William Gouge,
A Short History

Of Banking in New England.

We have searched the public libraries of Philadelphia for particulars respecting the New England Banks that broke previous to the war, but have been able to find no document of any importance, except the report of the committee of the Legislature of Rhode Island in relation to the affairs of the Farmers' Bank of Gloucester.  Many writers allude to the great distress that the operations of the moneyed corporations produced in New England about the years 1808 and 1809, but they do not even give a list of the Banks that then stopped payment.

That the distress was great, we have incidental proof in the rigidity of the laws afterwards adopted to enforce specie payments.  All experience shows that till the evils produced by moneyed corporations become absolutely unendurable, the proper remedy is not applied.

After the commencement of hostilities with Great Britain, the New England Banks were obliged, in order to maintain specie payments, to wind up nearly all their credit dealings.  This operation necessarily produced much dis tress, and greatly increased the dissatisfaction with which the people of that section of the Union regarded the war like policy of Government.

This distress does not appear to have terminated with the war.  For, a Philadelphian, writing in August, 1815, says, after mentioning the curtailments made by the New England Banks, "Real estate would not command prices nigh its former value; merchandise fell greatly below its usual rate;  whilst money in the market was worth two per cent. a month.  This is the existing state of things in Boston.  It is manifest that the operation of the rigid laws of Massachusetts is highly injurious to the commerce of their towns, and we do not see that the boasted capacity of their Banks to pay a few notes in specie, renders their situation more enviable than our own."74

The natural anxiety of the New Englandmen to get payment of what was due to them by the people of the Middle States, was attributed to ill-feeling.  "Circumstances," said a New York writer, "have excited a spirit of envy at our prosperity, which has superadded a restless malignity of effort to increase artificially and aggravate the evils of an unfavorable balance.  Whoever has attended to the uniform language of eastern men and eastern writers, cannot have failed to discover this spirit – they will not believe that I speak of its authors with undue severity."75

74   Inquiry, &c.

75   "Statius," in the New York Columbian; republished by Mr. Carey, with commendations, as an appendix to his "Letter to Mr. Calhoun," 1816.

The apparent prosperity of the Middle States was such as might well excite envy;  but it was a wholesome adversity New England was experiencing.  Her currency could not, indeed, be called perfectly sound, for, as appears from Mr. Crawford's Report, many of the inconvertible notes of the other States found their way into her territory.  But, as the people had got them for less than their nominal value, they sustained no other loss except that which arose from the notes undergoing an additional depreciation while they remained in their hands.  The standard of value by which contracts were regulated in New England was not affected;  and the Banks being prevented from suspending specie payments, were prevented from exciting a wild spirit of speculation in the people.

The natural consequence of the suspension of specie payments in the other States, was an influx of specie into New England.  That this was very great, may be inferred from the fact that the Massachusetts Banks which had $1,560,004 in specie in 1811, had, in 1814, specie in their vaults of the amount of $6,393,718.  It was useless to keep such an amount of specie lying dead.  The abundant issues of treasury notes by the Government afforded easy means of paying duties.  There was enough, either of specie or of notes of different kinds in circulation, to supply all the wants of domestic trade.  The specie was, therefore, exported with so much rapidity, that the amount in the Boston Banks, which had been $5,466,759 in June, 1814, was, by June, 1815, or about five months after the return of peace, reduced to $2,125,076;  or, if the amount in the Worcester Bank be included, to about $2,800,000.  The exportation of specie did not stop till there was no more left than was just sufficient to support the credit of the notes in circulation: so that, when the United States' Bank commenced operations, the other States could derive no important supplies of metallic money from New England.

From a combination of causes, the operations of the United States' Bank were of limited extent in New Eng land.  The channels of circulation there were fully occupied by local Bank notes which had never been discredited.  The new institution had so little metallic capital, that it could not enter into competition with the local Banks;  and all the funds it acquired as receiver of the public moneys at Boston, were wanted to support its operations in the South and West.

Hence, the reaction of 1819 was less sensibly felt in New England than in other parts of the Union.

The ordinary operations of Banking in New England, are, however, such as to make men lament that the system was ever invented.  Expansions and contractions have, as we have before had occasion to remark, a more striking effect on the operations of manufacturers than on those of agriculturists.  So facile is production with modern machinery, that a small rise of prices causes a great increase of manufactured articles.  In a short time, the Banks are forced to contract.  Then there is a scarcity of money and a glut of manufactures.  Then the manufacturers petition for new additions to the duties on imports.  The tariff is raised accordingly.  Enterprize is again awakened.  There is a demand for capital: and the Banks supply – credit.  There is, however, no more solid ground for an extension of credit after the passage of a new tariff act than there was before.  Not more than a year or two elapses before the necessary reaction commences.  The manufacturers, again startled with the prospect of ruin, apply for additional "protection."  It may be granted; but it is doubtful if any tariff that can be established, will, while this system of money dealings continues, be able to protect multitudes from ruin.  We know some very zealous and very intelligent friends of the "American System," who are decidedly of opinion, that if there were no moneyed corporations and no paper money in the country, the manufacturers would require no protecting tariff.  If the excitement in relation to protecting duties were less violent than it is at this moment, we might invite particular inquiry into the effect paper Banking has on manufactures.  We might illustrate our argument, by showing the effects expansions and contractions of Bank medium have had on manufacturing operations in England.

The multitude of Banks in New England, makes it necessary for those concerned in them to resort to a variety of expedients to sustain them in their operations.  Of these expedients none but the concerned could give a full account: but some idea of their nature may be formed from the disclosures which are occasionally made.

Mr. Niles, in his Weekly Register for September 8th, 1821, for example, gives the following quotations from the New York Journal:–

"We observe by a notice in the Dutchess Observer, that the farmers of Duchess County have been shorn of all their wool by a most singular operation – or, in other words, that nearly all the wool in that county had been sold to J. Butler, cashier of the Litchfield Bank, who had recently failed, and assigned his factory, wool, &c. to the Bank, as security for his debts, leaving the farmers to suffer.

"The story, as told by one of the shorn, is briefly this:– The Wolcotville Factory, formerly belonged to Mr. Wolcott, who failed, being largely indebted to the Bank.  As the Bank is prohibited from buying and selling property, their Cashier, Butler, became nominally the proprietor.  The belief that James Butler acted in behalf of the Bank, was so universal, that he obtained an unlimited credit.  The agents for the factory have recently made large purchases of wool, in the usual manner, upon the notes of James Butler.  A great proportion of the wool raised this year in Dutchess County has thus been purchased and carried over to Litchfield, and as soon as the same is well packed away, James Butler, the Cashier, is discovered to be a defaulter to the Bank for some 16,000 dollars, and he assigns his factory, and the stock thus fairly and recently acquired, to the Litchfield Bank.  The Bank is paid – the farmer has a Litchfield shearing – and Jamee Butler, the cashier, is an insolvent."

The art of forming Bank capitals by discounting the stock notes of subscribers, appears to be as well understood in New England as in Pennsylvania.  The Kennebeck Bank, in Maine, had a nominal capital of 100,000 dollars;  but an official investigation, in the year 1826, showed that 89,370 dollars of the whole amount consisted of stock notes: that the directors held nine-tenths of the stock, and that they were in debt to the Bank not only for the amount of their stock notes, but in an additional sum of 34,400 dollars.  For two years, this Bank divided 12 per cent. per annum.

The expose of the Bath Bank in the same State, was very similar to that of the Kennebeck Bank.  Nearly three fourths of the capital were represented by stock notes, and nine-tenths of the stock were owned by the directors.  More than three-fourhs of all the discounts, in addition to those on stock notes, were made to the same directors.

The capital of the Bank of Vassalborough consisted of 300 shares, of which 283 "belonged either personally or representatively to a partnership at Hallowell, A. & J. Leonard, the former of whom is President.  The whole amount of money which the Bank had on hand on the 21st of June, 1826, was $40,000; $36,000 of which was in the hands of the firm above mentioned, and 4,000 in the hands of the Cashier.  The Bank had no record or charge to exhibit against the Leonards, who had about the whole property of the institution, and the Cashier had taken up his bond.  The Commissioners were requested to postpone their report, till the Bank concerns could be put into some form and comeliness, but the disorders of the body politic appeared too incurable to be thus tampered with."

On an investigation of the affairs of the Burrillville Bank of Rhode Island, it was found that only 6000 dollars of the capital had been paid even in stock notes.

Bank capitals being thus easily formed, and legislative charters conferring great privileges, we cannot wonder at the multiplication of Banks in New England.  Rhode Island, which had thirty-four Banks in 1820, increased the number to fifty by the year 1830: and Massachusetts, in the same period, made an addition of forty to the number of her Banking institutions.

In some of their recent acts, the Legislature of Massachusetts have endeavored to guard against the formation of Bank capitals out of stock notes, but that it is possible for the getters up of Banks to evade, if so disposed, even the strongest legal enactments, may be learned from the following extract from a report made to the Senate of the State, on the 25th of January, 1830.

"The Sutton Bank was incorporated the 11th of March, 1828.  The act of incorporation provides– 'That the capital stock of said corporation shall consist of one hundred thousand dollars in gold and silver, to be divided into shares of one hundred dollars each, which shall be paid in the manner following, viz. one-half part thereof on or before the first day of October (then) next, and the remaining part thereof on or before the first day of March, in the year of our Lord one thousand eight hundred and twenty nine.'  And it further provides, that no moneys shall be loaned or discounts made, nor shall any bills or promissory notes be made or issued from the said Bank, until the capital subscribed and actually paid in, and existing in gold and silver in said vaults, shall amount to fifty thousand dollars, nor until the said capital stock, actually in said vaults, shall have been inspected and examined by three Commissioners, to be appointed by the Governor for that purpose, whose duty it shall be, at the expense of the said corporation, to examine the money actually existing in said vaults, and to ascertain, by the oaths of the directors of said Bank, or a majority of them, that the said capital stock hath been bona fide paid in by the stockholders of said Bank, and towards the payment of their respective shares, and not in tended for any other purpose, and that it is intended there to remain as part of said capital."

"On the 26th day of September, 1828, the Governor, in compliance with an application for that purpose, made by a committee of the subscribers for stock in said Sutton Bank, appointed Commissioners to examine the moneys actually existing in vaults of said Bank, as is provided in the second section of their act of incorporation.  On the 27th day of September, 1828, the Sutton Bank borrowed, on a deposit of fifty-one thousand dollars in the bills of the City Bank, the sum of fifty thousand dollars in specie, for one day only;  this same specie was examined by the Commissioners, and the following certificates made out, viz.–

"We, the subscribers, Commissioners appointed for that purpose, have this day been shown, and have examined, fifty thousand dollars in specie in the vaults of the Sutton Bank, which was paid in by the stockholders at their first instalment, agreeably to their Act of Incorporation, passed the eleventh day of March, 1828.

Jonathan Leland.
Amasa Roberts.
Samuel Wood.

September, 27th, 1828."

Boston, Sept. 27th, 1828.

"Then personally appeared Hezekiah Howe, Jonas L. Sibley, Joshua W. Leland, and Thomas Harback, being a majority of directors of Sutton Bank, and made oath that fifty thousand dollars in specie by them shown in their vaults, was the first instalment paid by the stockholders of their Bank, towards the payment of their respective shares, and not for any other purpose, and that it is intended therein to remain, a part of said capital.

"Before me.

"The bills and specie were then re-exchanged;  this whole business, accomplished within an hour, and all of it done within the walls of the City Bank, in the city of Boston.

"It appears from the books of the company, that the several payments for the first instalment were made on the first and sixth days of October, 1828, and on the same days, almost all the stockholders are charged with notes for the same amount as their respective instalments: in two instances, notes were taken from individuals equal to their own subscription and the sums due from their minor children, in whose names stock had been subscribed: in two instances only, and those for a small amount, it appears any payment was made in money.

"On a petition to the Legislature, praying that they might be allowed further time to pay in the remaining moiety of their capital, 'An act in addition to an act to incorporate the President, Directors, and Company of the Sutton Bank,' was passed on the 20th of February, 1829, which provides, 'that the said fifty thousand dollars shall be paid in gold and silver, in the manner following:– twenty-five thousand dollars on or before the first day of June next, and the remaining twenty-five thousand dollars on or before the first day of October next.'  The payment in June was made in the same manner as the first payment, as was also the last, with the exception of some shares on which the instalment was not settled, either by note or otherwise.  The object of the Corporation in requesting an extension of the time of making payment for their stock in the mode adopted by them, is not apparent, as it may be supposed that it would be as convenient for them to make their notes in March last, as in the months of June and October following."

The case of the Eagle Bank at New Haven is deserving of notice.  This Bank had a capital of 600,000 dollars, and was accounted one of the safest Banks in New England.  It failed in September, 1825: and from a report by a committee of the Legislature, we give the following extract.

"George Bradly, Esq., the President of the Institution, was employed as Cashier of said Bank from its commencement, until the year 1817, when on the resignation of the Hon. Simon Baldwin, he was elected President.  From that period, the President was permitted to be the sole manager of the institution.  Its funds were placed entirely under his control and disposal.  No rules were prescribed by the Board of Directors regulating the mode of transacting the business of the institution, or requiring its officers to bring their doings under the review of the Board during the aforesaid time.  The President had not only in his hands the entire control of the concern of the Bank, but had, by accumulation of proxies, the power of appointing the directors.  In the successive changes of the Board, no examination was made into the state and condition of the Bank.  The funds of the institution were employed in speculations, and adventures unknown to the directors and stockholders, and entirely unconnected with, and remote from, the business of Banking.  Loans were made in various forms, and to a great extent, which were not communicated to the directors, and in some instances by arrangement not to be communicated.  In this course of management individuals obtained, without the form of security, and for various purposes, funds of the Bank; exceeding the capital, and to supply the exigencies created thereby, agents were employed in whose hands the bills of the Bank were placed to give them a forced and distant circulation, and by that means to sustain the operations of the Bank.  Those operations were not recorded in the regular books of the Bank, but vested in loose papers in the custody of the President, and in a book, in which the initial letters of the names of the agents were entered, and the figures containing the amount by them received.  The statements annually rendered to the Legislature, have been calculated to mislead, rather than to afford any information on which the public could safely rely in relation to the true state and condition of the Bank.  In one instance 220,000 dollars, issued upon the checks of the President, Normand Dexter, Henry C. Rossiter, the Messrs. Hinsdales, and other memorandums of indebtedness not entered upon the books of the Bank, were not included in the reported amount of circulation, making an error in the statement of the aforesaid sum of two hundred and twenty thousand dollars.  In the course of the last spring, other and further expedients were adopted by the President to assist his operations.  Without the order or consultation with the Board of Directors, a new post note was procured, and notes in that form payable on different times, were placed in the hands of an individual to an alarming amount, and without the precautions of security, to obtain by negotiations, the funds necessary to relieve the increasing pressures on the Bank.  Those notes were not entered regularly into the books of the Bank, and not known otherwise than casually to the Board.  The consequences of such expedients were in a few months developed.  The inability of the institution to redeem its notes, brought to an end its operations as a Bank in September last, and the distress in which the creditors were involved, and the great body of the stockholders, who cannot be supposed to have any agency in the management, is too deep and too extensive to require to be stated by the committee."

In May, 1827, a report was made to the Legislature, that the amount of Bank notes and post notes of the Eagle Bank in circulation, was 815,478 dollars.  In May, 1828, another report was made, in which it was stated that 1,451,507 dollars were owing to the Bank from four individuals, viz: from J. & D. Hinsdale, 530,466.50: from W.C. Holly, 236,779.47: and from N. Dexter, and W.C. Holly, conjointly, 568,801.98.  The amount of debts, good, bad, and doubtful, due from all other persons to the Bank, was then less than 200,000 dollars.

Governor Wolcott, in an address to the Legislature of Connecticut, in May 1826, said,

"Except in limited districts of the United States, the condition of our circulating medium is not very dissimilar to that which has been established by arbitrary Kings in the North of Europe, and especially by the Autocrat of the Russian Empire.  There, a Bank has been created, and its notes constitute a circulating currency throughout his vast dominions.  The credit which these notes obtain, is derived from revenues which are established by his sole authority.  These revenues are not indeed paid in Bank notes, but the demand for silver coin which the revenue establishes, imparts a forced, though precarious, value to the notes, which value is maintained and regulated by the reciprocating influences which are created between the supply and demand for paper and silver currencies.  The effect is, that all property is subject to his will.

"With us the currency which is required by the daily exchange between all the people, and by which the transactions between farmers, mechanics, laborers, manufacturers, and traders is regulated, is almost exclusively in Bank notes, which are issued by a great number of independent corporations, which possess an exclusive privilege of creating notes for their own benefit.

"This monopoly is here so exercised, that neither the amount of currency which is issued, nor the amount of that which is suddenly suspended, withdrawn, or annihilated, is subject to any practical limitation, other than what must arise from the state of foreign and domestic exchanges, the speculations of individuals, political events, and the necessities or caprices of the numerous monopolizing incorporations, who entirely control the circulation of the country.

"These last observations require no other confirmation than a reference to the notorious facts, that no coins circulate among the people, except small sums of copper, and the fractional parts of a dollar in silver, which is our silver unit.  Our unit of gold is a coin of ten dollars, which, with its fractional parts, in coins of five dollars, and two and one half dollars, have wholly vanished from circulation.

"The effects produced upon the people are, that no man can travel fifty miles, in any direction, without receiving paper notes of which he possesses no means of ascertaining the value, or even the authenticity, and this difficulty in creases in proportion to the distance of an individual from some one of these Banks.  From these causes, the whole country is subject to complex evils, arising from either a redundant or too restricted circulation of the only currency which can be obtained, and hence, sudden variations in the prices of all exchangeable commodities, far exceeding the customary profits of regular industry and commerce, thereby converting all transactions of business, especially at a distance from the seats of foreign commerce, into mere lotteries.

"It is amidst explosions of credit, principally occasioned by the conduct of Banks, that every class of industrious citizens, and all our enterprizing young men, are exposed to repeated losses, against which no vigilance can guard, and no prudence exempt them.

"These distresses are inflicted upon the community, without any advantage being derived either to the State, to the stockholders, to the depositors of funds, or to the honest debtors to the Banks.  They are so frequent, so extensive, and embrace so many personal interests and connexions, that it seems impossible to impute them, in many instances, to voluntary depravity.  The inference must be, that our system of Bank administration is essentially defective, and that to correct it, all interests ought to contribute their best councils and united efforts.

"There are fewer inducements at this time, why we should submit to the evils of a paper currency, than exist among any other people on the globe.  We are prosecuting an active commerce with states and nations where gold and silver are abundant, and are, indeed, staple articles of trade.  With these countries, the intercourse of the people on both sides is founded on friendly and constant relations, both personal and political.  Our fabrics of iron, wool, leather, wood, cotton, paper, and most other productions of our arts and industry, are as necessary to these countries, as a fair relative proportion of their metallic wealth has become essential to us.

"It is very consolatory to know, that the abuses of credit which are so prevalent, did not commence in this State, and that although we have yielded to temptations which we ought to have averted, our neighbors ought to correct their own conduct before they censure us.

"In my opinion, we ought to manifest our sincerity by immediately retracing the folds of the web in which we, in common with our neighbors, have become entangled.  We can perceive that the issues of notes from the Banks in this State have been annoying to the Banks in Boston and New York, while theirs, founded on no superior security, have been equally injurious to us.  Both parties ought voluntarily to concur, in permitting specie to circulate throughout the country, thereby rendering the capitals and credit which exist conducive to mutual advantage.

"The objections to the measure which I deem it my duty to recommend, will most probably be, that paper is a cheaper instrument of circulation than metallic money: and that the proposed restriction would diminish the dividend of Banks, in which the State, the school fund, ecclesiastical societies, the colleges and academies, other incorporations, stockholders, and numerous individuals, are interested.

"But if all these objections were true in point of fact, they would form very inadequate reasons for inflicting great, increasing, and remediless injuries upon all the people and the whole, nation.  These evils have not proceeded from the incorporations as such, but merely because they have issued bills of credit, as substitutes for the general currency of gold and silver.

"If any principles are demonstrable by reason and experience, they are, that paper money is an interruption to productive industry: that industry is the main source of wealth, and that whatever diminishes production is injurious to the lenders of capital.

"The stockholders of Banks are only interested in having their capitals safely invested, in such a manner as to secure the payment of a regular interest equal to the use of the sums so advanced.  It cannot promote their interests, that all the capitals of this country, whether invested in stocks or other transferable property, or in exchangeable commodities, should be constantly exposed to the hazards of rapid revolutions.

"In my opinion, Banks which deal in circulating notes, and which are safely conducted, require a much more elaborate and expensive organization and system of detail, than such as deal wholly or principally in gold and silver.  Honest men assume frightful responsibilities under the forms by which many of these institutions are now conducted, and their hazards increase in proportion to the number and variety of the notes which are received.  Many counterfeited and altered notes are so skilfully prepared, as to defy the scrutiny of adepts: and no safeguards are provided to protect those who receive them from the most offensive accusations.

"The case is far different, in respect to transactions in gold and silver: for by hydrostatic and other balances which are cheap instruments, which have been known and used since the time of Archimides, the purity and value of coins can at once be ascertained with unerring certainty."

The struggles of the New England Banks with one an other, to decide which shall have the greatest share of "the circulation," inflict great evils on the community, in addition to those which are inflicted by general contractions and expansions of Bank currency.  Sometimes a number of country Banks form a coalition to extend their operations, and the city Banks form alliances to resist them.  Sometimes some of the city Banks enter into arrangements to aid the designs of the country Banks, and sometimes these latter find efficient auxiliaries in the city brokers.  When a coalition succeeds in extending its issues of paper, certain districts or certain classes of society experience all the advantages, real or apparent, deriveable from an increase of circulating medium.  This continues till the counter-coalition succeeds in reducing the circulation of its rivals: and then follows a reaction, with "scarcity of of money," and its usual concomitants of bankruptcies and public distress.  A detail of the different measures of these combinations and counter-combinations, and an account of their effects on the community at large, would be interesting, but would exceed our limits.  A writer in the Massachusetts Journal endeavored, in the fall of 1830, to show that the Banking system of that commonwealth is the worst which could be devised; and recommended as a substitute for it, a State Bank and branches.  His prominent objections to the present system are "that it renders necessary about seventy Banking institutions: that this number must every year be increased, as the Legislature cannot properly withhold charters from any who may apply for them: that the competition for business between these numerous establishments, gives to individuals a dangerous facility in obtaining loans, and creates a system of fictitious credits, which, having no base on real capital, must, at every pinch in the money market, explode, and bring ruin upon the Banks and their debtors.  Other objections are, that the expenses of these various Banks in salaries, rent, &c., amount to a very large sum, (in Boston alone to 120,000 dollars,) which expenses are a tax upon stock:"  that the country Banks are put to a great expense in redeeming their bills in Boston;  "and that, after all, the notes of these Banks form a currency, of different and fluctuating value, instead of that steady and uniform currency which public convenience requires."

From accounts recently published, it appears that the number of Banks in Massachusetts, in August, 1832, was eighty-three, having nominal capitals of the amount of $24,520,000, notes in circulation of the amount of $7,122, 856, and specie on hand of the amount of $902,205.75.  Of these Banks, twenty-two were in the city of Boston.  The greatest amount of specie in any one of the city Banks was $127,131.43;  the smallest was $2,415.41.  The greatest amount of specie in any one of the sixty-three country Banks, was $22,966.90;  the smallest was $1,022.97.

Massachusetts was first in adopting the paper money system; and she will probably be among the last to abandon it.  Its ramifications there are so numerous, that nearly all the members of the community are compelled to give it either a willing or an unwilling support.