The History of New York State
Book 12, Chapter 19, Part 1

Editor, Dr. James Sullivan

Online Edition by Holice, Deb & Pam

 

CHAPTER XIX
BANKS AND BANKING

As the settlement of the colony of New Amsterdam was controlled by the Dutch West India Company, who were of necessity bankers, for such banking as was then essential to the transaction of business, there was no occasion for private enterprise. This Dutch organizations never rivaled in the banking business such great houses as the Fuggers of cologne, or the earlier Medicis, of Florence, for this main purpose, incidental to the great German and Italian houses, was trading. From the earliest period this company was in conflict over fiscal matters with the rising municipality of New Amsterdam, a situation which became more acute in 1651 when the city received its first charter. There was an immediate dispute over taxation, and it is of record in the early archives of the finance Department of New York City that payments were often deferred for lack of cash. "Upon Hendricks Hendrickse, the city drummer, applying for his salary, amounting to forty guilders ($17), he is told he must wait awhile, as there is no money in the chest at present."

What money there was in New Amsterdam was chiefly wampum, which the Dutch found in use among the Indians and speedily adopted for this own convenience. Wampum consisted of black or white beads strung together and sometimes made into belts. At first this seemed ridiculous to the Dutch but no more so than the few coins in circulation among the burghers were to the Indians themselves. They called coin money iron money. As the trade in furs began beaver skins were the accepted currency for larger amounts. Almost down tot he period of American independence the money chiefly is use consisted of the Spanish pistole, valued at $4 gold, the doubloon at $8 gold, the "pieces of eight" that is to say eight reals, from which the American dollar is derived, to which during the reign of Charles the Second was added the guinea, a gold coin deriving its name from the fact that it was mined from gold derived from that region in Africa.

If there were no bankers in the New Netherlands other then of Lords Proprietors themselves, the functions of the banker in early days were performed by practically all the mercantile establishments. The merchant would advance cash to his customers as readily as he would sell goods on credit, and would commonly, upon his customers' written order pay out cash to a third party. The merchant might even issue his own notes in case currency, and especially small change, became scarce. There being no statutory provision to the contrary any individual might receive funds on deposit and issue such notes, so that mercantile banking exercised as a common law right was not only convenient but legal.

However, in precisely the way in which the Goldsmith Company of London eventually monopolized the banking functions of the great England merchants, certain houses in New York developed into private banks. Bankers themselves seem to have regarded the note issue function of their business as more important then that of increasing their deposits, and as first used in American, the word "bank' always meant an issue of paper money. The earlier banks, originally so called, were created in New England. Massachusetts, by issuing bills of credit, which were made receivable for taxes, introduced the use of paper money in 1690. Unfortunately for New York it speedily followed the example of Massachusetts. Inadequate provisions were made for redemption of these early paper currencies with the inevitable result of depreciation. In 1720 the British government forbade the issue of bills for credit for other than necessary governmental expenses. The result was a disorganization and deflation which was one of the grievances against the mother country that culminated in the War of Independence. Commenting upon this early period of "wild cat money" the historian Hildreth writes:

"None troubled themselves with an inquiry into the subsequent effects (of these bills of credit); and the commercial condition of the colonies during this long period may be illustrated by that of the man to whom the use of intoxicating drinks, if it afford him an occasional stimulus, is still the steady and certain cause of weakness, disease, and misery."

Among the earliest and wisest of the first private bakers was Robert Morris, superintendent of finance under the Continental Congress, who succeeded in inducing that body to charter a bank, 1781, modeled upon the lines of the Bank of England, which he believed would be useful in supplying him with funds in anticipation of revenues, and would in other ways improve the financial methods of the Government. The bank was established in Philadelphia, and subsequently chartered by both Pennsylvania and New York, and this the first bank of the New World "the Bank of North America" was of conspicuous service for a briefer period. The Congress had subscribed to a portion of its stock and had made its notes of issue receivable for public dues. The original capital of this bank was $400,000, but was soon increased to $2,000,000. The Bank of North America was denounced as "an undemocratic monopoly which was destroying the commercial equality" which should exist in a new republic, and in 1785 the Pennsylvania Legislature repealed its charter. This was restored two years later, and the bank was continued in operation up to the present day. The political difficulties under which it labored in the early days were only those which burdened the banking of that period.

Bank of New York Founded.--The Bank of North America had it original charter from the Congress of Confederated Colonies, and contained a provision preventing it from establishing branches within the several colonies without their consent. The act of the New York Legislature of 1782 was simply confirmatory of the charter granted by the Congress. In passing this act it at the same time prevented the securing of a banking charter by any other corporation in the State. In 1784 the Bank of New York was founded under articles drawn by Alexander Hamilton, but was unable to secure a charter for seven years. This third oldest organized bank in the United States was authorized to have a capital of $1,000,000, and could contract debts, including those on account of circulating notes, to three times the amount of the capital. The first home of the Bank of New York was in the old mansion of William Walton, at 67 St. Georges (now Franklin) Square. This was a three story house built of old yellow Dutch brick with hewn stone lintels, having been erected in 1752, and remained standing until 1881. The first officers were: General Alexander MacDougal, president; William Seton, cashier; Samuel Franklin, Robert Bowne, Comfort Sands, Alexander Hamilton, Joshua Waddington, Thomas Randall, William Maxwell, Nicholas Lowe, Daniel McCormick, Isaac Roosevelt, John Vanderbilt and Thomas B. Stoughton, directors.

In 1791 the Legislature was induced to relent, and give the Bank of New York a charter, and it began its corporate existence on May 2 of that year. This charter was extended several times until 1852, when it was reorganized under the Free Banking Law with a capital of $2,000,000. On January 5, 1865, it became a national bank with a capital of $3,000,000. The charter under which this bank was incorporated was a sample of those granted during the next few decades, which were notable for what they forbade than for what they permitted. These early charters stipulated that the banks must not trade in stocks of merchandise, nor hold any more real estate then was needed in the conduct of their business, except such property as was received in satisfaction of claims, against a debtor. The amount of indebtedness a bank might incur might not exceed three times its paid up capital, and the notes issued must not be of small denominations, nor exceed certain limits. In theory and practice a bank could do anything that was not forbidden.

Early Banks and Politics.--Until 1825 or during a period of thirty-four years, the charter granted in New York State made no specific enumeration of the powers banks might exercise. There were no checks on fraud; no examination of books or transactions; no method of preventing trickery. The Legislature during the first decade after 1791 granted few charters. The need for banks was not great, there was a prejudice against such institutions as monopolies, and the few established banks desired no rivals. For the first fifteen years the Bank of New York had no competition in the city except the New York branch of the Bank of the United States. More outstanding is the fact that the bank has become an important factor in politics, and the getting of a charter from the Legislature was something only attained by one having political skill or favor.

In 1792 the Bank of Albany was established with a capital of $240,000. In 1793 the Bank of Columbia at Hudson was incorporated with a capital of $160,000. This was at the behest of a Rhode Island company which desired to open a foreign trade and establish a whaling industry. The Federalists, or "Conservatives" were in power at this time, but stoutly opposed by the Republicans, or "Liberals." In 1799 Aaron Burr and the Republicans wanted to create a rival banking institution, but realizing the impossibility of this with so strong an opposition--led at the time by Alexander Hamilton--tried trickery with success. Burr conceived the idea of an incorporated company which should supply the growing city of New York with pure water and himself with a bank. Yellow fever and malaria, from which the city had suffered greatly, were thought to be impure water diseases. Colonel Burr with his scheme for the prevention of a return of these dread plagues, had little difficulty in getting a charter for a company with $2,000,000 capital to be spent in the creation of water works to send clean water to the heart of the metropolis. There was a proviso attached to the application for this charter by which, if it was not found practical to employ all the capital in the construction of the said water works, the company was to have the privilege of employing the surplus in the purchase of public stocks or in "moneyed transactions and operations not inconsistent with the laws and Constitution of the Untied States, or of the State of New York."

The charter was granted April 2, 1799, and the water works begun that same month. In less then two years wells, a reservoir, twenty miles of wooden pipe had been completed, and 1,400 houses in New York supplied with water by the company. For all this about one-half of the capital of the organization had been expended; the other million dollars were employed in banking. When the Croton Aqueduct was completed in 1849 the water works was dropped, and the Manhattan Company became purely a banking institution. Both this and its old time rival, the Bank of New York are stronger today than at any period in their history.

The Period of Chartered Banks.--The period from 1782 to 1829 may well be called the period of chartered banks. Not that there were so many incorporated during these years, but because it was time when banking was gradually evolving from the private "pawn broker" stage under the control of the individual owner, to organized institutions over which the State had some oversight, although this, at fist, was little more than the granting of a formal permission to do business. Coincident with this rise was an increase in the restraints placed upon banking by the State; restrains which were irksome and fought by the banks; which laid the foundation of present banking systems, even if only by proving the necessity of State control.

Political conditions changed in New York in 1803, and the Republican party came into power. That same year application was made for the chartering of the New York State Bank at Albany, which, through the influence of the Clintons and Livingstons was granted, "the grounds taken in its favor was that the only three banks in the State of New York--the Bank of Columbia, at Hudson; the Bank of Albany, and the Farmers' Bank, near Troy--were all in the hands of the Federalists. The Republican character of this bank and the passage of its charter were both secured y admitting all the Clintonian members of the Legislature to subscribe for a certain number of shares. The prevailing party in the Legislature refused a charter to the Merchants' Bank, already in operation under articles of copartnership, and also to a moneyed corporation applied for by the friends of Burr" (Hildreth). There was a great deal of scandal over this and like affairs, such as the chartering of the Bank of America in New York in 1812. An even greater wrath was aroused in the opposition interests, and insult was added to injury in 1804 when a re-application of the Mercahnts' Bank for a charter was not only refused, but an act passed prohibiting banking by unincorporated institution under severe penalties; the Mercahnts' Bank being given one year in which to wind up its business. From this year banking in New York State ceased to be a function to be performed by any unauthorized individual or organization. It was not until 1837 that this particular "restraining act" was repealed.

Multiplication of State Banks.--Quite naturally, after the law of 1804, there were many applications for bank charters. When the Federal House of Representatives refused to renew the charter of the United States Bank (1811) by one vote; and the vote in the Senate was a tie, the immediate effect was to give an added impetus to the formation of State banks. Within four years 120 State banks were created in the United States. In New York the political reins were held so taut as to prevent for a time a corresponding increase with the State. By 1812 nineteen banks had been chartered by the Legislature with an authorized capital of $18,216,000. Among these were the Bank of New York, the Manhattan Company, the Merchants', Mechanics', Bank of America, and the New York City Bank, all in the metropolis; the New York State Bank, the Mechanics' and Farmers' of Albany; the Bank of Columbia, of Hudson; the Bank of Utica, and others of lesser note. Twenty-four additional bands received charters between 1812 and 1829, the total valuation of all banks in the State then being $25,105,000, of which amount only a little more than half was authorized for banks in New York City.

National Events Affecting State Banking.--Before taking up the efforts toward banking reform in New York State which culminated in the "Safety-Fund" system of 1828, certain National events affecting banking should, at least, be mentioned. The War of 1812 threw a financial strain upon all the States, and particularly New York, which was borne rather well. Immediately following this came a remarkable expansion in settlements, business and speculation. The up-State sections of New York, for example, received a tremendous influx of inhabitants; and this was especially true also of the near-West. To finance the farmer and the building of settlements, banks had to be provided, and in the States beyond New York they were provided in the most wild-cat fashion. If New York is to be criticized for the part politics played in its restraint of banks, it is also to be congratulated that this kept their numbers within bounds. In the inevitable collapse that was to follow, the commonwealth found itself in a better situation than most localities save New England. The serious weaknesses in the banking conditions of that time were that banks were too readily established, were not compelled to make specie payments on their notes, and produced a fictitious prosperity.

Congress had blundered in refusing to renew the charter of the United States Bank in 1811, for, whatever its faults, it has exerted strong influence for sound currency. The second Bank of the United States was established by a bill of April 10, 1816. One of its first duties was to force State banks to resume specie payments. With the aid of the Treasury Department, it partially succeeded in this, but in so doing all but wrecked itself. It also wrought havoc among the State banks; between the years 1817 and 1829 about 195 banking institutions in all parts of the Nation became bankrupt. The panic of 1817 to 1819, with the minor recurrences of it during the next six years, and which were attended by universal suffering, were blamed on the United States Bank, and on all banks, for that matter, although these crises were principally reactions from the inflation following the war with Great Britain. The resentment aroused in the people at large was reflected in the multiplication of banking laws.

New York while fortunate in escaping many of the evils of this period, mainly because of the legal restrictions which had characterized the progress of its banking, did not escape joining in the flood of new legislation. As has been indicated, the charters of the early New York banks were very simple affairs saying little about the powers conferred upon the corporations. This condition had been changed slightly by the act of 1803, and was to be altered greatly by later laws. The Bank of Niagara at Buffalo, incorporated in 1816, for example, was required to pay its notes in specie, the first of which such a thing was demanded. This provision was thereafter inserted in all charters. In 1824 this provision was made even stronger by prohibiting all New York banks from issuing notes "payable in any currency other than the lawful money of the United States." In 1825, a charter was granted to the Commercial Bank of Albany enumerated for functions which a bank could exercise, and stipulated that it should "have no other powers, whatever, except such as are expressly granted by this act." This policy was adhered to strictly in the granting of all future charters, and in the renewal of old ones. These rules were signs of the popular distrust of banks in this post-war period of deflation, and led to even greater changes in the banking legislation of 1827 and 1829.

The Law of 1828.--In 1828 the Legislature passed a general law aimed at correcting some of the abuses which adhered to banking; it was one of the first attempts to "impose uniform regulations on the banks rather than to control each institution through special provisions in its charter." This act forbade directors from extending loans beyond three times the paid-in capital, to receive stockholders' notes, in payments for subscriptions to stocks, to pay out unearned dividends, or to purchase any evidence of the bank's indebtedness at a discount. "A method of computing profits was prescribed, and if losses at any time were in excess of the bank's undivided profits, its capital was to be regarded as impaired and no dividends were to be paid until it was restored." All losses sustained through a violation of these rules were to be borne by the directors. It was a severe law, and no bank was chartered while it was in force. On the other hand, the year preceding this, 1826, 123 applications were made for charters with only one granted. If the law was intended to discourage the seeking of bank charters in the State, it succeeded fully.

Many realized that legislation had gone too far, Governor Martin Van Buren for one. The law just indicated was not retroactive, and there were forty banks in the Commonwealth which did not, therefore, come under its provisions. But thirty-one of these had charters which would expire during the next four years, and it was realized that something must be done to encourage the existing banks to renew this charters , and other to seek incorporation, or the State would be deprived of necessary banking institutions. About this time Joshua Forman, a Syracuse lawyer, came to the Governor with a plan which it was urged would correct the evils of the existing system and at the same time encourage banking. Van Buren was won over and upon his recommendations the plan was laid before the Legislature, and after almost meeting defeat there, was passed.

The Safety-Fund Act.--This was the "Safety-Fund" plan or act of 1829 which, in brief, required all banks chartered thereafter to pay a graduated tax until the State had received a total of three per cent of their capital, the proceeds to be set aside as a fund for the liquidation of all liabilities, except the capital stock of bank that should fail. "The circulation of banks was limited to twice their capital, and loans and discounts of two and a half times the capital." All banks were to be examined three times a year, and all charters issued after 1829 were to be uniform. The old banks were given the option of sharing this system; new banks were not so privileged. This scheme failed to please the city banks for it seemed to give the advantage to the country institutions. The cities, because the banks were more heavily capitalized there, would pay more into the safety fund, and the likelihood was that the country banks would the more often fail and reap the advantages of the fund. Fifteen out of twenty New York City banks came in during the next decade. In 1825 the number of banks under the safety-fund was 76 with a total capital of $26,231,460; that of the other banks in the State being but $5,175,000. The fund by this time had reached $400,000.

The First Test of the Safety-Fund.--The first test of the fund came in 1837, another panic year. Andrew Jackson, who someone has said "had innate capacity for doing the right thing in the wrong way" issued his "Specie Circular of 1836" requiring the payments for all public land to be made in coin. The country had just passed through one of its periodical booms; speculation had been rife; credit extended, and unbacked paper very widely circulated. Jackson's love of "hard money" and the attempt to bring in specie payments of notes, was but one of the factors in producing a panic; but he was blamed. The calamity was inevitable and the greatest which, as yet, had hit the finances of the country. In 1837, there were in circulation notes of various banks to the amount of $149,185,000. These could not be redeemed with coin. Probably without a single exception, every bank in the United States in 1837 stopped specie payment. Three New York banks failed that year and the losses taken from the fund. The liabilities were few and small. In 1849 there was another panic; between 1840 and 1842 even banks failed, and by the tine the affairs of four of these has been straighten out the fund was exhausted. In 1845 the State boned for $1,000,000 to settle the claims of the insolvent banks. "The eleven banks had paid only $86,000 into the fund; their total assets after liquidation yielded $138,000." The settlement of their obligations required $2,565.000, which, with interest charges on the State bond, brought the total amount paid out up to $3,120,000.

The Safety-Fund was continued until 1866, when the charters of all the incorporated banks had expired. Meanwhile the Federal government had established national banks not subject to the special taxes of other institutions, and had also laid a prohibitive tax on the notes issues of State banks. This double combination almost did away at the time with the State bank as an important feature of banking. The history of the Safety-Fund covering nearly forty years is that of a good plan badly carried out. It was an interesting and valuable contribution to the art of banking, and taught lessons that were useful in later developments. Like systems have been tried in the West almost up to the present day. Canada established a redemption fund for the benefit of bank creditors in 1890.

Free Banking system.--The next step taken in the progress of banking in New York was the installation of the Free Banking System. The panic of 1835 created a demand for a general revision of the private banking laws, particularly those having to do with the securing of charters. As we have seen, a bank charter was often a political gift or purchase. Few could gain the privilege, and fraud and corruption were common features of what should have been a simple business transaction. Something had to be done to mitigate the evils of the banking monopoly as held by the chartered banks. Something had to be done, also, to prevent a recurrence of the wholesale failures which were shaking men's confidence in all banking systems. Abijah Mann fathered the act of April 18, 1838, by which the Free Banking System of New York was established.

Into the twenty-six sections of this law it is hardly necessary to go. The feature of the act which made it notable as New York's second important contribution to banking was that it was the "first practical exponent of the principle of a bank circulation secured as to its ultimate redemption, by collaterals placed beyond the power of the bank, in the custody of the government." Under the law any association wishing to issue notes was required to deposit with the State Comptroller, bonds of bonds, or certain classes of real estate mortgages, to be the security for one-half of the bank's circulation. In case of failure the States was to employ the securities to redeem the outstanding notes. This system of free banking was the model after which the National Banks set up during the Civil War were patterned. While not the first such system to be established--Michigan had tried it the previous year--it was the first that was enforced successfully and the one copied in most of its features by sixteen other States. The system was not perfect; there were too many loop-holes through which the schemer might crawl. The range of securities which could be deposited was too wide and led to losses which averaged almost a third of the par value of the notes issued by failing banks. With the door open to everyone who could deposit the required securities, too many entered it, and failures were numerous during the first decade. Amendments were made in 1844 and 1846 that every prospective banker should make a substantial deposit of specie; in the latter year a double liability was placed upon the stock-holders. In 1846 the Legislature was "forbidden to legalize the suspension of specie payments, or to grant special charters." The restrictions upon chartered concerns, the better standing of the "Free" banks, and the difficulties attending the renewal of a charter, led most of the banks in the State to reorganize under the free system. "In 1848 the number of free banks was fifty-three, and of individual bankers fifty-one, with an aggregate circulation of $9,993,762, against securities amounting to $10,640,182." Minor modifications in the State banking laws were made from time to time, and general revisions of all statutes in 1882, 1892, and later.

 

The History of New York State, Lewis Historical Publishing Company, Inc., 1927

This book is owned by Pam Rietsch and is a part of the Mardos Memorial Library

Transcribed by Holice B. Young

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