The History of New York State
Book 12, Chapter 19, Part 2

Editor, Dr. James Sullivan

Online Edition by Holice, Deb & Pam


Trials of the Free Banking System.--The free banking system had to have its trials before proving itself worthy. One of it severest tests came in 1857, when the "Western Blizzard," as the panic of that day was called, hit the banks of the East. There had been a war with Mexico which, while it was not followed by the customary boom, did boost business. The discovery of gold in California in 1848 with the subsequent adding to the gold supply of the country profoundly affected the economic development of the Nation everything seemed prosperous and speculation against lifted its head. True there was a warning given by several failures in 1854 of prominent banks including one in Buffalo. But another boom had been born and by 1856 had reached unusual limits. In the early months of 1857 the Nation had every appearance of extraordinary prosperity. Then came an unexpected slacking of pace; credit had again been stretched too far. Supposedly strong banks in the West failed, and immediate demands were made upon the financial resources of New York, more particularly of the city. Several of the failures had been due to embezzlement and stock gambling. The populace lost faith in all banks and raided them for their deposits. In September, many of the large banks in the country suspended; New York tried to breast the wave. The Bowery Bank went under first, and runs were started on the other city institutions. On October 13.,1957. $4,500,000, above nine per cent of the total deposits in coin were withdrawn from metropolitan banks, and that evening its was decided to suspend specie payments. It is said that with the exception of the Chemical Bank of New York and a very few others, all the banks in the country stopped payment.

In New York the suspension lasted only sixty days. Two things were shown concerning the banking system of the State: That the reserve required was hardly enough for safety, and banking was too "free." It was too easy to issue bank notes; any individual or association could send out its notes so long as they abided by the rules. Under the system the fluctuations in the amount and value of the paper currency in the United States was greater then any other country, and tended to produce too many bankruptcies and failures. These conditions were in a measure corrected during the Civil War by the National Bank Act, which, while in many respects founded upon the Free Banking Law of the State of New York, differed radically from it in its effect upon the promiscuous circulation of notes. One odd result of a part of the Free Banking Law was that by the section which forbade a bank to suspend specie payments under penalty of forfeiture of charter all banks in the State were under automatically threatened with loss of their charters for having done so. Favorable court decisions determined the status of the banks to the satisfaction of all concerned.

Introduction of National Banks.--As has been already indicated, the Civil War brought out an innovation which threatened to d away with State banks, and indeed, almost did s ion some States. The outbreak of the conflict between the States was almost coincident with a suspension of specie payment. With the war costing a million dollars a day, the Federal Government had to add to the difficulties of the situation by large issues of notes, and the battle between the "greenbacks" of the national government and the issues of the 1,600 banks in the country was on, with the outcome never in doubt. Meanwhile a better method of financing the war was found in bonds, in the sale of which, under the leadership of that genius, Jay Cooke, the banks of New York ably assisted. The need was manifest of a uniform currency and a better market for the bonds, both of which were attained by the founding of a new banking systems, which was little more than an application of the free-banking systems of the States on a national scale. After much discussion the national Banking Act was passed and signed by President Lincoln on February 25, 1863. The distinctive principles of this system were government supervision of the operations of banks, and a circulation based directly upon the securities and guarantee of the government. The Federal authorities had found the key which opened the door to the sale of National bonds, and a more uniform, more stable circulating medium.

The greatest opposition to these banks came from the East, particularly New York, where the State banks were more numerous and strongly entrenched. Most of the early National banks were established in the small towns of the West. Even the first three in New York were small institutions. The First National Bank of New York was number twenty-nine on the list. As late as the middle of November, 1864, there were only 584 National banks in the whole country. Possibly the intimation of Jay Cooke that if the "New York bankers kept out of the system a new bank with a capital of $50,000,000 might be established there backed by the moral support of the Government" had much to do with the acceptance of the National bank in New York. More influential, however, was the imposition of a ten per cent tax on the notes of States banks which made the. bankers see light. The tax was not to go into effect until July 1, 1866, so the banks in New York had a year to prepare to meet the inevitable. In 1866 there were double the number of National banks in New York than banks of all other kinds; the State banks, for a time, were greatly reduced in numbers.

When the National banking system went into effect there were 309 State banks in operation in New York; five years later there were but forty-five. In 1863 there were seven national banks in the State; in 1868 there were 304. This condition did not hold for long, for as years went on, the high premium on government bonds destroyed any profits there were on circulating notes based on them, many of them issuing no notes in the present day. The State banking system provides for as much safety as the national, so there is little incentive to forsake State banking by those who desire to conduct a general banking business of discount, loan and deposit. From the low ebb of 1868, the State banks rose to more then 200 by 1894; meanwhile the National banks had increased only thirty, the total being 334, a number probably never since exceeded. Through the last four decades the commercial banks of the State have tended to decrease in numbers and increase in resources and capital. In New York City, there are about as many such banks as there were forty-five years ago. In Greater New York in 1889 there were 141 State and National banks, and trust companies; in 1926, 143. New banks had been organized during this period, but mergers had kept the numbers about the same. Up-State, in the three larger cities during this same period, there had been a reduction in the number of like institutions. In Albany, in 1889, there were ten such, in 1926, but five. Buffalo had thirteen banks and trust companies in 1889; in 1926 they numbered seven. Rochester had nine in 1889 and eight in 1926. The amount of resources of the institutions of these three cities had increased from $67,000,00 in 1889 to $847,000,00 in 1926. As illustrative of the centralization of resources one may note that while the three largest banks of Albany had fifty-five per cent of the resources of all the banks in the city, in 1926 they owned ninety-four per cent. In Buffalo the three largest had forty-two per cent of the resources of the banks in 1889, while in 1926 they held eighty-nine per cent. In New York City at this same time (1889) the ten largest banks had total resources amounting to $343,000,000; in 1926 by the same computation the sum was $6,098,000,000. The ten largest controlled thirty-three per cent of the banking resources in the city in 1889; in 1926 the percentage was fifty-nine. The concentration of banking power is not peculiar to New York but is more evident there.

New York the Nation's Banker.--Thus far in this chapter the attempt has been made to show the rise and to trace the progress of banking in the State, confining the attention simply to the development of the State bank as the typical institution and of the National bank which was patterned after it. These two, of course, do not comprise the whole system of banks nor does it touch several interesting features of the Commonwealth's banking. After the Civil War period, New York held so high a place in the financial activities of the Nation as to make its history National. Space does not permit the telling nor would a book contain, the story of New York's part in the money affairs of the country. As the financial center of the United States, New York City has made much of the banking history of the country. It saved the situation in the recurring panics; made some of them; and also made possible the reserve system by which they may be prevented. In the crises of 1893-95, the city was last to be effected and first to make a recovery. The stand taken by its financiers made possible the currency reform which was the main result of that critical period. In what may be called the "last panic" in 2907, it was the weakness of such a bank as the mercantile, and the failure of the Knickerbocker Trust Company that brought it on. But it was the city which realized the need of cooperation among banks which led to the Federal Reserve System, the most potent factor in the financing of the World War. The tale of the aid given by New York in the raising of five National loans totaling nearly $22,000,000,000, has filled several volumes. The story of the cooperation between the banks which, after the war, eased the country down to a peace-time basis without severe shock, has yet to be written. However interesting and important, the history of banking in New York State after the establishment of the National banks, in a brief chapter attention must be confined to the bare tracing of the growth of some of its more notable contributions to finance and banking, leaving the chronological route and using the subject way. The savings bank had its rise relatively early, and progressed along with the other banks until its resources exceeded those of any one class of banking. Then, there is the trust company, the New York Clearing House, the Federal Reserve System, private bankers and the stock exchange. Mention must be made of the growth of bank supervision and the New York State Banking Department.

State Banking Department.--As far back as 1829 three commissioners were appointed to aid the comptroller of the State in the management of safety-fund banking with oversight of the banks which became a part of the system. Of these bank commissioners, one was appointed by the Governor and Senate, another by the banks in the southern part of the State, and the third by the remaining banks, the method of appointment being based on the idea that each would be a check upon the other member. They were supposed to supervise and inspect banks and report annually to the Legislature the result of their investigations. Every bank in the system was to be inspected every four months by one or all of the commissioners, and if any three corporations desired it, make a special examination of any bank which they thought was in need of it. The commissioners could not be interested financially on any banking institution; the payment in full of the capital stock must be proven to the commissioners before the bank could start business; and in case of insolvency, after the Chancellor had determined the liabilities of the bank, the commission was to handle the settlement of its affairs. In 1837 the appointment of the commissioners was placed in the hands of the Governor and Senate.

As one reads of this plan for supervision of the banks, it would seem that our forefathers had hit upon a most perfect way of performing a delicate job. Nearly all of the work laid out for the Commission is similar to that performed in the present day; the improvements on the idea being few, and consisting mostly of details. Actually the commission was a failure. Men were given places upon it according to their political views without consideration of their qualifications to discharge their delicate duties. The stock of the safety-fund banks went to political partisans; too much of the money handled stuck to the fingers of the handlers. Up-State profited by this commission rule, so it was claimed, and the city banks were compelled to pay tribute; counter claims were made buy the country institutions. The Free Banking Law of 1837 placed even greater powers in the hands of the commissioners, and the scandal became greater. In 1843 the commission was abolished and the duty of the examination of banks given to the comptroller, and remained with that office for a decade.

The increasing multiplication of banks from 1845 to 1851--they more than doubled in the State--brought such an increase in banks supervision to place it beyond the ability of the comptroller's office to handle. In New York City alone a dozen banks were organized in 1851 and fifteen the next year. In order to care for the increase in banks, the New York State Banking Department was founded in 1851 with a superintendent of banking in charge. Its duties were much like those of the older commission but much elaborated and more numerous. There were more varieties of banks, and many more laws to be enforced. One of the requirements of the department made two years later, was that the banks of New York City should publish each week a statement of the average amount of its loans, specie, deposits and circulation for the preceding week. There were fifty-two banks in the city at this time. And this was but one of the multifarious activities of the department.

At the present day the New York State Banking Department has under its supervision a "greater variety of financial institutions than any similar department. The purposes for which these institutions were organized differ materially, and necessarily the laws governing the various classes also differ; the three principal classes being, of course, banks, savings banks, and trust companies. The following is a list of these organizations, the number of each, and their resources as shown by the reports of the department January 1, 1927:



State Banks



Savings Banks



Trust Companies



Savings and Loan Associations



Credit Unions



Private Banks



Safe Deposit Companies



Investment Companies



Personal Loan companies



Securities Companies



Land Loan Bank



Building Lot Association






Clearing House Association.--The weekly reports demanded by the Bank Department in 1853 led indirectly to the birth of one of the outstanding features of the Nation's banking. These reports often were used to cover a bank's true condition, and it was not until the New York Clearing House was set up that this practice was checked. The idea of such a body had been suggested by Albert Gallatin as early as 1841. In 1851 George B. Lyman published a letter in the "New York Journal of commerce," a suggestion that a bank should be chosen as a medium of exchange; "that all city banks keep an account with it, and sent their gross exchanges to it at some regular hour each morning." On august 16, 1853, a committee met to draft a plan, which plan was printed in the "Bankers' Magazine" signed by Lyman. This plan was adopted and Mr. Lyman was made manager (September 13, 1853). The first clearing was held on October 11 in the basement of 14 Wall Street, but soon was change to 82 Broadway, and again to the Bank of New York. Another change or two and the Clearing Association was installed in its own building on Cedar Street. Such was the rise of the New York Clearing House. Boston followed suit in 1856; Philadelphia in 1858; Chicago in 1865, and at the present time there are 182 regularly organized clearing houses with special arrangements in scores of other places. Levi P. Morton, former Governor of New York and financier, said of this movement that "at the outbreak of the Civil War the New York banks were enabled by it to come instantly to the assistance of the Government with large sums, which earlier they could hardly have commanded otherwise; and later in the panics of 1873 and 1893, the issuance of $25,000,000 in loan certificates on the fist occasion, and nearly $50,000,000 in the second, again did much to withstand the terrible pressure of those times."

The clearing house did away with the cumbersome method of sending messengers with their packets of notes and checks to each of the more than fifty banks in the city at the time of its origin. Each bank had to keep detailed ledger accounts for each of the other banks. Daily settlements were impossible, and the custom was to use one day of the week for this. This gave many openings and time for trickery and even fraudulent manipulations. Not only did the new method obviate many of the difficulties of these transactions, save time and money, but prevented fraud playing much of a part in the exchange. It also improved banking methods by "compelling weekly reports and by exercising supervision" over the banks admitted to membership. When the association was formed there were fifty-two banks in it, with a combined capital and surplus of $49,000,000, and deposits aggregating $39,000,000. Their loans were $97,000,000. D the cash on hand $9,700.000; notes outstanding amounted to $9,500,000. Compare this with the table which follows of the present membership of only thirty-one members and the statistics of their condition and some hint may be gained of the progress made by banking since 1853. The Clearing House now handles more than a billion dollars a day in three clearings, sometimes adjusting a third of this sum in six minutes.


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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