46

as may be received by the Suffolk Bank at the same discount as taken, without the permanent deposit of $5,000, provided said banks will make all their deposits at the Suffolk Bank, and at all times have money sufficient to redeem the bills taken." Also, That should any bank refuse to make the deposit required, the bills of such bank shall be sent home for payment at such times and in such manner as the directors may hereafter order and direct." The president was also authorized to compound with any bank not to purchase its bills.

The result of the hearty action of the Suffolk Bank, in accordance with this report of its committee, was a lively competition with the New England Bank, which soon brought the rate of discount on Massachusetts bills down to one-half of one per cent.. or even less. But even this, though so much less than in earlier years, still operated as a premium to keep the bills of the country banks in circulation, in preference to funds which could be used at par in payments of the Boston banks.

A committee of the directors of the Suffolk Bank, April 10, 1824, laying before the other banks of Boston their plans for checking the enormous issues of the country banks, especially those of Maine, called attention to the fact that the 11 banks of Boston possessed a capital of $11,150,000 out of a total for all New England of less than $20,000,000; yet that the country banks furnished $7,500,000of the circulating medium, while the banks of the city, with a capital more than equal to all the rest, kept in what might be fairly termed permanent circulation only $300,000. They stated that in less than three months the Suffolk Bank had received nearly $1,000,000 in country paper, the greater part of which had been sent home for collection or redeemed by agents in Boston. As the benefits proposed-an increased circulation and discounts-would be common to all the banks of the city, this committee proposed a co-operation of all the city banks in measures by which, if vigorously pursued, the banks might obtain a circulation of $3,000,000 and a proportionate increase in their deposits.

The result was an agreement between the Suffolk and six other Boston banks under which a fund of $300,000 was furnished in the notes of the several banks in the following proportions: State Bank, $50,000; Massachusetts Bank, $50,000; Union Bank, $40,000; Manufacturers and Mechanics' Bank, $40,000; Columbian Bank, $30,000; Eagle Bank, $30,000; Suffolk Bank, $60,000.

These bills were placed in the hands of the Suffolk Bank, which was to pay them out in equal proportions in purchase of country bank notes. To carry out the scheme it was agreed that the Suffolk Bank should receive from the other associated banks all their foreign money at the same or less rate of discount than the New England Bank, or other banks in Boston, received it, and should send it home for redemption, unless the issuing banks should make satisfactory provision for its redemption in Boston. May 24, 1824, the Suffolk Bank began business under this agreement which might be terminated by either party on 30 days' notice.

The animosity previously shown by the country banks against the Suffolk Bank while acting independently was redoubled as they began to appreciate the curtailment of their circulation that would result, and felt the necessity of keeping larger specie reserves. The association was termed the "Holy Alliance" and the Suffolk Bank derided as the "Six-Tailed Bashaw."

After a year's experience with the arrangement outlined, the Suffolk Bank agreed to receive from the associated banks at par, instead of at the minimum discount current, all the country money they might receive from their depositors, and immediately place it to the credit of the depositing bank.

The general arrangement made between the Suffolk Bank and the New England banks which opened an account with it, for the redemption of their bills, was as follows: Each bank placed with the Suffolk a permanent deposit of $2,000 and upwards, free of interest, the amount depending upon the capital and business of the bank. In consideration of this deposit the Suffolk Bank redeemed all the bills of that bank which might come to it from any source, charging the redeemed bills to the issuing bank once a week, or whenever they amounted to a certain fixed sum; provided, the bank kept a sufficient amount of funds to its credit, independent of the permanent deposit, to redeem all of its bills which might come into the possession of the Suffolk Bank; the latter bank charging it interest whenever the amount redeemed should exceed the funds to its credit; and if at any time the excess should be greater than the permanent deposit, the Suffolk Bank reserved the right of sending home the bills for specie redemption. In payment the Suffolk Bank received from any of the New England banks which kept an account with it the bills of any New England bank in good standing, at par, placing them to the credit of the bank sending them on the day following their receipt.

"The effect of the measure, partially adopted by a few banks, was such that the circulation of 16 banks in Massachusetts, in six months' time, decreased $382,371; one of them from $213.566 to $117,143, an enormous amount still for one bank, located in a small town. In Maine the decrease was $336,819 in six months; while in the same time the circulation of the Boston banks increased $283,497.”*

* Report of Committee on Banks, Rhode Island, 1826.

This increase of the circulation of the Boston banks (which were, of course, the institutions with largest capitals) coupled with the decrease in the circulation of the smaller banks of the State, favorably broadened and strengthened the general basis of the circulation. The amount of notes outstanding issued by the Boston banks was in 1826 about twice as large as four years previous, while those of the distant banks had decreased nearly 25 per cent.

When any bank refused to join in the Suffolk System," the Suffolk Bank simply presented its notes for payment at its counter. Now, as those notes were issued on the express condition that they should be redeemed on presentation, this proceeding on the part of the Suffolk Bank, however disagreeable to its debtors, can hardly Le called unjust or oppressive. It had, moreover, the desired effect of convincing the greater part of the country banks that it was far easier and cheaper to collect and pay their debts in Boston, than to continue under the manifold evils of the oid system, aggravated by the improved condition of their neighbors; for, as every part of New England has pecuniary transactions with Boston, all the bank notes which were redeemed at Boston were naturally at par in every part of New England.*

Although the hostility to the Suffolk Bank somewhat abated, as the system became more widely extended, and more and more country banks opened an account with it, still many of the weak ones always felt that it was arbitrary and oppressive.t

From the following letter, written in 1832 by the cashier of the Suffolk Bank to the Bank of Rutland, Vt., something of an idea may be obtained of the feeling then prevailing, and of the actual position of the Suffolk Bank with regard to the New England Banks. It also clearly states one of the principal reasons for requiring them to keep a perinanent deposit. He writes:

* **

"We have never required you to redeem your bills at this bank instead of your own; nor have we ever demanded of you an exorbitant price for counting your bills.' They will be received and counted at this bank whether you have a permanent deposit with us or not. We ask of you a permanent deposit as a consideration of receiving from you bills of all the other banks in the New England States in exchange for your own at par; some of which are converted into specie by us at a discount of one and a half per cent. In addition, we take the whole risk of those bills after they have been placed in our hands. If you still think the price we ask for transacting your business is exorbitant, and should prefer paying your bills at your own counter, we have no objections to sending them there; but we hope you will not expect us to take the bills of all the other banks in the New England States in payment for them at par. We have no intimation from other sources of a growing disaffection among the country banks; and if we had, we should not feel ourselves obliged to transact their business without a reasonable compensation. On the contrary, gentlemen who were very much opposed to the system we have pursued, at its commencement, now express approbation of it, and their willingness to contribute to its support rather than that it should be abandoned."

Occasionally, however, a bank would cut loose from the arrangement, in the hopes of getting up an increased circulation. Finding, however, that their circulation was then limited to their immediate vicinity, they were usually glad to return to the usual arrangement.

The banks of Maine, especially, for many years bitterly opposed the system, and there was never a time when there was not some opposition from one or more of the Maine banks-sometimes with the full approval of the State officials, as is evident from the following:

"The two banks at Bangor deserve particular commendation. These banks formerly complied with the requisition of the Suffolk Bank, for the privilege of redeeming their bills in Boston with current money; but that bank having, as the directors say, violated that arrangement between them, they withdrew their deposits and have for several months redeemed their bills with specie only, and at their own counters.

"They have, as will be seen by the abstract, a liberal supply of specie in proportion to their bills in circulation, and are entitled to the unlimited confidence of the community. The Boston alliance, as was to be expected, have constantly sent home their bills for specie, but all calls have thus far, and will, we doubt not, continue to be promptly met. Former attempts to resist this alliance, formed for the purpo e of controlling the pecuniary resources of New England, have proved unsuccessful; nor is it probable that two or three banks can now contend against it with any prospect of success. Whether the present system of paying tribute to Boston is susceptible of improvement, or how far it is consistent with the interest and honor of the State, or whether the evils which result from its operation are of sufficient importance to call for legislative action, are questions which we shall not undertake to decide."-Report of Maine Bank Commissioners, 1837.

That these sentiments were not long regarded as expressive of the true situation is evidenced by the following quotations from subsequent reports:

"Our banks have accomplished their great object, of furnishing a sound currency-sound, equal and uniform, in consequence of its redemption at par in the great central market of the country. The

*J. S. Roper in "Hunt's Magazine," vol. 24, p. 707.

+ One of the most strenuous opponents of the Suffolk Bank system was the Veazie Bank of Bangor. Through its instrumentality a law was passed in Maine, giving the banks of that State a certain delay, after demand at their counters, in which to redeem their bills in specie. The Veazie Bank availed itself of the time allowed, which it used to the annoyance of the Suffolk Bank. Having received in the regular course of its business a quantity of Veazie Bank notes, the Suffolk Bank would send a messenger to Bangor and demand specie for the same. The bank would acknowledge the demand and claim the lawful delay. In the meantime, it would collect Boston funds and send them to a well-known Bosten broker, who, himself no friend of the Suffolk Bank, would take great pleasure in exchanging them in one way or another for checks on that bank. He would them present himself at the bank. demand specie for his checks, and with the coin thus obtained pay it for the bills for which it had demanded specie some days before; in short, not only requiring the Suffolk Bank to hold the bills of the Veazie Bank for a certain specified time, but at the end of that time to furnish specie for their redemption.--D. R. WHITNEY, The Suffolk Bank.

bills furnish a most convenient instrument for exchanging the various commodities of commerce and agriculture, and go into wide circulation. * * * The system is admirable, and is, perhaps, without a parallel in the world; it leaves us nothing to desire, so far as an instrument of commerce is needed within the circle of the Eastern States."-Report of Maine Bank Commissioners, 1842, p. 11.

All the banks now in operation redeem their circulation in Bo-ton, except three: The Calais Bank at Calais, the Mercantile Bank at Bangor, and the Westbrook Bank at Westbrook. These three banks, the public will perhaps be surprised to learn, are sound and well-managed institutions, and perform all their legal obligations to their bill-holders. They pay their bills on presentation at their own counters, where alone, by law, they are bound to pay them. And their bills pass as cash in the immediate vicinity of the banks, although they do not even there answer all the purposes of money, as they cannot be sent abroad without loss; and if they chance to stray beyond a small and limited circle, or if wanted for foreign purposes, embarrassment and loss to the holder is the result; irritation and loss of confidence takes place not only in these banks, but to some extent in all.

Boston being the great business mart for New England, all money which is not current in business there cannot be said to answer all the purposes of money. *** The suggestion is therefore made, whether, under existing circumstances, there is not a moral obligation resting upon the directors of those banks to make their bills current in Boston.

The Suffolk system, so called, has been believed by some to be tyrannical and oppressive, adopted by the strong to compel those to pay tribute whom circumstances had placed in their power. But when it is considered that this system was merely to receive the bills of the country banks as cash, and present them at their own counters for payment, and that any other arrangement than this was a mutual bargain for mutual benefit and convenience, it is difficult to perceive in what consists the wrong. And it is believed that this system, and this system alone, in times gone by, has preserved our moneyed institutions from the general wreck which has fallen upon those of some of our sister States. -Report of Maine Bank Commissioners, Dec. 31, 1842.

The notes of the three banks above mentioned were at this time quoted in the weekly price currents at a discount of from one to eight per cent.

Again, speaking of the Calais Bank and the Mercantile Bank, in 1848, the Commissioners said: "Their bills will not circulate beyond a limited sphere. At fifty miles distance they cannot be used without loss, while the bills of the other banks of the State circulate, it is said, without loss to the farthest bound of the Union."

In general, it was the practice of each bank to gather together the bills of all other banks paid in over its counters and include them in its weekly remittances to the In Rhode Suffolk Bank for the purpose of meeting the redemption of its own bills. Island this practice was so far modified by the arrangement between the Merchants' Bank and the other banks of the State that each was allowed to include the notes only of banks in other towns than that in which it was located. This was far from general elsewhere, however; and the Bank Commissioners of Maine note, in 1840, that though some banks near each other exchange bills many send those of their immediate neighbors away to the Suffolk, and in this practice the Commissioners found another objection to the “condemned system," which thus "makes banks of necessity compete to do each other injury by preventing a circulation of their respective bills.'

Between the years 1831 and 1833 a great increase took place in the number of banks in New England. During this period no less than ninety new banks were chartered. By 1834 the redemption business of the Suffolk Bank had increased five-fold, from $80,000 to $400,000 daily. To reduce the business, it became necessary to modify somewhat the arrangement made with the Boston banks. Theretofore they had been allowed to send in all their foreign money at par. Now they might send in on any one day an amount equal to one-half their permanent deposit only. If they exceeded that amount they were charged one-tenth of one per cent. on the excess. They were also restricted to the foreign money received by them in their regular course of business, excluding deposits from banks and brokers. At the same time the permanent deposits of the Boston banks were reduced to $10,000 and a year after to $5,000.

In Rhode Island there was early inaugurated a sub-system of redemption on practically the same basis as the central system. It is thus explained by the Committee on Banks in 1836:

*

An arrangement exists between the Merchants' Bank in Providence and all but four of the banks in this State (except the Providence banks) to redeem their bills. The four banks not included in the arrangement are the Cranston, Kent, Village and Fall River Union Banks. The permanent deposits of the banks in the Merchants' Bank vary from $1,000 to $3,000 each. The whole amount of deposits is about $60,000. * * The Merchants' Bank receives at par from the banks with which it has an arrangement the bills of all other banks in New England, except of those in the same town where the bank is situated. Where the balance is against a bank upon the amount of bills collected, and the permanent deposit would be thus trenched upon, interest is charged. The interest accounts are closed and the balances carried forward once a month.

An arrangement also exists between the Merchants' Bank and the Suffolk Bank in Boston, as follows: The former receives at par from the latter all the bills of banks in this State except the four above mentioned. It remits at par bills of all the banks in the New England States except Rhode Island. The Merchants' Bank pays interest on any balance against it; the Suffolk Bank pays none. This arrangement is the basis of

that with the other banks, as before stated.

By virtue of this arrangement the Suffolk Bank was relieved from the necessity of keeping accounts and doing business with all the Rhode Island banks. Yet their redemptions were meanwhile carried on just as satisfactory through the medium of the Merchants' Bank as they could have been had each of the Rhode Island banks dealt directly with the Suffolk, When the simplification thus effected is considered, the

NEW ENGLAND BANK CURRENCY.

strange thing is not that the Rhode Island banks should have preferred to do business in this way, but that other States did not have similar sub-systems.

The suspension of specie payments in 1837 put an end at once to all coercive measures on the part of the Suffolk Bank, and consequently each bank was left to its own volition. Many of them continued to redeem their bills at the Suffolk as they had done in the past. The bills of these banks, according to Mr. Whitney, passed current all over the Union, and in some places even commanded a premium. Other banks withdrew their accounts and the bills of those banks had a local circulation only. At first many of the weak banks, particularly those of Maine, which had always been opposed to the Suffolk system, were inclined to break off, and even some of the stronger ones were ready to abandon the system entirely. The most of them were held together, however, and at the resumption of specie payments the Suffolk Bank was able to take its old place at the head of the redemption system.

As to the internal organization of the Suffolk Bank throughout practically the whole period of its existence as a center of redemption, it may be noticed that the practice was early inaugurated, and thereafter adhered to, of paying a sufficient salary to the head of the Foreign Money department to cover all expenses connected therewith -he hiring his own clerks and assuming all loss by counterfeits and uncurrent or muThe salary was from time to time increased as the business grew, until tilated bills. from $4,250 in 1826 it had risen to $8,500 in 1837; $10,800 in 1846; $20,000 in 1849; $24,000 in 1853; $30,000 in 1854; and $40,000 in 1857.

The total expenses incurred by the bank in carrying on its foreign money work for the year 1858 was $40,000-the largest amount ever appropriated for the purpose. The redemptions during this year amounted to $400,000,000. In other words, the busine s was carried on at an expense of only 10 cents per $1,000. It is interesting to compare with this the results of our present system of redemption of National Bank In the fiscal year 1894, the total amount of such notes passing through the redemption agency in the Treasury Department at Washington was $101,767,455, of which $50.944,080 were soiled and mutilated notes returned for destruction and reissue, $10,929,535 more were in final redemption of notes of banks no longer issuing circulation, and only $39,893,840 normal current redemption. This redemption was carried on at a cost of $107,445-or $1.06 per $1.000.

notes.

When it is remembered that it is only through constant working of an effective system of redemption that elasticity can be secured and every tendency to expansion in excess of the demands of commerce promptly checked, the importance of this showing can not be too strongly emphasized. In New England at this time the circulation of the banks for which redemption was carried on was less than $40,000,000. The whole circulation was, therefore, on an average, redeemed ten times over during the year.* At the present time an amount equal to the entire circulation of the National banks does not pass through the redemption agency in less than two years, even at the rate of last year's redemptions, which were far larger in proportion to the circulation of the banks than at any other time for the past fifteen years.

The following table shows the amount of notes of New England banks annually redeemed through the Suffolk Bank :

DATE.

REDEMPTION.

1851

$243,000,000

1835.

95,543,000

1844.

126,000,000

1852

245,000,000

1836.

126,691,000

1845.

137,000,000

1853

288,000,000

1837

105,457,000

1846.

141,000,000

1854

231,000,000

1838

76,634,000

1817.

165,000,000

1855

341,000,000

1839.

107,201,0.0

1848.

178,000,000

1856

307,000,000

1840..

94,214,000

1849

199,000,000

1857

$76,000,000

1841

109,088,000

1850.

220,000,000

1858

400,000,000

THE BANK OF MUTUAL REDEMPTION.

The opposition to the Suffolk Bank, which had existed from the very inception of the system, had in late years been diverted, by its acknowledged success as a regu lator of New England Čurrency, from the system to the Suffolk Bank, this largely because of the handsome profits which its business permitted it to divide. Indeed,

*On this point, a committee appointed to examine the banks of Connecticut in 1837 reported that they have taken pains to inquire at each bank the average period of the circulation of their bills, and find, that so rapidly do their bills circulate and return for redemption, that for the six months prior to the 1st of April last about two-thirds of the bills of the Connecticut banks in circulation were redeemed once in thirty days and the other third within about forty-five days from the time they were issued."

So, too, in 1841, the Bank Commissioners of Maine stated that the average circulation of the Central Bank of that State for the preceding six months had been $48,000, and the average monthly redemption of its notes in Boston during the same period $38,000.

the President of the Bank of Mutual Redemption stated in 1862 that ever since 1828, when the Lowell Bank, wit. which he was then connected, was required to place one-tenth of its capital in the Suffolk Bank, he had advocated the establishment of a bank in Boston, to be owned by the New England banks, and to look out for and protect their interests there.

The Boston banks and the larger proportion of the country banks were, however, so well satisfied with the system as carried on by the Suffolk Bank that it was not till 1855 that sufficient co-operation was assured to permit success with an independent undertaking. In that year the Bank of Mutual Redemption, at Boston, was established with the express object of redeeming the bills of New England banks-the stockholders' by-laws reciting that, "as the bank is always to do the business of redeeming the notes, the currency of the New England banks at par, when redeemed at all, everything else in the management of the bank shall be made subsidiary and subservient to the proper discharge of the duty, with a discreet and conservative care for the common good."

Its stock, of which $500,000 was subscribed and paid in, was held only by the New England banks, no one of which would hold stock in excess of five per cent, of its capital or above $20,000. The Directors were all required to be stockholders in some one of the subscribing banks and inhabitants of the New England States and three-fourths of them inhabitants of Massachusetts. Except as otherwise provided the bank was subject to the provisions of the banking laws of the State. The more important of its special provisions were that no notes of less denominations than $5 were to be issued; nor should the aggregate circulation exceed one-half the capital stock; or, for more than three consecutive days, three times the specie held; the bank was forbidden to receive the bills of any bank at a discount; and a reserve of ten per cent. of the capital must be maintained.

The bank went into operation in 1858, at the opening of which year 135 New England banks were interested as stockholders, and 35 kept a permanent deposit with it, aggregating $143,000. Upon its application to enter the Clearing House much of the existing strife was manifested.

The bank, however, was finally admitted to the Clearing House; and as soon as it was fairly organized the country banks which were interested in it withdrew their deposits from the Suffolk and transferred them to the Bank of Mutual Redemption. For some little time some friction existed between the two redemption agencies. At first some of the country banks complained that the Suffolk refused to present their bills for redemption at the Bank of Mutual Redemption, designated for that purpose by them, and even refused to accept specie at its own counter, but held them until a large amount had accumulated, and then sent them home for specie. The public mind was somewhat disturbed lest this antagonism should endanger the system. “There is no difference of opinion," said the Bank Commissioners of Massachusetts in 1858, among the officers of the banks of this State or among practical business men that the system should be maintained in its integrity, whatever agent or agents in Boston may be employed for doing the business. The redemption of their bills in Boston, by all New England banks, has become indispensable in securing an extensive par circulation for their currency, and in facilitating the transaction of business."

The immediate cause of the complaints above alluded to was amicably adjusted for a time-the Suffolk Bank agreeing to receive from the Bank of Mutual Redemption the notes of banks which still kept their accounts with it, and sending to it the notes of banks which had transferred their accounts to the latter institution. But on November 1, 1858, the Suffolk Bank gave up its agency in the system and disclaimed all further responsibility, assigning as reasons:

1. Because its main feature, the right to send home bills for specie, cannot be given up without destroying its efficacy;

2. Because their exercise of this right is effectually made use of by those banks hostile to the Suffolk to place it in a false attitude toward the public; and

8. Because, under the existing circumstances, the bank does not wish to stand in the way of a trial of the attempted experiment of a foreign money system to be conducted on less stringent principles.

The Suffolk, however, while thus discontinuing the regular business of counting and assorting country money, announced its willingness to receive such money at a discount of 25 cents per $1,000; and several of the Boston banks made such an arrangement with it. It also continued to receive from such of its country correspondents as kept a satisfactory account with it such country money as they might have occasion to remit. So that during the ensuing years the business was shared by the two banks; but in other respects the system was not materially different from the "Suffolk System," as previously carried on.

Upon the suspension of specie payments, in December, 1861, the system was, of course, greatly deranged, and in fact practically broken down: For its main basis had been the right to demand specie in redemption whenever a bank refused to fulfill the requirements as to its redemption in Boston; and when this right had to be given up