position. Accordingly that official insisted that the Legislature should enact laws which would limit the period of any appropriation (1) for not more than two years; (2) for a period of time after the close of the fiscal year when warrants might be drawn on unexpended appro- priations. He suggested that every institution should have a disbursing officer. There were at this time, quite a number of uncancelled warrants in the state audi- tor's office. There were also outstanding a number of the Yankton asylum claims.

On July 1, 1897, Kirk G. Phillips, state treasurer, reported that at the com- mencement of that fiscal year the state had outstanding in unpaid revenue and funding warrants the sum of $250,000, which constituted the entire floating indebtedness. This showed a large reduction in the state debt, besides which the expenses of the Legislature of 1897 had been paid. At this time the state treas- urer noted almost for the first time how promptly and fully the revennes came to the treasury from all parts of the state. This betokened a vast improvement in the financial condition of all the counties. It was the belief of the treasurer that the state would not be compelled in the future to issue any more funding warrants and that it would be in a condition in a short time not to need any more temporary loans. The law which authorized the issue of revenue funding or emergency warrants to protect the credit of the state and which was passed to meet the necessity occasioned by the defalcation of W. W. Taylor, had proved to be a wise one and had fully accomplished all for which it was intended. Dur- ing this fiscal years the bonded indebtedness had been reduced by $126,600, leav- ing a net balance bonded indebtedness of $1,011,600. Of this remaining bonded indebtedness $99,000 bore interest at the rate of 5 per cent and all the remainder bore interest much lower, down as low as 31/2 per cent. It was the policy of the treasurer to continue the reduction of the bonded debt as fast as funds accumu- lated for the purpose. At this time there were uncollected taxes due the state

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from the counties amounting to $411,220. This seemed' a large sum in view of the excellent financial condition of the state, but was due more to inefficiency in collection methods than to any defect in the law or lack of prosperity. How- ever the revenue laws were not perfect and permitted this slackness in the col- lection of taxes. The Legislature of 1897 provided for a revenue commission and the settlement of such questions was within their province. The revenue derived from licenses to dealers in intoxicating liquors amounted this year to about fifty thousand dollars. The state treasurer in 1897 commended the law which provided for the safekeeping of the public funds and for monthly settle- ments with the governor. All banks had been prompt in obeying the law by making full and comprehensive certified statements to the governor direct, con- cerning all of their transactions.

Mr. Phillips, in July, 1898, stated in his report that the financial condition of the state had shown such marked improvement that he deemed it wise to review the management of state funds. His report embraced the following facts: The liabilities of the state on January 8, 1895, consisted of a bonded debt, a floating debt and a large deficiency in the trust funds. The bonded debt amounted to $1.040,200 ; floating debt, $220,000; deficiency in the permanent school fund, $45,520 ; deficiency in the interest and income common school lands fund, $52,324; deficiency in the interest and income endowment school lands fund, $610, all making total liability of $1,358,654. From this amount was to be deducted from the Taylor shortage $138,765, leaving the net debt $1,219,889. In the meantime, from 1895 to 1898, there had been issued bonds to the amount of $98,000 and had been paid bonds to the amount of $276,600. The floating debt had been liquidated, the school funds had been replaced and the bonded debt was now only $861,600. Thus there was a reduction in the'state indebtedness from January 8, 1895, to July 1, 1898, of $358,289. Besides there was in the treasury belonging to the bond interest and sinking fund and the special sinking funds a total of $141,283. There was also in the treasury available with which to pay current expenses $136,975. Thus, all items considered, the condition of the finances during the above period had been improved to the total amount of $636,547. The treasurer earnestly recommended that the policy of reducing the state indebtedness be continued as rapidly and quickly as possible without the effort becoming a burden to the people. He recommended legislation that would permit a portion of the permanent school fund to be invested in the public indebtedness of the state, thereby giving the best security to such fund, in order that the people of the state might have the benefit of the annual interest paid on the indebtedness.

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History of Dakota Territory, volume III, Part 77

Author: Kingsbury, George Washington, 1837-; Smith, George Martin, 1847-1920 Publication date: 1915 Publisher: Chicago, Ill. : S.J. Clarke Publishing Company Number of Pages: 1146

Author: Kingsbury, George Washington, 1837-; Smith, George Martin, 1847-1920
Publication date: 1915
Publisher: Chicago, Ill. : S.J. Clarke Publishing Company
Number of Pages: 1146