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INSURANCE OF BANK OBLIGATIONS IN SIX STATES

During the Period 1829-1866

Carter H. Golembe and Clark Warburton

The Federal Deposit Insurance Corporation

1958

jflSUKANCE OF B A M OBLIGATIONS IN SIX STATES CURING THE PERIOD 1829*1866

This is a study of the first attempts in the United States to
bank creditors (depositors or noteholders or both) through use
of the insurance principle* No comparable study of the insurance plans
operated in six States prior to 1866 has ever been made, and only one
of these has been previously analyzed. The authors have drawn, for almost
all of their information, on original source material, much of which was
unknown or discovered after having been thought lost for nearly a century.
It iB believed that in addition to providing a detailed account of the
forerunners of Federal deposit insurance, the study makes a significant
contribution to American banking history.
protect

Among the highlights of the study are the following:
A description of the purpose of bank-obligation insurance, as
viewed by the men who first considered such a plan in this country in 1829.
(Ch. II, pp* 6-10.)
An account of the origins of modern bank examination procedures
and their relationship to insurance. (Ch. II, pp. 13-18.)
The role of bank supervision in the operation of Indiana's mutual
guarantee insurance plan— the most successful of all such plans operated
during this period. This includes instructions to examiners and extracts
from the private correspondence of supervisory officials. (Ch. IV, pp. 1628. See first the third paragraph on p. U of Ch. I.)
A description of the short-lived insurance program operated in
Michigan and its collapse after the panic of 183?j and an account of the
extraordinary difficulties encountered by bank examiners in Michigan in
the 1830’s. (Ch. V. pp. 18-27 and 27-33*)
The development of the deposit assumption technique for the pro
tection of insured creditors of Ohio banks; and an appraisal of the vital
role played by insurance in enabling insured Ohio banks to survive the
panic ,of 1857 without a single failure, including an account, taken from
private correspondence, of actions by supervisory authorities. (Ch. VI,
pp. 25-30. See first the third paragraph on p. if- of Ch. I.)
plans.

A summary of the important lessons taught by the early insurance
fChr VTEI, pp. 2 and 3 .)

PREFACE
This study of insurance of bank obligations in six States
prior to 1866 is the outgrowth, of a larger project which was begun
in 193^ shortly after the Division of Research and Statistics was
established. Under the direction of Mr. Mortimer J. Fox, the first
chief of the Division, Miss Florence Helm and Mrs. Ethel Bastedo
began to collect material on the experience of States with deposit
insurance. Within, a few months they had obtained considerable in
formation on the character of the deposit guaranty legislation in
eight States during the quarter of a century preceding establishment
of the Federal Deposit Insurance Corporation, and had become familiar
with references to the New York and Verjnont "safety funds" in a
report of the National Monetary Commission and Knox's History of
Banking*
In October 193^-, Mr* Clark Warburton was placed in charge
of the survey of previous experience with insurance of bank obliga
tions, with Miss Helm continuing for a tine to work on statistical
data and Mrs. Bastedo on the legislation in the eight States with
deposit guaranty systems. By the end of that year enough work had
been done to report: "Surveys have been made of State plans for
the guarantee of bank deposits." 1/ However, it was realized that
more exhaustive studies were desirable than these brief surveys, and
a comprehensive project was outlined, of which a description was
published in an inventory of current research on financial problens
prepared at the National Bureau of Economic Research in cooperation
with government agencies, universities, and other organizations. J
During the next few years progress on the studies was slow
for several reasons. Collection of statistical data on the deposit
guaranty funds, and on bank failures was found to be far more
difficult than had been anticipated. It was also found that bank»
obligation insurance or mutual guaranty systems had been in operation
in four States, besides New York and Vermont, prior to establish
ment of the national banking system, that almost nothing had been
published regarding them, and that the published accounts of the
experience of New York and Vermont were inadequate for appraisal
of their degree of success, their deficiencies, and the reasons
for their discontinuance. In addition, Mr. Warburton's time soon
became preoccupied with work more closely related to current opera
tions of the Corporation and with other research projects, notably
a study of bank failures and losses to depositors in the United
States from IQ65 to 1933, with attention to the reasons for the great
waves of bank failures that were concentrated in certain years.
It was not until 19^1 that Mr. Warburton was again able to
devote a sizable portion of his time to the history of bank-obligation
1/ Annual Report of the Federal Deposit Insurance Corporation
for 193U, p. 29.
2/ A Program of Financial Research, Volume Two (National
Bureau of Economic Research7 l937)> pp • 157-58•

iii

insurance. During the next two years he reviewed the material that
had been obtained on the eight systems of deposit guaranty estab
lished "between 1907 and 1911, collected and analyzed additional
infoimation, and prepared reports on three of these systems. In
addition, considerable information was collected by two assistants,
Miss Carol Colver and Miss WilheLaina Sharpe, on legislation per
taining to the six systems of bank-obligation insurance established
■between 1329 and 1858, and on the operations of four of them. But
early in 19^3 , because of various circumstances partly associated with
the war effort, all work on the project was suspended indefinitely.
Work on the project was resumed in 1952. It was decided
to give first attention to the pre-1866 experience, with Mr. Carter H.
Golembe responsible for preparation of reports on each of the six
systems. Mr. Warburton has had general direction of the studies,
suggesting facets that needed exploration and providing editorial
comments. Mr. Golembe has been assisted by Miss Helen Thompson; and
Mrs. Dorothy O ’Gwynn, Mrs. Eileen Payne, and Mrs. Hazel Shea have
given stenographic and clerical service. Miss Jeanette Karp and
Mr. David Cole have read the manuscript and made many valuable
editorial suggestions. Mr. Golembe and Mr. Warburton are jointly
responsible for the final results as they appear in this book.

Edison H. Cramer, Chief
Division of Research and Statistics

January 195®

Table of Contents
INSURANCE OF BANK OBLIGATIONS IN SIX STATES

Page
I»1
Introduction ........................................ .
Extent and. character of the insurance plans. . . . . . . .
I-l
Supervision of banks participating in insurance systems . 11*6
protection of creditors of banks participating in
insurance system.................................. 1-12
Appraisal of the insurance systems ........................ 1-17
Insurance of Bank Obligations in New
Review of I'Tev York banking history

York, 1829-1866 . . . .
II-l
to l8<S6~ . . . . . . . .
II-l
Character of the insurance plan........................II-4
purpose of the insurance legislation ...................II-6
Statutory provisions relating to supervision and regula
tion of participating banks.................. .
11-13
Humber and obligations of Hew York banks, 1829-1866 . . . 11-19
History of operation of insurance system.............. II-3^
Appraisal of supervision and regulation of insured banks . 11-50
Appraisal of New York’s insurance system.............. II-5^
of Bank Obligations in Vermont, 1831-1866 . . . . III-l
Review of Vermont banking history to"lo31. "1 . ..........III-l
Character of the insurance plan........................III-l
Supervision and regulation of participating banks . . . . III-3
Number and obligations of banks. ...................... Ill-4
History of operation of the insurance system........... Ill-11
Appraisal of supervision and regulation of participating
hanks. . . . . . . . . . . . . . . ....... . . . . . .III-lS
Appraisal of Vermont's insurance plan.................. 111-19

Insurance

Insurance of Bank Obligations in Indiana, 183^-1865. . . . . . IV-1
Review' of Indianabanking history to 1865. « • ........... IV-1
Character of the insurance plan.............. ......... IV-4
Supervision and regulation of participating banks......... IV-5
Number and obligations of Indiana banks, 1835-64 ......... IV-9
History of the operation of the insurance plan . . . . . . IV-15
Appraisal of the supervision and management of the Branch
Banks. ........... ............. ................. IV-16
Appraisal of the insurance plan................ .
IV-28
Insurance of Bank Obligations in Michigan, 1836-18^2 ....... V-l
Review of Michigan banking history to 1844 . . . ......... V-l
Purpose and character of the insurance plan.............. V-3
Statutory provisions relating to supervision and regulation
of participating banks............................... V-5
Number and obligations of Michigan banks, 1835-41. ....... V-9
History of operation of insurance system................ V-l8
Appraisal of supervision and regulation of participating
banks............................................... V-27
Appraisal of Michigan's insurance system . ............... V-33
Appendix............................................. V-37

Table of Contents (continued)
mSURAXKS OF BANK OBLIGATIONS IN SIX STATES
Page
Tnaurance of Bank Obligations in Ohio, l81J-5-l866........... VI-1

Review of Ohio "banking history to 18&5* • * * ........... VI-1
Character of the guaranty legislation........... .
VI-^
Statutory provisions relating to supervision and regulation
of branch hanks......... ...........
VI -7
Number and obligations of Ohio hanks, 1845-65........... VI-11
History of operation of insurance system......... .
.VI-20
Appraisal of the supervision and regulation of partici
pating banks...................................... .-32
Appraisal of the insurance p l a n ......... ............. VI-42
Insurance of Bank Obligations in Iowa, 1858-1865. ......... VII-1
Review of Iowa banking history to I&65. . . . . . ....... VII-1
Character of the insurance p l a n ....... ............... VII-3
Statutory provisions relating to supervision and regula
tion of Insured banks ........... ...................VII-5
Number and obligations of insured banks ................. VII-9
VII-13
History of operation of insurance system......... .
Appraisal of insurance system.................... . • VII-16

The Continuity of Bank-Obligation Insurance Problems. . . * VIH-l
Bibliography....... . ........... . . . . . . . . . . . .

IX-1

List of Tables
Page

1 . Principal Provisions of Bank-Obligation Insurance Plans
Adopted by Six States, 1829-1858 ........................1-3
2 . Extent of Banit-Obligation Insurance in Six States, 18291366 ................................................. 1-5

3 . Principle Provisions Relating to Supervision of Banks
Participating in Bank-Obligation Insurance Systerre, Six
States, 1829-1866. . . . ....... . . . . . . . . . . . . .

1-8

Iv. Insurance Disbursements and Bank Creditor Protection, States
with Bank-Obligation Insurance Systems, 1829-1866. . . . . .1-14

5. Insurance Funds and Assessments, States with Bank-Obligation
Insurance Systems, 1329-1866 ...................... .

.1-16

6. Number and percentage Distribution of Operating Banks, by
Insurance Status, New York, 1829-1866.............. . • 11-20
7.

Amount and Percentage Distribution of Bank Obligations,
Operating Banks by Insurance Status, New York, 1829-1866 . II-24

8 . Obligations of Banks Participating in Insurance, by Type of
Obligation, New York, 1829-1856........................ 11-27

9. Number, Deposits, and Circulation of Banks Participating
in Insurance, by Size of Bank, New York, 1834, 1642, 1855* 11-30
10.

Insured Obligations and Insurance Coverage, New York,
1829-1366........... ...............................

11-33

11. Participating Banks in Serious Financial Difficulties,
New York Insurance System, 1829-1866 ..................

11-35

12. Protection of Depositors and Noteholders, Participating
Banks in Serious Financial Difficulties, New York Insurance
System, 1829-1366.................................... 11-39
13-

Insurance Receipts and Expenditures, New York, 1829-1866 . 11-44

14.

Insurance Fund and Insurance Assessments, New York, 13291366 ...............................................

11-48

15. Statutory Limitations on Bank Operations........... . . 111*5
16.

Number and Obligations of Vermont Banks, by Insurance
Status, 1831-1858.................................... III-8

17.

Deposits and Circulation, of Vermont Banks by Insurance
Status and Year, I83I-I858 ...........................

III-9

10. Number, Deposits, and Circulation of Vermont Banks, by
Insurance Status and Size of Bank, 1833/ 184-3* 1849- . • .111-10

vii

List of Tables (continued)
Page

19. Bank Creditor Protection and Insurance Disbursements,
Vermont, I83I- 5 8 .................................... 111-13
20.

Insurance Receipts and Expenditures, Vermont Insurance
System, 1831-1867.................................... 111-17

22.

Obligations, Indiana Branch Banks, 1835-64.............IV-11

23. Circulation and Deposits, Indiana Branch Banks, Selected
Dates.............. ................................ IV-12
24.

Obligations, All Indiana Banks, 1852-64................ IV-14

25.

Losses to Noteholders, Indiana Free Banks, 1855-62 . . . . IV-16

26. Discounted Bills of Exchange, State Bank of Indiana,
1835-57............................................. IV-27
27*

28.

Number and Percentage Distribution of Operating Banks, by
Insurance Status, Michigan, 1835-1841. ......... . . . .

.V-10

Circulating Notes; Individual and Business Deposits of
Operating Banks, by Insurance Status, Michigan, 1835-1841. .V-13

29. Total Obligations of Operating Banks, Michigan, Selected
Dates, 1836-39........................................ V-15
30. Participating Banks Ceasing Operations, Michigan Bank0b.ligation Insurance System, 1838-1840 ...................V-22
31. Number and Percentage Distribution of Operating Banks,
by Insurance Status, Ohio, 1844-65 .................... VI-12
32. Amount and Percentage Distribution of Bank Obligations
Operating Banks by Insurance Status, Ohio, 1845-1864 . . . VI-15
33*

Obligations of Banks Participating in Insurance by T^pe
of Obligations, Ohio Branch Banks, 1845-1864 ........... VI-17

34.

Number, Deposits and Circulation of Branch Banks, by Size
of Bank, Ohio, 1846,. 1855, 1861........................VI-18

35*

Insured Obligations and Insurance Coverage, Ohio, 18451864................................................ VI-19

36.

Ohio Branch Banks in Serious Financial Difficulties,
1545-64............................................. VI -21

37*

Insurance Assessments, Ohio Branch Banks, 1850-57* • * * • VI-22

38. Adequacy of Safety Fund and Extent of Insurance Coverage
Ohio Branch Banks, 1845-64 ........................... VI-45
39* Number and Obligations of Iowa Branch Banks, 1858-1864 . •VTI-10
viii

-3List of Tables (continued
Page
1*0.

Circulation and Total Obligations of Iowa Branch Banks,
December 5, 1859; December 5* 1 3 6 4 .................. VTI-11

1+1.

Insurance Fund and Assessments, Iowa, I858-I86U ....... VII-15

CHAPTER I
INTRODUCTION

During the first thirty years after organization of the
Federal government in 1789, banks were chartered by special acts of
State legislatures or the Congress, usually for a limited number of
years.
For two-thirds of this period there were no bank failures;
but in the last third many failures occurred and great controversies
developed about the operations of banks and their place in the economy.
In consequence, the next forty years was a period of development of
banking codes and experimentation with various types of banking sys
tems. During this time six States inaugurated systems of bankobligation insurance.
The States which adopted insurance programs for the pro
tection of bank creditors during this period were New York, in 1829;
Vermont, in I83I; Indiana, in 183^; Michigan, in 1836; Ohio in
18^5; and Iowa in 1858.-/ All of the systems, except that of Michigan,
operated with varying degrees of success until banks were no longer
eligible to participate in insurance. In Indiana, Ohio, and Iowa,
this was because of their conversion to national banks between 1863
and 1866; in New York and Vermont because of expiration of the
charters of the participating banks, with continuation of banking
operations under national charters or under State laws which had not
provided for the insurance of bank obligations.
In the debates which preceded establishment of the Federal
Deposit Insurance Corporation in 1933 reference frequently was made
to State deposit guaranty systems adopted by several States between
1907 and 1917* Little attention was paid to the bank-obligation
insurance systems which operated prior to establishment of the
national banking system, notwithstanding the fact that a few of the
States had a remarkable record in this field, and all of them pioneered
in the development of some of the basic principles of present day
deposit insurance.
Extent and Character of the Insurance Plans
In many details the early bank-obligation insurance systems
differed from those adopted by individual States in the first decades
of the twentieth century and by the Federal government in 1933* This
was a consequence both of the characteristics of banking during this
earlier period and of the fact that the plans were experimental
procedures in providing protection for bank creditors.

1/ Because bank liabilities during the period covered"in
this study usually consisted of circulating notes plus deposits it
has been found more convenient to use the single word "creditors”
when referring to the owners of these obligations, rather tlian the
Phrase "depositors and noteholders". Similarly "bank obligations" has
Been used in place of "deposits and circulating notes.”

1-2
Approximately one-half of the nation's bank-supplied circu
lating medium before i860 was composed of the notes issued by indivi
dual banks. Hi is was because banks commonly extended credit in the
form of circulating notes as well as deposits. In the less developed
areas of the country bank credit was largely in the form of circula
ting notes; in the eastern cities, chiefly in the form of deposits.
After 1865 all circulating banknotes irere guaranteed by the Federal
government, so that later bank-obligation insurance proposals
were usually limited to deposits.
Another difference between the early insurance systems and
those adopted after 1900 related to the function of bank capital. In
addition to serving as ultimate security for the protection of bank
creditors, bank capital was more extensively used as a tool for the
limitation of bank operations than is the case today. In the early
decades of the nineteenth century restrictions on the amount of bank
lending, or on the creation of obligations, were often expressed in
terms of multiples of capital rather than, as at present, in terms of
required reserves against deposits.
Table 1 summarizes the provisions of the six plans adopted
between 1829
1858.
Function of bank-obligation insurance. Bank-obligation
insurance was a major banking reform and, as is often true in such
cases, the motives which actuated proponents of the insurance legis
lation are not readily distinguishable after the passage of more than
a century. In general, it appears that bank-obligation insurance was
advocated and adopted for two reasons: to protect the community
from severe fluctuations of the circulating medium due to bank
failures; and to guard against loss to individual bank creditors,
particularly those of limited means.
Hie available evidence indicates that the first of the
above mentioned functions, i.e., to prevent severe fluctuations in
the circulating medium, was the more important. Much of the evidence
pointing to thi6 conclusion relates to the New York insurance system
and is discussed in Chapter II. However, it is also indicated by the
fact that although there were differences among the six States in
the types of obligations insured, in none of the States was there a
limitation on the amount of insurance provided each individual bank
creditor.
Obligations insured. In the first four plans adopted, all
debts of the participating banks, i.e., circulating notes and deposits
primarily, were covered by insurance. In New York, the insurance
legislation was later amended to restrict insurance to circulating
notes and this same restriction was also included in the last two
plans adopted. However, as noted above, in none of the six State plans
waa there a limitation on individual coverage.
Limitation of insurance to circulating notes in three States
reflected a belief, then current but by no means universal, that
“ar^t6 affected the amount of circulating medium only through the
issuance of banknotes. Also, there was the belief that depositors
could "choose" their banks, whereas noteholders were more likely to
_ Persons of modest means who had no choice but to receive the bankla the form of wages.

1-3
Table 1. Principal Provisions of Bank-Obllgatlcn
State

obligation* Insured

Banks participating

Insurance Flans Adopted toy Six States, 1829-1858
Assessments;

site of fund

Payment ef bank creditors

New York

1829-42, all debts 1/
1842-66, circulating
notes 2/

All banks established or
reohartered subseqioat
to passage of aot } /

Annually 1/2 of \% of capital stook
to maximum of 3£. If fund reduced,
annual assessment not to exceed
above rate until fund restored to
maximum

Vermont

All debts

All banks established or
reohartered subsequent
to passage ef aot J$/

Annually J/k of ljf of capital stook
After completion of liquidation of
to maximum of 4 1/ 2%. if fund re
failed bank
duced, annual assessments not to
exoeed above rate until fund restored
to maximum

Indiana

All debts 1/

Branob Banks 5 /

No specific amount;
aents as necessary

Hlohlgan

All debts

All banks established or
reohartered subsequent
to passage of aot

Annually 1/2 of I t of oapltai stock
to maximum of 3 %. If fund reduced
annual assessments not to exoeed
above rate until fund restored t«
maximum

Ohio

Circulating notes

Branoh Banks £/

Single assessment prior to opening
Immediately, through special assess
of bank: 10$ of amount ef circu
ments on solvent Branoh Banks. As
lating notes. Thereafter* assess
sessments to be repaid from insur
ments at above rate applicable
ance fund, and funfi repaid from pro
only to additional circulating notes. ceeds of liquidation of assets of
If any, issued by bank
failed bank

Iowa

Circulating notes

Branoh Banks

speoial assess-

After completion ef liquidation of
failed bank; idgianing in 1837
Immediate payment from fund to
holders of circulating notes
authorized

Within one year after failure, If
liquidation proceeds and stook*
holder contributions insufficient
After completion of liquidation of
failed bank

Single assessment prior to opening
Immediately, through speoial assess
of bank: 12 l/2£ of amount of circu ments en solvent Branoh Banks. As
lating notes. Thereafter assessments sessments to be repaid fren insur
at above rate applicable only to ad
ance fund and fund repaid from proditional circulating notes, If any.
osc(?3 of liquidation ef assets of
Issued by bank
failed bank
^ / included circulating notes, deposits, and miscellaneous liabilities; excluded oapital accounts.
11
2/ Aot of April 12, 1842.
3/ Free banks, which were authorized In 1838, did net participate In lnsurmnee.
y free banks, whioh were authorized In 1851 , did not participate In iiunoMoee, In 1842 participating banks were authorised under
specified conditions to withdraw from insurance.
i/ Branch Banks were essentially Independent banks which possessed their m m officers, distributed earnings to their own stockholders,
and collectively constituted the "State Bark" in these States,

1-4

Table 2 summarizes significant data relating to coverage
of, and participation in, bank-obligation insurance systems adopted
prior to i860.
Membership. The first three insurance plans adopted were
include, immediately or eventually, all operating banks.
In New York, Vermont, and Michigan the law applied to all banks
organized subsequent to passage of the act, with provision that
existing banks must join at the time their charters were extended or
renewed. Michigan went even further and specifically provided what
may have been intended in New York and Veimont: that an already
existing bank could join at its option prior to a renewal or ex
tension of its charter.
intended to

In Indiana, Ohio, and Iowa membership in the insurance
system was limited to the Branch Banks of the respective State Bank
Systems. It is important that these Branch Banks not be confused
with present day branches of operating banks. The Branch Banks of
Indiana, Ohio, and Iowa were vhat would now be called unit or inde
pendent banks, each with its own stockholders, board of directors,
and officers. The Branch Banks collectively constituted the "State
Bank," of which there was a Board of Directors, or Board of Control,
composed of representatives of the Branch Banks, or in part of
such representatives and in part of appointees by the State legis
lature. The Board, i.e., the State Bank, did not itself engage in
*ny banking operations; it was a bank supervisory agency which bad
functions somewhat similar to the combined functions of bank super
vision within the Federal Deposit Insurance Corporation and the Board
of Governors of the Federal Reserve System.
In all but one of the six States the insurance systems did
not include free banks. The "free banking" movement began in the
late 1030's, before any of the insurance systems had been thoroughly
tested by experi3nce, its primary purpose being to permit the organi
zation of any bank meeting 6tat2d requirements. The gcal of the
free banking" movement vas to curb monopolistic tendencies thought
to be inevitable in banking under special charters, and associated
with this goal was a method of providing protection for holders of
circulating banknotes through the posting with State officials, by
e&cn bank, of bonds or mortgages in an amount equal to the bank's
total issues of such notes. Sponsors of ":;ree banking" claimed that
ank depositors were capable of protecting their interests and,
consequently, in the free banking systems neither insurance nor
Porting of collateral was required for the protection of depositors.
By States passed "free banking" legislation - including all of
nose States which also made use of the insurance principle - and
ree banks were excluded from insurance except in Michigan. Conse
quently the insurance systems did not become as universal in coverage
had been anticipated, and in the two States where bank-ob 11gation
nsurance had been first introduced - New York and Vermont - the
number of banks participating decreased as charters expired and
8 oc/Jaolders reorganized their banks under the "free banking" laws.
_
Table 2 shows the maximum and minimum numbers of banks
&rticipating in insurance in each of the six States.

1*5
Table 2* Extent of Bank-Obllgatlon Insuranoe In Six States, 1829*1866

Item

Hew York

Vermont

Indiana

Period of operation

1629-1866

1831-1866

1834-1865

Michigan

Ohio

1836-1842

Iowa

1858.1865

1845-1866

Number *f participating
banks:
Minimum (year)
Maximum (year)

2 (1865)
91 {1839J

ll8*Il-48)

(1857-6l|

(l84o)
<1838)

i iStUi

Peroent of all banks in
State participating'
Minimum (year)
Maximum (year)

2.0* (1865)
90 .7 ( 1837)

Obligations oorered by In
surance or guaranty
(In thousands):
(1865)
Minimum (year)
*70,090 ((1836
183s)
Maximum (year)
Peroent of all bank ob
ligations covered;
Minimum (year)
Maximum (year)

(1865)
(i84o
(1840)

12 .?# (1855)

14.3# (0.840)

51 ,45« (1846)
79.1 (1864)

22 (l84o)
1,423 (1838}

$1,576 (1845)
8,460 (1851 J

2 .4* fl640)
61.5 (1838)

17 .3* (1845 )
55.1 (1857)

100.0 ( 1834- 51) 84.6 { 1838}

307 (1858)
1,936 (1847)

$2,182 (1842)
7,898 (1862)

8.3* (1858)
78.3 (1845)

25.558 (2.854 )
100.0 (1835-51)

100 .0# (1858-65 )
100.0 (1858-65 J

5 (1858)
1,526 (1863 )

2 .9*
46.1 (1862

1-6
Types of insurance systems. Insurance of bank obligations
was provided by three methods: 1) establishment of an insurance fund,
commonly referred to at the time as a "Safety Fund", 2) a requirement
that the participating banks mutually guarantee each other's obliga
tions, sind 3) a combination of the first and second methods.
Reliance upon an insurance fund alone was the case in New
York, Vermont, and Michigan. As indicated in ISable 1, the fund was
established through assessments levied on capital stock of par
ticipating banks, reflecting the relationship between capital and
bank obligations previously noted. The cost of administering the
insurance systems, including salaries and expenses of Bank Commission
ers, was charged against the funds.
While New York's insurance system was adopted by Vermont and
Michigan, Indiana developed in I83U an alternative plan which re
quired that all participating banks mutually guarantee the lia

bilities of a failed member bank. This obligation became effective
when a failure occurred, and no provision was made for an insurance
fund. Administrative expenses of the Board of Directors of the State
Bank were met by special assessments on the participating banks.
Insurance systems adopted by Ohio in 1845 and by Iowa in

1858 apparently reflected a conscious effort to incorporate the
essential portions of the two methods, with major reliance on the
Indiana precedent. As shown in Table 1, protection for bank creditors
in Ohio and Iowa was dependent upon the mutual guaranty provision,
with the insurance fund available for reimbursement of the con
tributing banks. This was probably due in part to evident success
of the Indiana system by 1345 as contrasted with the difficulties
experienced in New York and the depletion of the fund in Michigan.
The method of paying administrative expenses of the Ohio and Iowa
systems was similar to that of Indiana.
In each of the five States having insurance funds, custody
of the fund was given to the supervising authority, but ownership,
directly or indirectly, remained with the banks.
Method of paying creditors of failed banks. Immediate pay
ment of insured obligations was effectively provided for in only two
of the six States during this period. The systems of Ohio and Iowa
provided that the necessary amounts would be made immediately avail
able through special assessments levied on the sound participating
banks in
proportion to their note circulation. This represented
an improvement over systems adopted earlier. In New York, Vermont,
and Michigan, creditors had to wait until liquidation of the failed
bank had been completed, and the deficiency determined, before re
ceiving payment from the insurance fund. Indiana required that its
insurance plan become operative only if liquidation of the assets
of the failed bank proved insufficient to meet the claims of bank
creditors within one year.
Supervision of Banks Participating in Insurance Systems
The development of bank supervision was one of the notable
eatures of bank-obligation insurance systems operated in six States

1-7
prior to 1866. Before the adoption of the first "bank-obligation
insurance system in 1829 bank supervision, when it existed at all,
vas characterized by inadequate condition reports and sporadic, in
effective bank examinations.
Condition reports were not required cf many banks during tl
first few decades of banking in this country. When they were re
quired, it was usually because the State was a stockholder and it
vas felt that reports should be made to the State--either to the
governor or to the legislature— as to any other stockholder. How
ever, the only information provided was a simple breakdown of assets
and liabilities. It was not until after about 1800 that some States
toegan to require more detailed information from banks. But as late
as 1829, the year the first insurance plan was adopted, some banks
still submitted no condition reports and many others did so only at
irregular intervals.
Bank examination also had its origin, in many States, in
the stockholder relationship between State and bank. As late as
1837, several Louisiana banks refused to be examined, claiming that
the State held no stock and therefore had no authority to examine
them. Prior to the 1830*s, bank examinations were rarely made excepl
in cases where it was suspected that the condition report was in
correct or it was believed that a bank was insolvent. In such cases
the legislature or governor would usually appoint one or several
prominent citizens to inquire into the condition of the bank and
submit a report. It was considered essential that the person or
persons so chosen occupy a respected and substantial position in
the community, as it was thought to involve great risk to the bank
and its customers if an ordinary businessman were to look at the
books of the bank.
There were a few instances when examinations were provided
for under conditions other than those specified above. For example,
the charter of the first bank to be established in Massachusetts
(in 1784) provided that an agent of the State could examine into
the condition of the bank at any time and be given full access to
bank records. However, this was unusual for the time, as is indi
cated by the fact that Massachusetts made no use of this power
until much later. In general, when examination was permitted
it was only with the understanding that the examiner would not be
allowed to do much more than verify the condition report which had
been submitted to the State, Rarely was he given unrestricted
access to bank records.
With the introduction of bank-obligation insurance legis
lation the supervisory picture was dramatically changed. In each of
the six States regular examination by paid examiners, authorized to
look thoroughly into the condition of the banks, was either written
into the law or became accepted practice. In addition, condition
reports were required in greater detail and with more regularity.
It is not too much to say that modem bank supervisory procedures
were effectively introduced to the American banking scene through
bank-obligation insurance legislation.
Table 3 summarizes the principle supervisory provisions of
the various insurance laws.

1-8
fable 3 . principle Provisions Relating to supervision of Bonks Participating in Bank-obligation Insurance Systems, Six States, 1829-1866

maie: >eriod
of bank-obligatlon insurance
New York

1829-1866

Vermont
I83I-I858

Indiana

^83^-1865

Mlohigan
1836-1842

supervisory agency

Bank examination

Condition reports

Enforcement powers of supervisory officials

If tanlc insoivent or had vio1CJ29-57. ¥hree UankComal s- — I&29-43. Bach bank three----- — 1829-43.— Annually to---times per year; additional ex*
Bank Commissioners.
lated law could apply to court
aloners; one appointed by
aalnatlons if requested by three
1843-66, Quarterly to
Governor; two by banks.
of chancery for injunction
participating banks*
Comptroller; Superinten
1837-43* Area Bank Commis
against continued operation*
18*13-66, Examination only
dent of Banking Department.
sioners appointed by Governor,
when bank m s believed to be In* Content expanded.
1843-51* State Comptroller.
1851-66, Banking Department; solvent or to have submitted
falae condition report*
superintendent appointed by
Governor*
1831-37» Three Bank comnls*
eloners; one appointed by
legislature; two by banks,
1837-5®% One Bank Commis
sioner appointed by legisla
ture*
1834-55. Board of Directors
of the State Bank of Indiana;
President and four dlreotors
appointed by legislature; one
director by each Branch Bank,

Each bank once per year; ad
ditional examinations i f re
quested by a stockholder or bank
debtor*
Bach bank twice per year; ad
ditional examinations if re
quested by directors of a bank.

Annually to Bank Commi3sioners.

Monthly to Board*

1856-65 . Board of Directors
of the Bank of the State of
Indiana; four directors
appointed by legislature; one
director by each Branoh Bank;
president by Board,
1836-37 * One Bank Commlssloner appointed by Qovernor,
1837-40. Three Bank Codmlssloners appointed by
Governor,
1840-42, Attorney General.

If bank Insolvent or had vlo*
lated law could apply to court
of chancery for Injunction
against continued operation.
If bank insolvent* had vio
lated law, or was mismanaging
its affairs could close btek.
Could regulate dividend pay
ments, 1/
could establish ratio of
loans and discounts to capital
for any or all banks between
limits 1*25 to 1.00 - 2*50 to
1.00, Loan of deposited funds
exempted.

1836-40. Each bank three times
Annually to Bank Commlsper year; additional examina- ' mieeloners; Attorney
tlons If requested by three parti- General,
clpatlng banks,
1840-42. Whenever requested
by Governor.

If bank Insolvent or had vlo~
lated law could apply to oourt
of chancery for Injunction
against continued operation*

1*8 (a)
Table 3* principle Provisions relating to Supervision of Banks participating in Bank*obligation Insurance Systems, S5:-i S':n* >s, 1823-1866
State: Period
— —
■
of bank-obliSupervisory agency
gatlon insurance_________ __

_
Bank examination

Ohio
1845-1866

Board of Control of the
State Bank of Ohio; one
member appointed by each
Branch Bank; president by
Board from outside its
membership.

Left to discretion of Board;
policy was to examine eaoh bank
onoe per year.

Iowa

Board of Directors of the
State Bank of Iowa; three
directors appointed by
legislature; one director
by eaoh Branch Bank; presi
dent by Beard,

Left to discretion of Board;
policy was to examine each bank
twice per year.

1858-1866

1/ Hot stipulated in law Irnt assumed by agency*

Condition reports

Enforcement powers of supervisory officials

Quarterly to Board, policy
If bank insolvent, had vio
was to require monthly re
lated law, or any order of
ports to Board.
Board, could close bank.
Could regulate dividend pay
ments*
Could order any bank to re
duce its circulation or lia
bilities to whatever level was
deemed safe,
Could determine proportion of
reserve to be in vault oash, 1/
Monthly to Board.

If bank insolvent, had vio
lated lav, or* aay order of
Board, could close bank. Could
regulate dividend payments,
Ciaid order any hank to reduce
its ciroulatioi or liabilities
to whatever level was deemed
safe.

1-9
Function of supervision under Insurance plans. In con
the relationship between supervision and bank-obligation
insurance it should be remembered at the outset that both were
reforms aimed at protecting the public against bank failures. This
problem did not become serious until about the time of the war of
l3l2 ; indeed, the first failure had not occurred until 1809, more
than a quarter century after banking began in this country. Pro
posals for supervision and insurance reflected a growing awareness
that, since banks create circulating medium, the public has a deep
interest in a stable banking system.
sidering

In view of the evident concern for establishment of banking
which would protect the public against the consequences of
hark failures, it would appear that one explanation for the adoption
of insurance and supervision at the same time was simply the con
venience of incorporating a number of reforms into one piece of
legislation. In each of the six States here under consideration the
circumstances at the time of adoption were such that far reaching
changes in the respective banking structures were both feasible and
necessary.
systems

Notwithstanding the possibility of independent development
of these two reforms, it is probable that many people saw bank super
vision as a necessary adjunct to insurance, for two reasons: it
would make insurance practicable and also make it acceptable. The
new techniques of bank supervision which were being advocated prior
to 1829 were a recognizable extension of already existing supervisory
practices and might well have been adopted on their own merits. Bankobligation insurance, on the other hand, was new to the American
banking scene and hardly could have been placed into operation with
out accompanying supervisory legislation.
The need for some control over the risk to which the
various insurance systems, i.e., the participating banks, would
become exposed was clearly recognized by the proponents of insurance.
It was not maintained that supervision would prevent all loss to the
insurance system, but rather that the early exposure of financial
difficulties would reduce both the number of failures and the amount
of loss which nevertheless occurred in those failures. For example,
Joshua Forman, the author Of the Hew York plan, pointed out that ex
amination, plus other authority given supervisory officials, would:

prevent mismanagement and ... secure the prosperity
of the failing banks before mismanagement has progress
ed to its consummation ... If /some banksj should suc
ceed in breaking through all restraints, and consummate
their ruin, the losses would be comparatively small,
and within the means of the fund to meet them. 1/
1/ New York Assembly Journal, 1829> P« 178.

1-10
Improved supervision was also thought to oe the answer to
the charge that insurance would penalize the sound hanks for the
benefit of the creditors of the badly managed hanks. Clearly, there
bad to he some assurance given the well-managed hanks that their
assessments would not he dissipated as a consequence of unsound
banking practices which, in the absence of any check, might he
stimulated b y the knowledge that losses were covered by insurance.
Probably the best demonstration of this role of supervision is found
in the fact that all but one of the supervisory systems originally
provided for the selection of most or all of the supervisory officials
by the participating banks.
Composition and selection of supervisory staffs. Two types
of supervisory agencies were established in the six States. In New
York, Vermont, and Michigan all supervisory operations were conducted
by individuals known as Bank Commissioners. Wo provision was made
for subordinate staff members. In Indiana, Ohio, and Iowa the super
visory structures were more complex. Overall policy and final
authority were given to banking boards in each State but supervisory
operations were conducted by officers or executive committees of
these boards, and occasionally by specially appointed agents.
In general, supervisory officials in States relying pri
marily upon an insurance fund for bank creditor protection (New
York, Vermont, and Michigan) were appointed by the Governor or leg
islature, while in States with a mutual guaranty system (Indiana,
Ohio, and Iowa) all or most of the members of the banking boards
were chosen by the banks. Selection of supervisory officials by
participating banks was authorized in the original laws cf New York
and Vermont but was soon abandoned.
The typical term of office for a supervisory official in
the six States was one or two years. No official, whether a Bank
Commissioner, member of a State Board, or official of a State Bank,
was given a longer term than two years, except the president of the
State Bank system in Indiana. The term of that office was five
years until 1856, at which time it was reduced to one year.
The salaries provided for supervisory officials by the
various acts were generally sufficient to assure the full-time
services of the respective individuals. Only the Vermont schedule
was on a per diem basis, indicating that the Bank Commissioner may
not have been expected to devote all of his time to supervisory
tasks. In Ohio and Iowa salaries were determined by the banking
boards and were comparable with salaries established by statute
in the other States.
Examination and condition reports. Regular examination
of banks participating in the insurance system was required by the
original insurance law in four of the States; but in the two in
which it was not required (Ohio and Iowa) regular examination was
ordered by the respective banking boards. The only States which
later restricted this practice were Michigan, in 18U0, and New
York, in 1843.

1-11
Condition reports to supervisory officials were required
in all six of the insurance laws. Their frequency and content
varied.
Those of New York, Vermont, and Michigan appear to have
been fairly limited as to detail, However, significant improvement
vas made in this regard in New York "beginning in 1843.
In the second group of States, i.e., Indiana, Ohio, and
Iowa, the frequency and content of condition reports were to a
significant extent determined "by the respective supervisory agencies.
This was true whether or not the law dealt with such matters, re
flecting the broader authority of the banking boards as contrasted
with the Bank Commissioners. In general, these reports were much
more detailed than those of Vermont and Michigan.
Enforcement powers of supervisory officials. Supervisory
officials in each of the States with bank-obligation insurance systems
were clothed with authority considered sufficient to implement
their operations and functions. In actual fact, however, this
authority in some States was not sufficient to permit the most ef
fective supervision, while in others it went beyond what are today
considered normal supervisory powers. It is again convenient to
consider the States in two groups: New York, Vermont, and Michigan,
each of which had an insurance-fund type of insurance system, and
Indiana, Ohio, and Iowa, each of which depended primarily upon mutual
guaranty fc^protection of creditors of failed banks.
In the States of the first group ultimate authority of
the Back Commissioners rested upon their right to apply for an in
junction against the continued operation of any bank found to be
insolvent or operating in violation of the law. The effect of such
an injunction was to place the bank in a position under which re
ceivers could be appointed and, if necessary, disbursements made
from the insurance fund.
In Indiana, Ohio, and Iowa a bank participating in the
insurance program could be closed by supervisory officials because
of discovery of Insolvency or of illegal operation. More important,
it could be closed if it refused to comply with an order by super
visory officials. Since the officials were charged with safeguarding
the interests of the entire system such orders could well relate to
unsafe and unsound banking practices, regardless of the legality of
such practices or of the solvency of the bank. As a matter of fact,
the Indiana act went so far as to make it the "duty" of supervisory
officials to suspend the operations of any bank "mismanaging its
affairs, whereby the interest of the other /banks/ is endangered." 1/
In addition to giving supervisory officials the right to
use the suspension power in circumstances other than illegal or
insolvent operation, States having the mutual guaranty type of in-

~lA An Act to establish a bank with branches, January 23,
1834, section 39*

1-12
ranee system provided such officials with less severe penalties to
be applie^l3an^s operating in an unsafe and unsound manner. These
•ncluded authority to prohibit or regulate dividend payments and
the power to compel a "bank to contract the amount of its assets and
j_^abilities •

It is not known whether the various State legislatures in
the provisions relating to the contraction of assets and
should be used only in the cases of individual banks or,
some occasions, in the cases of all or most of the banks
at the same time. The Ohio and Iowa laws seem to reflect the former
interpretation, the Indiana lav possibly the latter. However that
may be, it is clear that on those occasions when the power was used
to apply equally and at the same time to all or most of the banks,
it bad ceased to be a weapon in the supervisory arsenal and had
■become, instead, a device characteristic of a central bank, whereby
the result of its use would be either contraction or expansion of
the volume of bank liabilities, i.e., of the major segment of the
money supply*
tended that
liabilities
on at least

Protection of Creditors of Banks Participating in
Insurance System
The record of protection accorded creditors of banlcs par
ticipating in bank-obligation insurance plans prior to 1866 is excep
tionally good. In three of the States no insured creditor suffered
any loss as a consequence of bank failure, and in two others a sub
stantial portion of losses that would otherwise have been borne by
creditors was covered by insurance payments. In five of the States
insurance ended only because participating banks had become national
banks or were otherwise ineligible to continue in their respective
systems.
Banlcs in financial difficulties. In all six insurance
systems under discussion one or more participating banks became
involved in serious financial difficulties. In Michigan all but one
of the participating banks closed within three years. In other States
the number of banlcs in financial difficulty in any one year was small,
although one or a few banks which failed constituted in some cases a
sizable percentage of the banks participating.
For the six States combined during the insurance periods
failures of participating banks were fewer than those of nonpartici
pating banlcs both in actual number and in proportion to number. In
each of four States the number of failing nonparticipating banks
exceeded the number of participating banks in financial difficulties.
The greatest difference occurred in Indiana where of a total of 70
cases of bank difficulty, 69 were nonparticipating banks. Only in
Michigan were there more failures among participating banks than
among those not operating under insurance. In Iowa, where all banks
participated in insurance, there was one case of a bank in serious
financial difficulty.
Methods used to protect creditors of
difficulty. The measures taken in some of the
authorities to protect the creditors of failed
in imminent danger of failing, were not wholly

banks in financial
States by insurance
banks, and of banlcs
contemplated by

1-13
ranee legislation. Such measures were developed in an attempt
rovide better coverage or to meet emergencies not foreseen at the
't0 ^ insurance was adopted. In general, they represented improvements
^^the original plans and some are similar to those used today by
the Federal Deposit Insurance Corporation.
In New York it was discovered at an early date that de
bitors and noteholders of a distressed ‘bank could, in some cases,
better protected by restoring the bank to solvency than by
allowing it to go into receivership. Consequently, disbursements for
the former puipose were successfully made in a number of cases. Also,
a borrowing power was given to administrators of the Hew York system
when it became apparent that insurance assessments might be suffi
cient to cover loss but not to provide a sufficiently large fund
for the needed disbursements at time of bank failures.
The question of whether to place a distressed bank in re
ceivership and pay insured creditors or to arrange for its continued
operation arose in several cases handled by insurance authorities in
Ohio.
In these cases, receivership would have deprived the re
spective communities of needed banking services and, in addition,
it was feared that the failures would adversely affect the credit of
the other participating banks. It was therefore decided to pre
vent if possible the closing of the banks. The procedures which
vere used resemble, in some respects, those used by or available to
the Federal Deposit Insurance Corporation today.
Indiana and Iowa had only one case of a participating bank
involved in serious financial difficulty and in each instance the
bank was kept from closing through action taken by the insurance
authority. Little information is available on the precise techniques
which were used but it appears that financial aid was granted,
either in the form of a loan or a subordinated deposit, by some or
all of the sound participating banks.
Disbursements to protect creditors of distressed banks.
Insurance disbursements made on behalf of creditors of participa
ting banks in financial difficulties and the degree of protection
achieved thereby are shown in Table
In the six States combined,
more than 85 percent of insured obligations in failing banks were
made available to creditors either through direct payments by the
insurance systems and receivers or through rehabilitation of dis
tressed banks by insurance disbursements. In individual States the
degree of protection provided ranged from 100 percent in Indiana,
Ohio, and Iowa to zero in the case of Michigan.
It will be noted that in some cases claims against the
respective insurance systems were considerably less than the obli
gations insured at or near time of failure. Four of the insurance
plans--New York, Vermont, Indiana, and Michigan— provided that in
surance payments need not be made until the receivers of the failed
banks had an opportunity to dispose of at least some of the assets
and declare a dividend. In the other two States, Ohio and Iowa,
creditors of failed banks were to be paid immediately, but in
practice there was sufficient time between the failure of the bank
and the return of circulating notes for redemption to realize upon

Table

State and year
of bank diffi
culty

Insurance Disbursementa and Bank Creditor Protection, States with Bank**Obligation Insurance Systems, 1829-1866
(Amounts in thousands)
Participating banks In
serious finanolal dlffi*

teyments to
_______ cult log_____ _ _ _ _ ^insured ore*
Insured obli- ~ditors by
receiver 2/
Number
gatlons 1/

Total six States
New York, total

---- 5^7----

1840
1841
1842

4
5

1854

1
1

1857

1848

Vernont, tatal

----T635---

1857
Indiana, total
----- TOT?--Mlohlgan^total

1839

1840

Ohio, total
---- "1850

1852

I 9,900

* 2*5X8

$ 4,260

* 3.151

$ 6,485 5/

$ 2,123
*lOT
241

$ 2.813
---55
446
1,724
532
*4 t

$ 2.813
35
446
l,72«t
532

696 v
2,392 V

640
474

1.027

186
20 .

186 8/

125
509

26
16

10
“5

75
47

£5

4 494

100 0

* i
itt
w

150

100 .0

■ * *

100.0

***

100.0

I * *

1 0 0 .0

98.8
98.0

1 0 0 .0

34.9

41.9

291
«*>

173

1.2

2.0
*t»
12.3

tV75
65 .I

100 0
T GO

100.Off
»»I
*•»
***

218 TC/
» tt

1 .0

10/
424 10/
399

2 .1*
»I»

1T5S7

$ 1.091

10/
424 10/
218 15/

13.3*

53.5*

>»I

179 11/

86.7*

72.3#

* * *

Protection of insured
creditors: Percentage
of insured obligations
Hade avail- Not"paid
ablo to
creditors 5/

I 87.7

ICO

7§

$ 1,091

74.0*

»•*
)

1 75

46l
$

l
1
T

Banks placed in recei v e r s h i p __________ Banks rehab11Claims
"
payments to in sure creditors ltated with
against inby lnsuranoe system_________ insurance aid:
suranoe sysAmount
¥ercent of
Disbursements
tem
claims

291

173

100.0*
loolo

ISO
100.0

100.0

1 0 0 . 0*

327
32
lift

ToO

12/

100.0

•tI

I-l4 (a)
Table 4*

Insurance Disbursements and Bank Creditor Protection, States with Bank-Ob ligation Insurance Systems* 1829-1866 (continued
(Amounts in thousands)
v
1

1/ At time of failure or last report prior to failure.
5/ Amounts for New York in 1840, 1841, and 1842, and Vermont in 1839 and 1857 , represent reported receivers1 collections. The
amounts cf~receivership expenses charged against these sums, if any, are not known.
3/ Through payments by receivers and payments on claims in receivership cases, and through rehabilitation of the bank in other
cases.
4/ In New York and Vermont chiefly because claims were not presented.
5/ Circulating notes and deposits through 1842; circulating notes only 1848, 1854 , and 1857. Deposits of two banks * M c h failed
in 1842, aTter passage of the law restricting Insurance to circulating notes, are included beoause of recognition of the liability of
the insurance fund for their deposits by an act passed in 1845. Miscellaneous liabilities are unavailable for some banks and are probably
included with deposits in other oases; such liabilities at time of failure were probably very small*
6/ circulation at time of closing plus estimated deposits. Deposits estimated by assuming that average deollne In circulation
between reporting date and dates of failure was matched by a similar decline in deposits. Pour of these banks were enabled to resume
operations beoause of insurance aid*
7/ Includes obligations fraudulently Issued and not shown on books at last reports prior to failure.
0/ Records conflict as to circulation outstanding at time of failure, $192,000 being given in some reports,
5/ Amount of disbursements, presumably in the form of loans, made to rehabilitate bank not known.
1*0/ Partially estimated.
IT/ Includes, as of date Just prior to failure, notes in circulation of $156,000 plus $23,000 carried tuader liabilities as "sundlres
The latter sum probably represented circulating notes held as security by other Branch Banlcs for amounts previously advanced to sustain
the failing bank,
12/ Excludes the $23,000 mentioned in note 11 because the circulating notes presumably held as security by the other participating
banks are assumed to be Included among those redeemed by the payments to Insured creditors.
13/ Disbursement made to one of the banks prior to failure In an unsuccessful effort to prevent Its closing. The amount advanced
in this oase was apparently not recovered by the contributing banks,
14/ Estimated,

1-15
a portion of tbs assets

of the bank involved.

Better protection of creditors of banks involved in
financial difficulties was achieved by the systems with initial guaranty
than by the simple insurance fund systems. Full payment was made to
1!ie insured creditors of four banks which had been placed in receiverin Ohio, but there may have been some loss to depositors, who
were not protected by insurance. In the case of eight other dis
tressed banks— six in Ohio and one each in Indiana and Iowa--insurance
disbursements made possible the continued operation of either the bank
involved or a successor bank.
In Chio ar*d Iowa, where only circu
lating notes were protected by insurance, this had the incidental
effect of providing full coverage for depositors.
On the other hand,
no payments were made from the insurance fund to creditors of failed
Michigan banks, and only partial protection was given Vermont
creditors. Although all claims against the insurance fund were paid
in New York, payment t/as delayed in some cases for considerable
periods of time.
Adequacy of insurance funds and assessments. Measures of
the adequacy of the insurance funds and rates of assessment in the
five State systems embodying an insurance fund are shown in Table 5It will be noted that in three States the funds and assessment rates
were sufficient to cover all insurance costs, although as was pointed
out earlier, they were not sufficient in New York to cover all dis
bursements at the time such were needed.
The average ratios of the insurance funds to total and to
insured obligations varied considerably from State to State. Michigan’s
insurance fund average one-twentieth of one percent of insured ob
ligations, while the funds in Ohio and Iowa were 12 and 19 percent
respectively of insured obligations. It should be noted, however, that
in Vermont, Ohio, and Iowa, and in New York prior to iSiiO, most of
the income derived from investment of the insurance funds was returned
to the participating banks in proportion to their contributions.
All of the assessments paid by participating banks were on
capital stock or insured obligations and were intended to be made for
a limited number of years. However, to provide a basis for comparison
with rates under Federal deposit insurance, the equivalent average
annual rates on total obligations are shown in Table 5- It will be
seen that the rate most closely approximating the present statutory
rate of one-twelfth of one percent under Federal deposit insurance was
Michigan's one-tenth of one percent per year. Other rates v/ere sub
stantially higher, ranging from one-fifth of one percent in New York
and Vermont to about two percent in Iowa.
Included in Table 5 are the assessment rates which would
have been necessary to cover the insurance costs. Because of the
relatively small surplus and liability in Hew York and Vermont
respectively, such rates in those States are approximately the same
as those actually paid. In both Ohio and Iowa, the rate could have
been considerably smaller so far as the ultimate cost of insurance
was concerned. On the other hand, to have been successful in the
short and disturbed period in which it operated, Michigan's insurance
system would have required a tremendously high assessment rate.

1-16
*
insurance Funds and Assessments, States with Bank-Obligatlon Insurance
fa*1* 5’
Systems, 1829-1866
1/
(Amounts In thousands!-

Item

Kew York
Vermont
Michigan
Ohio
Iowa
(1829-18661 (1831-1866) (1836-181*2 ) (18^5 -1866) (1858-1865;

tnsurance funds:

$ 21

$190 2/

Average size

0 . 1*

$ 759

$ 171

As percent of:
Average total obliga

tions
Average insured obli
gations

Balance or deficiency
at close of system

0 . 6#

1*9#

.05/5

0.9

1.9

.05

-18

$-1,091

7.1%

18.6

11. 6
$

7 .2%

815 3/

$ 309

Assessments and fund

income:
Assessments and Income

available for Insurance
operations;
Assessments paid
Interest received

$3,^13

3,105
308

Insurance disbursements
2,961
Other costs 6/
439
Refunded to banks or State
13

Assessments necessary to
cover insurance
costs 7/

3,092

3
3

1,649 4/

36
642

349

$1,649

It094

349 4/
5/
20

100

907

309

400 8/

30 8/

Equivalent average annual
rate of assessments on
total obligations;
Paid
Necessary to cover in
surance costs

0.2#

0 .2#

0.2

0. 2

0.1%
39.1

0.8#

2.1J*

0.2

17 SxcYudes Indiana, whose Ttnsurance system was one of mutual guaranty,
with no fund.
2/ Balance In fund at end of each year. Average size of fund computed by
taking inEo account balances only during years when fund was tirmedlately available
to protect Insured creditors was $379*000; or 0.9 percent of total obligations
and 1.0 percent of Insured obligations*
3/ Amount In fund In last year of full operation of Insurance system.
%/ Maximum In Insurance fund plus total of special assessments used to
redeem notes of failed banks or rehabilitate operating banks, plus supervisory
costs estimated at $100,000 for Ohio and $20,000 for Iowa*
5/ Wot available.
6/ Includes (when applicable) supervisory salaries, interest paid on
borrowings, dividends to banks from Investment Income, and miscellaneous expenses,
less recoveries and miscellaneous receipts. In Ohio and Iowa, Includes only
estimated supervisory costs.
y 11Insurance costs Includes disbursements to creditors of failed banks
or in aid of operating banks, supervisory expenses. Interest on borrowings, and
miscellaneous expenses, less recoveries, interest income retained in fund, and
miscellaneous receipts.
0/ Estimated by assuming approximately 50 percent recovery on disburse
ments, plus estimated supervisory costs*

1-17
The differences "between actual rates and computed necessary
rates in Michigan, Ohio, and Iowa do not depend solely on the claims
made by creditors of failed banlcs.
For example, Michigan's computed

-ate is very high because of the small number of years during which
the necessary amounts would have been contributed. The computed
necessary rate would have been much lover for Michigan if its system
had started earlier, or had experienced a decade or two of prosperous
'.-■ears before encountering a wave of failures, and if it had had power
to borrow funds to meet claims as they arose.
Appraisal of the Insurance Systems
The six insurance and mutual guaranty plans adopted during
the period under discussion pro%rided creditors of failing banlcs with
a degree of protection previously unknown in American banking and,
as has been indicated, three of them were wholly successful in pre
venting losses to holders of insured obligations.
In the chapters
to follow, each of the State systems will be described in detail and
an appraisal made of its operations. However, some general comparisons
can be made at this point.
All of these pioneer systems operated under handicaps that
were inherent in the insurance plans or resulted from external
pressures. The most serious defect was in the systems of New York,
Vermont, and Michigan, where there was neither mutual guaranty nor
provision for an original fund or for borrowing power. In Michigan
and Vermont, the first failures came before a sufficient fund had
been accumulated, and these were so serious in the former State that
the system collapsed. In Hew York the fund was provided with borrow
ing power only after insurance operations had temporarily broken down.
A handicap common to all six of the insurance plans, associ
ated with the lack of borrowing power, was the pressure for rapid
liquidation arising out of the regulations governing the parent of
insured creditors. Liquidation under pressure usually results not
only in smaller recovery, but also tends to adversely affect values
in a market likely to be already depressed. In New York, Vermont,
and Michigan such pressure came from creditors who, under most cir
cumstances, could not be paid until the liquidation of the failed
banks had been wholly or substantially completed. Indiana's
insurance plan was also subject to the same handicap although the
problem never arose in practice. In Ohio, and inherent in the Iowa
plan, pressure for rapid liquidation came from the participating
banks because the assessments necessary to make prompt payments to
creditors could be lessened, or even avoided, if sufficient xunds
were secured from the receiver.
In two of the six States, Ohio and Iowa, sizable insurance
funds were provided immediately upon organization of the systems.
In these States participating banlcs were required to make the major
portion of their insurance contribution prior to opening for business.
Consequently, it is probable that confidence in the safety of insured
obligations was more widespread among creditors, and was achieved
more quickly, than was the case in Hew York, Vermont, and Michigan.
Also, the assessment rates in Ohio and Iowa, as computed on an equiva-

1-13
i_ent annual average, were much higher than in the other States.
Banking and business developments during the early years
?t' the insurance systems were also an important factor in their
s:CCess or failure. This is particularly evident when the Michigan
experience is compared with that of Ohio or Iowa. The Michigan
system was started at a time when the nation was on the verge of a
deep and prolonged depression. In Ohio, the system was established
after recovery from that depression was under way; and in Iowa,
after the panic of I0 S7 . In each of these cases there was a subse
quent and fairly prolonged period characterized by general prosperity
and relatively few bank failures.
The influence of supervision is reflected in the record of
all of the State systems. As a factor in the successful operation
of insurance it was most important in the case of Indiana, Ohio, and
Iowa. However, it must be remembered that supervision in these States
included activities on the part of supervisory authorities which are
today the function of the central bank. In Indiana, which must be
reckoned as the most successful of all systems in terms of minimiza
tion of banking difficulties over a prolonged period of tine, it is
difficult to attribute the success of the system t.o anything other
than the excellence of supervision, for it was subject to some of the
handicaps described above. The Indiana system had neither a:i original
nor accumulated fund upon which to draw; and had been in operation
only a short time before the panic of 1337 and the long depression of
the late 1830*s and early 18^01s.

CHAPTER II
IIISUTxMCE OF BANK OBLIGATIONS IN EEW YORK, 1329-1866

Ilevr York was the first State to use the insurance principle
,n providing for the protection of bank creditors. The plan was
o-*.-”ted in 1629 and went into full operation in 1831. It became
Operative in 1866, when the charters of the last of the partici
pating banks expired.
Review of New York Ranking History to 1866
New York banking history to 1866 can be divided into
three periods by the following events: establishment of the Bank
of New York in 1 7 institution cf the insurance system in i82Q; 1/
and passage of the Free Banking Act in 1838. To provide background
information for the sections to follow, New York's banking history
during each of the periods delineated by these events is briefly
sketched below.
Banking from 17&- through 1828. Banking in New York began
three years after establishment of the nation's first bank in
Philadelphia. In 178-t the Bank of New York, formed under articles
of association drawn up by Alexander Hamilton, opened for business.
However, because an earlier act of the State legislature (1732) pro
hibited all banking in the State except that conducted by an agency
of the Philadelphia bank (the Bank of North America), it was not
until 1791 that the Bank of New York was able to secure a charter
from the State legislature. This marked New York's entrance into
a period of banking by special charter which was not seriously
altered until 1329, and during which U3 banks were chartered with
an authorized capital of over $30 million.
Provisions of charters granted in New York State after 1791
varied. The earlier charters were clearly patterned upon those of
the Bank of England and the first Bank of the United States, whereas
the later charters began to reflect the banking experience which was
steadily accumulating. In general, the charters consisted of
restrictive and prohibitory clauses and it was not until 1825 that
the first specific grant of banking powers was made by the legisla
ture. 2/ Typical among the provisions of bank charters were limita
tion of capital stock, prohibition of dealings in real estate or
other merchandise, and restriction of bank debts to a given multiple
of capital.

1/ The insurance system was popularly known as the "Safety
Fund" system, and is so referred to in most of the literature.
2/ Specific banking powers were stipulated for the first
time in charters granted to the Commercial Bank of Albany and the
Dutchess Covinty Bank.

II-2
Passage of a special act “
by the State legislature was
^ t0 secure a bank charter. As the demand for bank facilities
•
value of a charter naturally increased, particularly after
;-sa^e of several restraining acts which prohibited banking by un*
zed corporations. As a result, legislators were under heavy
i U -sure to grant new bank charters and it was inevitable that
^ % i c a l considerations often appeared dominant in their delibera
tions.

There was no effective supervision of banks during this
-eriod.

Examinations were rarely made, usually only after a bank

;
“^s fcnown to be insolvent. Until 1824- reports from banks were
*rre£uiar and scattered.
Those which were published gave little
^nfovaation. on the actual condition of the banks concerned. The
banking privilege was therefore frequently abused. Among the
charges leveled at banks were: organization without the necessary
-aoital, dishonest management, maintenance of fictitious credit by
m a k i n g unearned dividends, sale of worthless stock, excessive rates
3f interest, failure to observe limitations upon the issue of cir
culation, and unwarranted expansion and contraction of circulation.
Despite the probable existence of the unsafe banking
practices noted above, the first bank failure in New York did not
occur until 1819, thirty-five years after banking began in the
State. During the next decade seven additional banks failed,
resulting in severe losses to bank creditors in some cases.
Most bank charters granted during this period were due
to expire in the early 1830's. As that time drew near it became
clear that the legislature would only renew the charters if there
vas a thorough revision of the banking system. Consequently, when
a new administration came to power in 1829 the way was open for
the introduction of banking reforms.
Banking from 1829 through 1837. In the fall of 1828 Martin
Var. Buren was elected Governor of New York. His first message to
the legislature devoted considerable space to the problem presented
by the impending expiration of many bank charters. After dismissing
suggestions ranging from the aboliton of all banking to the estab
lishment of a State Bank with branches Van Buren gave the first
:ii :i.al indication that a proposal entirely new to banking would
.• -n be cade:
My own reflections ... have derived much assistance
from a sensible and apparently well considered plan
that has been submitted to me, and which will, in due
season, be laid before you ... It proposes to make all
the banks responsible for any loss the public may
sustain ... l/
1j State of New York, Messages from the Governors, Charles
Z. Lincoln, editor, (Albany: 1909), III, 243.

II-3
Three weeks later, on January So, 1829, Van Buren sent
the detailed plan of the aan who first conceived
'' |,arjc-obligation insurance, Joshua Forman. The plan provided for
.:ie Establishment of an insurance fund, to which all banks would
! i-eruired to contribute as a condition of charter renewals, the
rointment of a board of commissioners to regularly examine the
•"•anks, and the compulsory investment of bank capital in State bonds
vell-secured mortgages.
the Assembly

Except

law on April 2,
of bank capital
Afferent form,
Zr the National

for minor changes, the first two provisions became
1829. The proposal having to do with the investment
was rejected, but at a later date, and in slightly
bee ace part of the Free Banking Act and, still later,
Banking Act.

Passage cf the insurance law was effected over the bitter
-ppcsition of New York City bank3, and only after the Albany banks
vere mollified by repeal of a restriction limiting them to six per
cent on discounts. Oppostion to the law was based primarily on the
argument that well-managed banks should not be made responsible for
the errors of poor bankers and, secondly, that the supervisory powers
granted in the act were impossible of being carried out and would be
ruinous to the banks.
So strong was the oppostion of the New York City banks that
at first they refused to accept charters under the law and threatened
to cease operations. However, this extreme position was soon
abandoned and by 1&32 most of the banks chartered prior to 1829 were
operating under the law. In addition, new banks were authorized,
so that by 1837 a total of 88 banks had been either chartered or
rechartered under the provisions of the 1329 act.
Banking from 1838 to 1866. Support for the insurance law
of 1329 was based in part upon the belief that it would eliminate
scae of the more objectionable features of chartered banking. When
it became evident that neither the existence of mutual responsibility
nor the visits of bank examiners was sufficient to prevent mismanagement of some of the banks antagonism towards chartered banks was
revived. The result was passage of Kew York's pioneering Free
Banking Act in IS38. 1/
Basically, this new legislation was designed to throw
en the business of banking to all persons ^Jho could meet certain
.ruaum requirements. The number of backs was not limited and,
oourse, it was no longer necessary to secure a charter by virtue
of having a special act passed by the legislature. There had been
sore discussion of making the nev banks subject to the insurance
law but in the bill which finally emerged protection of holders of
-'-rculatins notes was provided for by having each bank deposit securitie

1/ Although Michigan preceded New York by one year in
passing such an act, credit for the step must remain with the latter
since Michigan merely passed a version of the bill then under con
sideration in the New York legislature.

bonds or nortgages) with the State government to the full
[^le of aotes issued.
The introduction of free banking came hard upon the heels
and just prior to the severe depression 1339-^2.
free and chartered banks were numerous during
r-1 se ,rears. However, enthusiasm for free banking was unchecked
^.,e opposition to chartered banking was, if anything, intensified.
the era of banking by special charter was finally ended. As
-barters expired, banks reorganized under terms cf the Free Banking
t °
x866 the charter of the last bank participating in the
^nsurance system expired, leaving banking in New York (except for
♦vo^banks with perpetual charters) within the province of free banks
the new national banks being organized.
r ti-e panic of 1 6 3 7
- iures acong both

Character of the Insurance Flan
During the first fifteen years of its operation substantial
plan, but there was no
The plan centered on a
fund, created from assessments levied on participating banks, which
was to stand as a guaranty for the obligations of failed participa
ting banks. Most of the changes were a consequence of experience
gained during the banking difficulties of 1837 and the early 131+0's.
In describing the development of the principal provisions of the
insurance plan, details of the operational history of the insurance
s--stem will be touched upon occasionally. However, the .aajor part
of the latter story is left to a later section of this chapter.
alteration was made in New York's insurance
change at any time in its basic character.

Obligations insured* Under the original act of 1829 insurance
applied to "such portion of the debts, exclusive of the capital stock,
of any of the said corporations which shall become insolvent, as
shall remain unpaid, ..." 1/ Nowhere in the act was "debts” further
defined so that for thirteen years the word "debts" was interpreted
litei’ally, i.e., to mean all bank obligations to the public, the most
important of which were deposits and circulating notes.
In 181+2, when the claims of noteholders and depositors of
failed banks had exceeded the amount available from the fund, the
lavr was amended to make insurance apply only to circulating notes.
The new provision required that the insurance fund "after paying the
liabilities already charged upon /itj, shall be inviolably appro5.?•Lated and applied to the payment and redemption of such portion
f the bank notes, outstanding or in circulation, of any of the said
I uiking corporations subject to contribute to said fund ..." 2/
While the language of the amendment seems to clearly exclude
deposits from insurance protection, and has been so understood by

~l/ An Act to create a fund for the benefit of the creditors
cf certain monied corporations, and for other purposes^"April 2, 1829,
section 4.
2/ Amendment adopted April 12, 18^2, chapter 2bf, section 5*

II-5
most modern writers, this was not the interpretation of the New York
State Comptroller.
In his l84o report Millard Fillmore lamented the

that the amendment simply gave preference to noteholders and
a surplus could still be used to pay depositors. According
lo Knox, he desired that the fund be "sacredly devoted to the bill
4jld.Gr" but such further amendment, if necessary at all, was never
adopted. 1/
fact
rhat

Insurance fund. The fund out of which payments were to be
to insured bank creditors was created by requiring each partici
pating bank to pay annually to the State Treasurer an assessment
equal to one-half of one percent of paid-in capital stock. 2/ Pay
ments were to continue until each bank had paid a total of three
percent of its capital stock. The State Comptroller was charged
with management of the fund but ownership remained with the partici
pating banks, each of which was to share in the fund's nst income,
proportionate to the bank's contribution. 3/
siade

Maximum size of the fund was set at three percent of paidin bank capital (less any held by the State), bj In other words,
each bank had to make only six full payments to meet its quota,
assuming no increase in its capital stock. The 1029 legislation
required that assessments, at rates determined by the Comptroller
but not to exceed the regular rate, be resumed whenever the fund
was reduced as a consequence of insurance paynents. The special
assessments were to continue until the fund was restored to the maxi
mum amount. 5/
The provision for special assessments was substantially
modified in an 1341 amendment. There was often a considerable pass
age of time betwen the date a bank failed and the date at which pay
ments were actually made from the fund. Under the 1829 law, it was
not until such payments were made and a loss to the fund resulted
that special assessments could be levied. The amendment made any
allocation of the fund for the protection of creditors of a failed
bank, regardless of actual expenditures or the creation of a loss,
a reduction in the fund by definition, therefore giving the Comptroller
the right to levy special assessments almost immediately upon failure
of a bank. 6/
1/ John Jay Knox, History of'Banking in the United States,
Bradford Rhodes and Company, 1900}, p . ^ 12.
2/ An Act to create ..., section 2. The first payment of a
bank in operation less than one year was in proportion to the portion
of year it had operated. Stock held by the State, if any, was not
included in the assessment base.
3/ Ibid., section 6; section 7* Salaries of Bank Commis
sioners were a prior charge against earnings of the fund.
h/ Ibid., section U.
5/ Ibid., section S.
Amendment passed l84l, chapter 292, section 5 .
(New York:

n-6
Method of paying creditors of failed banks. Under the 1829
of failed tanks could not be reimbursed from the fund
.^liquidation was completed and a court order was secured
< -ecting the State Treasurer to pay the necessary amount out of the
•*-isu*ance fund. Since long periods of time were often required to
rnuidate a bank, this provision constituted a serious defect in the
"ian- Bank creditors, particularly noteholders, being unable to wait
for payment, might be forced to dispose of their claims at heavy dis
counts •
creditors

Fortunately, the law was amended in tine to deal with the
*irst cases in 1337* The Comptroller was authorized to make immediate
■cayEents out of the fund, under such arrangements as he thought best,
to holders of circulating notes, so long as the amount due, i.e., the
excess of liabilities over assets of the failed bank, did not exceed
two-thirds of the insurance fund. 1/ Hie method adopted, according
to Foot, was to pay noteholders immediately, leaving depositors to be
•oaid out of bank assets. After payment of depositors and other
Creditors, remaining assets were taken by the Comptroller and, if
they were insufficient to cover earlier payments to noteholders, the
deficiency was made up through renewed assessments on the participating
banks. 2/
Participation of banks. It was the original intention of
the State legislature to make the insurance system general. This is
clear from the first sentence of the 1829 law: "Every moneyed corpora
tion having banking powers, hereafter to be created in this State, or
whose charter shall be renewed or extended, shall be subject to the
provisions of this act." 3/ Since all banking was done under special
charter in 1829, this provision contemplated the eventual inclusion
in the insurance system of every bank in the State except the two
which held perpetual charters. No provision was made for the entry
of other than chartered banks nor did an operating bank have the
right to withdraw.
In 1838 the concept of an insurance system for all banks was
abandoned. The Free Banking Act of that year did not require banks
formed under its provisions to participate in the insurance program.
In fact, such a provision was expressly voted down prior to passage
cf the bill, kj This action stemmed primarily from political motives
and apparently had little to do with displeasure over the operation
of the insurance system to that time. Nevertheless, it signaled
the eventual end of bank-obligation insurance in Kew York State.
Purpose of the Insurance Legislation
The fact that New York was the first State to adopt bankobligation insurance, and did so after almost a half-century of banking
1/ Amendment dated May 8, 1837, chapter 350, section 1.
2/ L. Carroll Root, "New York Bank Currency", Sound Currency
(February, 1895), P* 5»
3/ An Act to create ..., section 1.
£/ Robert E. Chaddpck, The Safety-Fund Banking System in
New York State, 1829-i860, (Washington: National Monetary Commission,
1910), p. 379.

II-7
experience, has resulted in a more
preceding and following passage of

complete record of the discussion
the 1829 law than, is the case for
any other State. The arguments stated or implicit arguments of a
number of the leading participants in the debate over the insurance
■egislation are worth examining.
It is probable that most of the
vlevs described here were later reflected in debates preceding adoption
;f bank-obligation insurance plans in other States prior to the
Civil W a r •

Objectives of the 1829 act. The various objectives sought
by (or attributed to) proponents of bank-obligation insurance may be
broadly described as follows: l) to guard the State against de
struction of circulating medium caused by bank failures, 2) to pro
tect the bank creditor of limited means against loss, 3) to achieve
a political goal for which bank-obligation insurance served simply
as a ceans to an end. The first two objectives were those stated by
advocates of the 182? legislation, \rith protection of the circulating
aedium clearly of dominant importance. The third was that attributed
to the authors and supporters of the plan by its critics.
Most of the advocates of the 1829 law were motivated, in
whole or in part, by a desire for a stable circulating medium,
although some saw the insurance provisions of the law as accomplishing
a much more limited objective. Perhaps the clearest expression of the
former position was by Joshua Forman in the letter to Van Buren which
first set forth his bank-obligation insurance plan:
... The object to be attained, is of incalculable
importance to the prosperity, happiness, and moral
character of this highly commercial and growing state-to secure them a sound, well regulated currency, which
shall not only be in the hands of the receiver of the
value it purports to be, but shall be so adapted to the
necessities of business, as to insure to regular, well
directed business, the support and protection necessary
to preserve its well earned profits, and depress and
restrain that adventurous, speculating business, which
causes those convulsions in the money market, baffling
all calculation, and defeating the best arranged plans
of business ... 1/
Most of Forman’s accounts of the purpose of his plan, as
did that quoted above, had reference to all of its parts, i.e.,
creation of an insurance fund, establishment of an examination system,
and the requirement of investment of bank capital in securities.
While it is difficult to determine with precision Forman’s concept
of the function of the insurance fund itself, he apparently felt that
it would contribute to the stability of the circulating medium in two
ways: first, by maintaining public confidence in the banks and re
placing circulating medium lost as a consequence of bank failures; 2/
second, by preventing overexpansion cf the circulating medium which, in
evitably in Fonnan's view, led to contraction "demoralizing Jnibseffects
1/ Ifew York Assembly Journal, lc!29, p. 175.
2j " ... the safety fund ^will/*prevent panic runs and pay
real losses
Ibid., p. 18^.

II-8
upon society." 1/ This last function was possible because each bank
would "be kept in check by the others, now more interested in their
welfare than before." 2/
Interestingly, it was the latter effect which was more
iaportant to Forman. "In times of reducing the circulation from a
redundant to an ordinary one," the banks exert a "tremendous effect"
on business. "Great as has been the evil and loss from the failure
of banks, they dwindle into insignificance, compared with the public
injury occasioned by the irregular and injudicious management of the
soivent banks." 3/
The relationship between the insurance plan and the stability
of circulating medium was also sensed by other advocates of the 1829
law, but not expressed as clearly as by Forman. Van Buren, in his
first message to the legislature, noted that the "stability of /bank^
paper, is the principal and almost the only point, in which the
public has much interest." KJ This view was echoed by the legislative
committee which prepared the first draft. 5/ In a similar vein, the
son of Alexander Hamilton, a Van Buren supporter, saw as the primary
goals to be achieved by new legislation in 1829 "the stability of the
currency of the country; and, second, the security of the depositors
ana holders of the notes of the banks ..." 6/
The more limited objective of protecting the bank creditor
of modest means against loss due to bank failure was also sought by
most advocates of the 1829 law; and for several of its advocates
was the only important objective. Although both Van Buren and the
legislative committee evidenced a desire for a stable circulating
medium in their discussions of the 1829 law, in their statements
regarding the specific function of the insurance provisions the
safety of the small creditor was of primary importance. At a later
time Van Buren gave as his reason for considering a bank-obligation
insurance plan his desire, "to protect the most helpless against
losses by ^bank/" failures ..." 7/ Although this statement was made
some thirty years after the act was adopted, it is supported by his
message to the legislature accompanying the original insurance plan:
/The insurance/ fund is to be raised gradually, and
in a manner little burthensome to the banks; to be at
all times kept good by them, and instead of going into
the public treasury for the general benefit, is to be
applied to the protection from actual loss of those
of our constituents who would otherwise suffer by the
failure of banks improvidently chartered by the state,
or unskilfully managed by those to whom they were so
granted; and whose paper, in the unavoidable state of
our currency, our citizens can hardly be said to have the
option to take or refuse... 8j
1/ Ibid., p. 18U.
2/ Ibid., p. 178.
3/ Ibid., p. I8ij-, and 17^. Emphasis in original.
%J State of New York, op. cit., p. 242.
5/ Few York Assembly Journal, 1829, p. ^376/ James A. Hamilton, Reminiscences(New York: 1869),pp.82-8
7/ Martin Van Buren, AufbOiograpiiy, "(Washington: Government
Printing Office, 1920), p. £21.
8/ New York Assembly Journal, 1829, p* 173*

II-9
gjjailarly* the committee reported that:
The loss by the insolvency of banks, generally falls
upon the farmer, the mechanic and the laborer, who are
least acquainted with the condition of banks, and who,
of all others, are most illy able either to guard
against or to sustain a loss by their failure. The
protection and security of this valuable portion of
our population, demands from us, in their favor, our
most untiring exertions; and our time and talents
cannot be more beneficially employed, than when we
are legislating for their indemnity, l/
An event which throws light on the relative importance of
the two objectives described above was the 1837 amendment to the in
surance law, authorizing the Comptroller to take necessary measures
for the Immediate payment of the notes of any insolvent baric. Under
the 1829 Act, the requirement that creditors of failed banks would
be reimbursed from the insurance fund only after liquidation of the
assets was completed suggests that the problem of ultimate loss to
the individual creditor was paramount in the minds of those persons
drafting that particular section. However, virtual abandonment a
few years later of this procedure for paying creditors indicates that
restoration of the circulating medium, or solvency of the banks, or
both, was the primary goal. In other words, it was desired not
merely to reimburse the insured noteholder for the difference between
his original claim and receivers1 dividends, collected perhaps over
a period of years; but also to make his notes immediately acceptable
or convertible into other means of payment. Whether this was con
sidered at the time as the original intent of the 1829 Act is not
known.
The significance of the 1837 amendment, so far as the pur
pose of insurance of bank obligations is concerned, is that it is
important for the objective of guarding against destruction of circu
lating medium, but unimportant for protection of the bank creditor
of modest means against loss. The difference between receiving
immediate payment of insured obligations and receiving payment over
several years is small, consisting of the foregone interest on unavail
able funds. However, the first method has the important advantage
of providing for the immediate restoration of purchasing power within
the affected community, either because insured notes are immediately
replaced or because the distressed bank is sufficiently strengthened
by having its notes circulate at par to continue in operation.
It is to be expected that opponents of the insurance legis
lation saw, or professed to see, objectives much less praiseworthy
than protecting the individual bank creditor or guarding the circula
ting medium. Probably the most frequent charge was that the plan was
designed to give control over the banks to the administration. Ex
ponents of this view were consequently more concerned with the ex
amination requirements of the act than the provision for insurance.

11-10
ijyoical of such attacks was the following:
The bank safety fund, law, first conceived by a
visionary speculator, is undoubtedly one of the most
gigantic schemes of political power, and moneyed
monopoly, ever devised and brought into operation in
any country. The plan, as is believed, was first
unfolded by the projector, to Mr. Van Buren, then
Governor of the State of Hew York, who discovered in
it at once, a mighty engine of political power. The
capital of all of the banks in the state, amounting to
30 millions of dollars, with the privilege to issue
bills to the amount of seventy-five millions, subject
to the control of the Commissioners of the right
political stamp, empowered to examine books and papers -administer oaths to the officers and clerks--enter
their vaults and handle their treasures, stop their
discounts, and restrain, their issues, opened to the
aspiring, an avenue to political advancement, more
favoured than any ever before contemplated. In the
suppressed language of General Root, on the floor of
the Assembly, it conferred a power, greater than that
wielded by Philip of Maceaon. 1j
It is, of course, entirely possible that Van Buren and some
of his followers in the legislature were more than a little interested
in the political implications of the plan. Abijah Mann, without whose
skillful manipulation the bill could not have passed the legislature,
vas apparently uninterested in the principles of insurance and of
bank examination. The great accomplishment, as he saw it, was that
"the banks had for the first time yielded to conditions prescribed
by the Legislature." 2/ What conditions, he indicated, were of no
concern to him. 3/ Nevertheless, it is probable that this particular
objective was not of great consequence to most supporters of the act
and it is at least possible that even to the politicians it was not
the most important objective.
Conception of circulating medium. A large part of the
difficulty encountered in determining the objectives of the 1829 law
stems from the fact that there were varying concepts of circulating
medium. While it is clear that the idea that deposits were part of
the money supply was accepted at an early date in this country there
were still many in 1829 who either did not accept, or were not even
aware of this fact, hf To the latter, circulating medium consisted
of specie, i.e., gold and silver coin, plus banknotes. Since banknotes
far exceeded specie in amount, the terms "circulating banknotes" and
"circulating medium" could be used interchangeably by these persons.
1/ R. IC. Moulton, Legislative and Documentary History of the
Bank of the United States, (New York: IS3V), p. 67 . Emphasis in the
original.
2/ A. C. Flagg, Banks and Banking in the State of Hew York,
(Brooklyn: 1363}, p. 39*
3/ rbid., pp. 37-395/ Henry E. Miller, Banking Theories in the United States
before i860, (Cambirdge: Harvar<rTjnivei"sity Press, 1927), p. 110.

11-11
The different concepts of circulating medium become impor
ts to a determination of the objectives of the 1829 law when it is
^e^eracered that it was also believed that holders of circulating
otes '..'ere unwilling creditors of a bank. Contrariwise, it was felt
-hat depositors were deliberate creditors, i.e., they had surplus
funds to deposit and were in a position to choose their bank. As a
result, once it is determined that a proponent of the safety fund
felt or believed that insurance protection shotild be restricted to
noteholders, instead of applying to all bank creditors including
depositors, it is still not glear whether he believed the primary
objective was protection of^/circulating medium, imperfectly under
stood, or the safety of the "small'' creditor, i.e., the noteholder.
Several of the key personages connected with the 1829 legis
lation felt that protection was being offered only to noteholders.
Joshua Forman, the originator of the plan, apparently used the terms
"circulation" and bank "debts” interchangeably in his original
presentation of the plan and there is no evidence to show that he
ever considered whether deposits would or would not be insured. 1/
Similarly, the Assembly committee reporting the bill stated:
... the committee flatter themselves that something can
be formed out of it, which will effectually indemnify the
biil-hclder from every possible loss that can in any
event be sustained by the insolvency of banks ... 2/
Among others holding this view were: Enos Throop, lieute
nant governor of Kew York in the Van Buren administration:
.... It is worthy of consideration, whether the law of
last winter, creating a safety fund, and a board of
visiting and examining commissioners, does not afford all
the guarantee for the soundness of bills, which it is
in the power of legislation to devise. 3/
Albert Gallatin, financier:
.... with a laudable intent to protect the community
against partial failures, a "safety fund" has since
been established by law, consisting of a tax of one-half
per cent, on the capital of every bank, and which is
applicable to the payment of the notes of any that may
Tail ... UJ
V New York Assembly Journal, 1029; pp." 174-06.
%J, Tbii-* P3/ January 5 , 1830* State of New York, op. cit., p. 3H*
Albert Gallatin, "Considerations on the Currency and
Banking System of the United Statec:, American Quarterly Review
(December 1830) in Sh^ Writings of Albert Gallatin, edited by Henry
Adams, (Philadelphia: 1079), III, 317.

11-12
ojjc! Abljah Mann who managed passage of the bill through the Assembly;
The Safety Fund law therefore required a contribution
of three per cent ... to constitute the Safety Fund, to
be applied for the redemption of currency issued by the
weak and broken banlcs ... 1/
To those who believed that only circulating notes were in
sured the 1842 amendment which specifically restricted protection to
circulating notes merely clarified the language of the original act
and was not a departure from the objectives of the authors. This
interpretation of the 1842 amendment was held by no less authority

than the New York Bank Commissioners in l84l. In their report of
that year the Commissioners clajmed that most people had not under
stood the phrasing of the section dealing with insured obligations,
'jjiey stated flatly that the 1829 a-ct had been "primarily designed
to secure bank note holders, and not depositors or other creditors.’‘2/
Of those quoted above, Forman was the only one of whom it
be fairly said that his apparent belief that only circulating
notes would be insured was due to lack of understanding that circu
lating medium consisted of both circulating notes and deposits rather than to any desire to limit the objectives of his plan. 3/
So far as the others are concerned, it is only clear that they thought
circulating notes alone were insured. For what reason they advocated
or believed this is not known.
may

Although several modern accounts of the New York insurance
system have accepted the thesis that the intent of the law's formu
lation was to insure circulating notes only, there is substantial
evidence pointing to the fact that many contemporary observers had
always advocated {or assumed) that both depositors and noteholders
were insured, 4/ This suggests, of course, that these observers
could scarcely have felt that the primary purpose of the act was to
protect the ''small" bank creditor. As noted above, James A. Hamilton,
writing to Van Buren while the legislation was still being considered,
specifically mentioned "the security of the depositors and
holders of the notes ..." 5/ In an anonymous pamphlet published
in 1829 the act was severely criticized because it allegedly favored
the bank creditor and discriminated against the stockholder. The
bank creditors who were to receive the benefits of this act were
identified as "the bill holder and depositor." 6/ Similarly, Redlich
points to the fact that an amendment to the Vermont act, which act
copied that of New York, clearly recognized that both deposits and
notes were intended to be covered. 7/ Redlich dismisses the l84l
1/ Flagg, op. cit., pp. 37-38*
2/ "Annual Report of the Bank Commissioners," January 25 ,
l84l, New York Assembly Documents, document number 64, pp. 16-17 .
3/ This judgment of Forman's view can also be found in Fritz
Redlich, The Molding of American Banking, (New York: Hafner Publishing
Company, 1951 ), 1,91.
4j See, for example, Chaddock, op. cit., p.272: Miller, op.
cit., p. 151 .
5/ Hamilton, op. cit., p. 173* Emphasis added.
%j An Examination of some of the Provisions of the Act ...
passed April 1829. anonymous, (New York: 1329J1 ?• 5.
7/ fcediich, op«■ej-k., p. 264.

II-13
tatement of the Bank Ccmtnissigners regarding the
with the flat assertion:
"the ccnmissloners were

history of the act."

purpose of the act
uninformed, on the

Another piece of evidence is the act itself. If the legis
lators actually confused the words "debts" and "circulating notes"
it might be assumed that the words were used interchangeably in the
act. Yet, at each place where it vas necessary to refer to the obli
gations to he insured the legislature carefully used the term "debts".
In one section it gave clear indication that by debts it meant
"liabilities": the fund was "to be inviolably appropriated and
applied to the payment of such portion of the debts, exclusive of the
capital stock ..." 2/ On the other hand, in those parts of the act
where it was necessary to refer to circulating notes the legislature
had no difficulty in using precisely that term. 3/
Finally, it is of interest that the committee which drafted
the 1829 act referred in its report to the banks’ "debts, amounting
to nearly 30 millions of dollars." kj Thirty million dollars was
probably about equal to the sum of circulating notes plus deposits
in 1829, and apparently far exceeded either item alone. 5/ It is
unlikely that the committee would have used the term "debts" to mean
hoth circulating notes and deposits in its report, but to mean only
circulating notes in the act itself.
Statutory Frovisions Relating to Supervision
and Regulation of Participating Banks
New York's act creating an insurance fund was notable not
only because it introduced the insurance principle for protection
against bank failures but also because it made significant contri
butions in the area of bank supervision. This section surveys those
provisions of the law, and later amendments or changes, dealing
with supervisory activities and with the operations of participating
banks.
Supervisory agency. The supervisory department established
by the 1829 act was of modest size, consisting of only three persons,
with no allowance for staff or quarters mentioned in the act. Each
was designated as "Bank Commissioner", with a salary of $1,500 per
annum to be paid out of the insurance fund. 6/ Term of office was
two years, with Comnissioners removable by the governor for cause. 7 /
It was originally provided that two of the three Commis
sioners would be chosen by the banks (one by banks located in New
Iy, roid<>
2/ An Act to create ...., section 4.
V Ibid., section 27.
zl
York Assembly Journal, 1829i p» M-l*
5/ There are no available bank data for New York in 1829.
However, data for other years indicate this was the probable order of
magnitude of the items.
6/ An Act to create ..., sections 7 and 26.
7/ Ibid., section 23 .

II-11*
rk City and. one by so-called "country" banks) and one by the
with the advice and consent of the Senate. 1/ However,
in l337 an amendment to the act placed all appointments in the
governor's hands.
vernor,

It is evident that in providing an annual salary of $1,500,
roughly equivalent to $7,000 today, the intent of the authors of the
l829 act was that these be full-time positions. Curiously, it was
just this intention which drew strong criticism from opponents:
We think ... they ^the Commissioners/ will be men, with
whom the salary ... will be an object of some importance;
for, it can not be supposed, that gentlemen, in easy
circumstances, will be induced to accept an appoint
ment, the duties of which, if perfoimed as they ought
to be, will require so much of their time and attention. 2j
Hiis criticism reflects the practice of that period of appointing
prominent individuals to examine particular banks, when the situation
appeared to warrant, as a public service. To the critics it was
inconceivable that competent personnel could be secured if the salary,
however adequate, was to be a major consideration.
In 13^3 the offices of Bank Commissioner were abolished
and many of their duties transferred to the Comptroller. 3/ This
arrangement lasted for eight years, after which time it was recog
nized that the duties of* bank supervision were too numerous to be
handled by the already overburdened Comptroller. Accordingly, in
I85I a "separate and distinct department which shall be charged with
the execution of the laws ... in relation to the banks ..." was
established by the legislature, kj
The chief officer of the newly created department was to
be appointed by the Governor for a term of three years, at an annual .
salary of $2 ,500. He was given the title, "Superintendent of the
Banking Department", and authority to employ a staff sufficient to
handle the department's work. The Backing Department thus estab
lished was retained during the remainder of the insurance period and
to the present day.
Bank examination. As pointed out in Chapter I, the roots
of bank examination are to be found in the provisions of early bank
charters which required, usually because the State was a stockholder,
that banks make reports of condition to the legislature and that
agents of the legislature or the Governor be permitted to visit
banks when necessary. However, it was not until 1829/ when New York
adopted its insurance law, that the fundamental principles of modern
examination procedures were adopted. Tne important provisions of
the law which related to bank examination were:
~~

1 / Tbid., sections 20 and 21.
2/ An Examination of some of the Provisions ..., pp. 30-31•
3/ An Act to abolish the office of Bank Commissioner, and
for other purposes, April 18, 1SU3 .
4/ An Act to organize a Bank Department, April 12, 1851 .

n-i5
Three persons, to be styled "the Bank Com
missioners of the State of New York," shall be
appointed in the manner hereinafter provided; whose
duty, or the duty of one of whom it shall he, once
at least in every four months, to visit every
moneyed corporation upon which the provisions of
this act shall he "binding; and thoroughly to in
spect the affairs of the said moneyed corporations;
to examine all the books, papers, notes, bonds,
and other evidences of debt of said corporations;
to compare the funds and property of said corporations
with the statements to be made by them as herein
after provided; to ascertain the quantity of specie
the said corporations have on hand; and generally
to make such other inquiries as may be necessary to
ascertain the actual condition of the said corpora
tions, and their ability to fulfil all the engage
ments made by them, l/
The said commissioners, or either of them, shall
have power to examine upon oath, all the officers,
servants, or agents of said corporations, or any other
person, in relation to the affairs and condition of
said coiporations; which oath the said commissioners,
or either of them, are personally authorized to
administer. 2/
In addition to requiring three examinations in each year for
each bank, special examinations were to be made when requested by
any three participating banks. 3/ It was also provided that examiners
make annual reports to the legislature of their activities, hj
To modern eyes these provisions would scarcely seem ex
ceptional, but contemporary observers immediately noted three signi
ficant departures from tradition: First, examinations were no
longer to be made sporadically, under a specific direction of the
legislature, but instead were to be regular and frequent; second,
the position of bank examiner was to be on a full-time basis and
carry adequate compensation; third, and perhaps most important,
examiners were to have complete access to bank records.
So far as the third point is concerned, in most States
prior to 1829 it had generally been assumed that examinations, when
necessary at all, should be confined to verifying the accuracy of
statements of condition. Rarely was the examiner shown a detailed
schedule of bank assets or permitted to ascertain or question the
value of individual items in the loan portfolio. Tentative steps
toward thorough examination policies may well have been taken prior
to 1829 in the cases of individual banks, but it appears that the
1/ An Act to Create~a fund for the benefit* of the
creditors of certain moneyed corporations, and for other purposes,
April 2, 1829, section 15 .
2/ Ibid., section 17*
3/ An Act to create ..., section 16.
zJ Ibid-* > section 19*

II-16
New York law was the first to set out such a policy in specific
terms, applicable to an entire banking system.
The novelty of this concept of bank examination is best
illustrated by the criticism it attracted. One example, character
izing the examination provision as "one of the most gigantic schemes
of political power, and moneyed monopoly, ever devised and brought
into operation in any country." has been cited above. 1/ More re
strained but not less adamant opposition was contained in an anonymous
pamphlet circulated in New York City soon after passage of the law. 2/
Intended as an attack on all provisions of the law, the largest part
of the argument was directed at those relating to bank examination.
Among the comments were:
The powers granted these commissioners are such,
as never ought to be placed in the hands of any three
men, be their qua&iffications what they may, or their
characters ever so pure and unsullied ...
If the proposed law shall go into effect, the fiscal
affairs of every man must be laid bare to the view
of these commissioners ...
We have reason to believe, there are few men, at
least such as the public would have confidence in,
that will accept an office, requiring ever;'' moment
of their time, both summer and winter, to be devoted
to its duties ...
It is surely improper, that spies and inquisitors
should be commissioned to look after the conduct and
actions of those who have_conducted well, and thus
fasten on them, oblique /_sic7 and mistrust, not merited
or warranted by their acts ...
The appearance of two fundamental banking innovations in
the same act, i.e., insurance of bank obligations and regular bank
examination, was more than coincidence. Although each was sought
for its own sake there was a strong relationship between them.
Regular bank examination was the answer to those who charged that
insurance would place a premium on reckless banking. Contrariwise,
the existence of mutual responsibility made the new mode of exami
nation, if not welcome, at least more palatable to participating
banks.
It is also significant that the introduction of these
innovations was considered as the effective answer to demands for
State participation in banking, i.e., for the end of an independent
banking system. Among the proposals for banking reform current in
1829 was one calling for a State-owned bank with branches through
out the State. To this, Joshua Forman answered that with the intro
duction of the insurance principle and of bank examination:

1/ See above, p. 11-10.
2/ An Examination of some of the Provisions ..., pp. 18,
28- 30.

11-17
The whole body of banks would constitute a
kind of community something after the model of our
federal union, in which each in its proper sphere
would have the same freedom of action, separate
patronage and individual benefit or loss from good
or bad management, they now possess - with a super
vision over the whole, as perfect and more beneficial
for the public than that of a general ^State-owned/
bank over its branches - and a common fund for the
ccrrmcn security, which, under the operation of the
principle of inspection to prevent mismanagement, and
the power to secure the property of the failing banks
before mismanagement has progressed to its consumma
tion ... is on the whole a more ample security to the
public than that of a general bank with branches ... 1/
When the duties of the Bank Commissioners were transferred
to the Comptroller in 164-3 the examination power was drastically
curtailed. Instead of regular examination, the act provided that
the Comptroller could only examine "whenever he shall have good
and sufficient reason to suspect the condition of any bank, or the
correctness of its quarterly report." 2/ Ho change was made in this
regard when the office of Superintendent of the Banking Department
was created so that, for that part of the insurance period from
1843 to 1866 there was no regular examination of participating
(or nonparticipating) banks.
Condition reports. New York1s insurance law of 1829 did
not introduce any major advance in requiring condition reports from
banks. Two years before, in 1827, all banks had been required to
report regularly to the State Comptroller. 3j Prior to that time,
reports had been regularly submitted only by those banks whose
charters included such a requirement. However, the insurance law
did require that reports previously made to the Comptroller would
now be made to the Bank Commissioners so that, for the first time
in any State, condition reports were directed to persons giving
their full time to bank supervision.
Condition reports submitted to the Bank Commissioners were
made annually, as of the first day of each year. Only three items loans and discounts, circulation, specie - were reported for two
dates, July 1st and January 1st.
With, the removal of the Bank Commissioners in 1843, and
the transfer of their powers to the Comptroller, it was apparently
felt that more frequent and detailed information was necessary.
Consequently participating banks, as well as those not included in
the insurance system, were required to report quarterly to the
Comptroller.
~~

1/ Letter from Joshua Forman, New York Assembly Journal,

1829, p. 178 .
2/ An Act to abolish ..., section 6.
3/ This applied only to banks receiving charters (or re
newals of charters) on or after January 1, 1828. Thus while it
would eventually have applied to all but two chartered banks at the
outset it applied to none.

II-lB
In addition, improvements were made in the content of
the reports. This was particularly true of the "loans and discounts"
item, which, before 1843, had lumped together nearly every debt due
a bank with the exception of deposits in other "banks and securities.
Beginning in 1842 "loans and discounts" was broken down to show, for
exanple, loans and discounts to directors as distinguished from other
borrowers, brokers' loans, loans on real estate, and overdrafts.
Although there were some changes in the description of deposit items
after 1843, in general there was a fairly detailed breakdown during
the entire period 1829-1866.
During the course of the insurance period some improvement
was also made in the matter of reporting dates. The annual reports
made to 1843 and the quarterly reports made until 1848 were as of
dates announced prior to the preparation of such reports. Consequent
ly, some reporting banks could so adjust or alter various items that
there was uncertainty as to the correctness of the totals. Beginning
in 1648 reporting dates were chosen as of a date already past and
it is believed that this, along with seme additional safeguards
adopted later, resulted in more accurate tabulations.
Enforcement •powers of supervisory officials. The authority
possessed by supervisory officials in New York, whether the Com
missioners, Comptroller, or Superintendent of the Banking Department,
stemmed from their right to secure an injunction against the con
tinued operation of any bank found to be insolvent or operating in
violation of the law. 1/ The various laws did not provide additional,
and less drastic, pieces of authority, such as to determine the form
of condition reports or take certain steps against a bank in hazardous
condition but not yet insolvent. The consequences of this arrange
ment are discussed in a section to follow. 2/
Bank operations. The insurance act contained relatively
few provisions dealing with bank operations. This was because each
of the banks subject to the law operated under individual charters
granted by the legislature and most operating regulations were in
cluded in them.
The most important limitations placed on the banks by the
1829 law related to circulating notes and to loans and discounts.
Following the then common practice of using capital as a regulatory
tool, circulating notes couli not exceed twice, nor loans and dis
counts twice and a half, the amount of capital "paid in and actually
possessed". 3/ It is likely that somewhat siniiar provisions were
found in many of the individual bank charters and that the 1829 law
merely brought all the banks under the same rule. In effect, the
law required a capital ratio on the order of twenty to forty per
cent, a not uncommon ratio for banks of that period.

1/ An Act to create ..., section 18.
2/ See below, pp. 11-72-73*
3/ An Act to create ..♦, section 27-

11-19
Aside from the requirement that interest on loans not ex
ceed. "the legal interest" (which at that time was 7 percent for
loans maturing in more than 64 days, and 6 percent for the shorter
term loans) the remaining restrictions also dealt with circulating
notes. 1/ All notes were payable on demand, i.e., post-notes were
prohibited. 2/ An amendment of May 16, 1837 , tightened the re
striction on circulating notes and also established a schedule
whereby the larger the capital of the bank the smaller was the pro
portion of notes allowed it. Thus banks with as little as $100,0C0
capital were allowed circulating notes to a maximum of $150,000
while banks w ith $2,000,000 capital were only allowed a volume of
circulating notes equal to $1,200,000.
Another amendment in 18^3 required a reduction of circula
tion to the proper proportion with capital if the latter became
Impaired or was reduced. In 1848 the circulation-capital relation
ship was eased by an amendment permitting banks with capital of
more than $200,000 to issue notes up to the additional amount. How
ever, these notes had to be secured in the same fashion as those of
free banks, i.e., by the posting of State bonds or mortgages.
Number

and Obligations of New York Banks, 1529-1866

During the 37 years of operation of New York’s insurance
system a wide variety of banks existed in the State. The discussion
below deals only with commercial banks operating under provisions of
various State banking laws. It therefore excludes private banks
(except those banks designated as "individual" banks and operating
in accordance with the terms of the Act of 1838), savings banks,
and national banks organized in the final few years of the period.
Number of operating banks. As described earlier, it was
originally intended to include in the insurance system all banks
except two. The two exceptions were the Bank of the Manhattan
Corxpany and the New York Dry Dock Company, each of which had a
perpetual charter.
Table 6 , which contains a distribution of banks by insur
ance status for each year in the insurance period, shows that during
the first nine years of insurance (1829-1837 ) this objective was
nearing realization. At the close of 1329 slightly more than half
of the banks were subject to the insurance law. As the banks not
participating in insurance renewed their charters they automatically
cane into the insurance system, ;So that by the end of 1837 about
91 percent of the New York banks were included.
With the formation of free banks (which did not partici
pate in insurance) beginning in 1838, the conception of an allembracing insurance system died. In addition, it apparently became
settled policy in New York to cease chartering (or rechartering),
so that as charters expired banks reorganized under the provisions

l/ Ibid~ section 33 *
2j Ibid., section 35*

11-20
rjabXe 6.

Number and Percentage Distribution of Operating Banks,
by Insurance Status, New York, 1829-1866 1/

Hixmber of banks
2nd Total Partici- Not participating in pating in inof
insurance suranee£
year
Charter- Free
y
ed 3/
V
20
43
23
1829
20
29
49
1830
—
12
51
63
1831
U
69
58
1832
69
10
79
1833
86
76
10
-1834
1835

1836

87
100
97
114
174

77
90

10
10
a
J
9
7

__
---

Percentage distribution
Total
Partici-. Not partici
pating in pating in ininsurance suranee
Charter- Free
u
ed 3/
y
100.0
46.5
53.5
100.0
40.8
59.2
81.0
100.0
19*0
100.0
84.1
15*9
-100.0
12.7
87.3
88.4
100.0
11.6
-100.0
100.0
100.0
100.0
100.0

5/
5/
5/

88
89
91

154
1840
of
132 %
l84l
1842
153 5/
12/
1843 11/ 136 :
1844 11/ 148 '

89
81
80
80

7
[
6
6
3

1845 11/ 148
1846 13/ 150
1347 U j ' 167
184813/ 182
1849 ~ 190

78
77
77
76
75

3
_>
2
2
2

209

243

69
6?
57
52

2
2
2
2
2

42
40
32
30
28

2
2
2
2
2

25
24

279

297
276

100.0

95
75

100.0
100.0

1337

1836

1839

1850
1851
1852
1853
l8p4

1855
1856
1357
1856
1859

276
322
333

286
312
294
301
303

i860
1861
1862

306

1863

309
284

10
6

2
2
2
2
2

99
77

2
13/

2
2

1864

302
308

1865
1866

16 6/
76 I j
58 10/;

100.0
100.0
100.0
100.0
100.0

67
70
83
104
113
136

40 10/
46 10/
50

172

207

263
279
242

270
260
269
273

276

289

88.5
90.0

11*5
10.0

90.7
?S. 1
52.3

9.3
7.9

57.8
64.4

60.9
58.8

—
—

4.0

14.0
43*7

4.5
5.3
4.5

37*7
30*3
34 .6

36.8

54.1

4.4
2.0

43*9

100.0
100.0
100.0
100.0
100.0

52.7
51.3
46.1
41.8
39-5

2.0
2.0
1.2
1.1
1.0

46.7
52.7
57.1
59*5

100.0
100.0
100.0
100.0
100.0

34.0
28.4
24.3
17*7

65.1
70.8

15.6

.9
.8
•7
.6
.6

100.0
100.0
100.0
100.0
100.0

14.7
12.3
10.9
10.0
9.2

.7
•7
•7
.7
•7

84.6

100.0
100.0
100.0

8.2
7.9
5-5
3*2
2.1

*7
.7
•7
•7
.7

91.1
91.4
93*8
?6.l
97.2

2.0

2.0
2.6

96.0

100.0

45.3

75-0

81.7
83.8
86.5
88.4
39*3

90.1

97.4

ii-ai
T&ble 6.

Number and. Percentage Distribution of Operating Banks,
by Insurance Status, New York, 1829-1866 1/
(continued)

Sources:

New York Assembly Documents, Annual Reriorts of the

P,nk Commissioners, 1531-1843;

I8 3 1 nicaber 59, 1 8 3 2 (7 0 )‘, 1333 (6 9 ),

{334 (102), 1835 (7*0, I636 (80 ), 1837 (78), 1833 (71), 1839 (101 ),
l34G (WO, l84l (64), 1842 (29 ), 1843 (3^); Annual Reports of the
Comptroller, 1844-1851: 1344 (4), 1845 (25), 1846 (25), 1847 (5), 1848
1849 (5)j I85O (8 ), 1351 (9); Annual Reports of the Superintendent
of the Banlcing Department 1852-61, 1864-67; 1652 (9), 1853 (6 ),
X854 (15), 1855 (10 ), 1856 (4), 1857 (5), 1853 (M, 1859 (5), i860 (3 ),
l86l (3), 1864 (3 ), 1865 (4), 1866 (3 ), 1867 (4); New York Senate Documents, Annual Reports of the Superintendent of the Banking Department,
X862-63; 1862 (32), I863 (3) L. Carroll Root, "New York Bank Currency,"
op. cit..
1/ Excludes private banks, savings banks, branches of operating
banks, and, for 1863-66, national banks.
2/ Banks chartered in accordance with terms of Act of 1829 or
whose charters were renewed following passage of that Act.
3/ Banks chartered prior to Act of 1829, including two banks
vith perpetual charters.
k/ Banks organized in accordance with provisions of Act of 1838.
5/ Differs from total published in 1953 Annual Report of the
Federal Deposit Insurance Corporation, p. 60, because of inclusion of
banks in^peration but for which no reports are available. In the
report for the year ending 1838 the Commissioners remarked in a footnote
that they excluded from the count the Dry Dock Company and the Delaware
and Hudson Canal Company, although "it is understood ... that both are
doing business under their charters." The data for 1838 were therefore
adjusted and, since the number of chartered banks not participating
could not, under the 1829 lav, increase, the data for 1335-37 were also
adjusted under the assumption that one (1835) or both (1836-37 * 1839-^3 )
banks had not been counted by the Commissioners in these years.
6/ As shown in Sound Currency, February 1, 1895, P* 17, which
also reports 48 applications made to date. A count of individual banks
by the writer indicates that as many as 22 may have been in operation.
7/ In operation on December 1, 1839, as reported in Sound
Currency, February 1, 1895, p. 17* A count of individual banks by the
writer shows only 66 in operation at end of year.
3/ Differs from totals published in 1953 Annual Report of the
Federal Deposit Insurance Corporation, p. 60, primarily because of
improved estimates of number of free banks. Also see notes 5/ and 10/.
9/ Excludes Wayne County Bank which failed near close of
year but was included in Bank Commissioners1 report.
10/ Estimated. Total was arrived at by listing the opening
and closing dates of every free bank known to have been started in or
prior to this year. These dates were taken from Williacn H. Dillistin,
Elstorical Directory of the Banks of the State of Hew York, (New York:
New York State Bankers Association, 1946). Banks which went into
voluntary liquidation during this year were estimated from information
provided in Sound Currency, op. cit., p. 18.

11-22
lable 6.

Number and Percentage Distribution of Operating Banks,
by Insurance Status, Hew York, 1829-1866 l/
(continued)

November dates.
12/ Differs from total published in 1953 Annual Report of the
j^deral Deposit Insurance Corporation, p. 60, because of inclusion of
^y-o chartered banks not participating in insurance and now assumed
not to have been included in official reports. See note
.
13/ The charters of the last two participating banks expired
before the end of 1666.

11/

II- 23
of the Free Banking Act or, after 1863, under those of the National
Thus in 1840 the number of banks participating in
insurance "began a steady decline, ending in 1866 with the expira
tion of the charters of the last two participating banks.

Banking Act.

Free banks, on the other hand, increased rapidly in
primarily because of banks newly organized but also because
of the conversion of banks previously participating in insurance.
In l847 slightly more than half of all New York banks were operating
under provisions of the 1838 act and during the final years of the
period almost all of the banks in New York, aside from newly
organized national banks, were free banks.
number,

Bank, obligations. Bank obligations are defined here to
include deposits, circulating notes, and miscellaneous liabilities;
and to exclude capital stock and other capital items. Table 7
shows the amount and percentage distribution of total bank obliga
tions for all operating banks in New York State, with the banks
grouped by insurance status.
Fluctuations in economic activity in the State, as veil
as in the nation, are reflected in the all-bank data. For example,
the panic of 183? is clearly evident in the decline from $83 million
of bank obligations at the end of I836 to less than $50 million
at the end of 1837 - Similarly, the deep depression which began
about 1839 and ended in 18U2 , the decline of 185^, the panic of
1857, and the inflation of the war years are all reflected in the
data.
As was the case with the number of banks, obligations of
banks participating in insurance became of increasingly greater
importance between I83O and 1838. By the latter year approximately
nine-tenths of all bank obligations in the State were attributable
to participating banks. However, there '.ms an almost unbroken
decline beginning about lokO, with the result that within a decade
less than half of all bank obligations were those of participating
banks and by i860, less than one-tenth.
Chartered banks not participating in insurance had a
relatively large share of all bank obligations during the early
1630*s, but this share naturally declined as such banks became
participating banks in the years prior to 1838, or free banks after
about 1840. They became of greater relative inportance only in
the last two years of the period, as a consequence of the marked
decline in the number of free banks after passage of the National
Bank Act.
The obligations of free banks increased almost as rapidly
as the number of such banks. As shown in Table 'J, these banks had
more than four-fifths of total bank obligations by 1855 and more
than nine-tenths in the early i860's.
Chartered banks, whether or not participating in insurance
were of larger average size than free banks. This can be seen from
a comparison of Table 7 with Table 6 . It will be noted that in
most instances the proportion of bank obligations of either group

11-21*
- amount and Percentage Distribution of Bank Obligations, Operating Banks
(*
by insurance Status, New York* l829-l86o 1/
(Amounts in thousands ot dollars)

Znd of
year

1829

1830
1851
1832

'Amount of obligations 2/
---- Banks par- Banks not partiticipating cipating in inAll
surance
banks in insur
Free"
Chartered
ance
3/

37^9
33366
39,095

3/
11,142

26,598 y

26,160

7,306 V

31,093

8,002

56,722

39,047
47,303

1835
1836
1837
1838
1839

73,847

59,666

39,932 V 32.673

5,259

lflW

45,600 5/ 41,334
45,764 V 33,338
45,355 ~ 33,162
64,101
47,131
71,375
49,866

4,266

1833

1834

1841
1842
1843
1844

47.652

82,623

42,732
1+9,690
57.67* 5/ 50,784

18U5

69,618
18*6 lZ'Vl

1847

iew
18U9
1850

1351

70,090

82,927
70,317
83,872
110,775
94,297
143,541

Percentage distribution
Banks
Banks not particlAll participa- pating in Insurance
banks ting in
Chartered
Freeinsurance

14,181
12,533
6,958

4 ,180

100.0

80.8

10 0 .0

84.8

19.2
15.2
14.0
11.9
13.9

100.0

8,605 V
9.419 3 /

6,890

70.5

100.0

29.5
78.2
79.5
81.9
83.4

100.0^

100.0
100.0

10 0 .0

,
3/
6,243 6/
8,388 "
11,468
18,385

100.0
1 0 0 .0

86.0
88.1
86.1
90.6
76.1

21.8
20.5
18.1

16.6

9.4
9.6
8.4

14.3
18.5
17.9
25.7

100.0
100.0

73.0
73.5

100.0

69.9

4.4

50,587
2.998
18,954
47.311
2.734
19,573
54.250
1,985
26,691
54,655 7/ 2.000 4/ 13,662 4/
53,959 7/ 2.000 "?/ 27,913 V

1 0 0 .0
1 0 0 .0

69.7
68.0
65.4
7 7 .7

4.2
3.9
2.4
2.9
2.4

26.1
28.1

51,232 7/ 3.000 4/ 56,543 4/

100.0
100.0
100.0
100.0
100.0

46.2

2.7
4.3

2.8

51.1
42.9
63.2

2.9
3.2

70.6

75.1

80.8
82.8

3,805
5,502
3,124

3 / 40,491 V

100.0
100.0
100.0

64.3

52.8
34.0
26.5

8.6

32.2
19.4
33.3

49,806
48,753
36,735
27.419

7/ 4,000
V 4,000
7/ 4,000
J/ 4,000
5,465
4,088
3,973
4,662
4,290

124,390
135.732
113,578
155,348
146,061

100.0
1 0 0 .0
100.0

15.7

3.5
2.5
3.0

86.7

165,906

24,188
24,080
13,493
16,923
15.555

100.0

9.6

100.0

9.4

2.6
2.6

87.8
88.0

1860 182,151
1861 211, 178

14,601
18,481

6,473
6,929
8,976

161’ °TL
185,768

100.0

8.0
8.7
7.0
6.4
3.9

3.6
3.3
3.0

88.4

100.0
100.0
100.0
1 0 0 .0
100.0
100.0

1.2

1852
1853 138,560
1854 126,056

1855 154.043
1856 163.900
1857 131.044

1858
1859

176,933

1862 299,341

1863
1864

314,829
353.350

1865
1866

47,879

61,018

21,002

t/ 90,788 ty
J/ 97.825 V
t/ 94,637 V

20,060

6,7^5

13,751

7.723

269,363
287,984
331.876

8.035
8,557

52,262
39.322

21.7
14.7
10.3

88.0

2.1
2.2

90.0
91.5
93.9

13.2
17.9

85.6
82.1

Sources; See Table b .
—
1/ For types of banks Included and excluded see Table 6, note 1. No
adjustment has been made for Individual banks which may not have reported on a
given date.
2/ Includes deposits, circulation, and miscellaneous liabilities. Totals
may therefore differ slightly from those published In 1953 Annual Report of the
Federal Deposit Insurance corporation, pp. 62-63 .
3/ Not available.
%/ Estimated.
5/ Incomplete,
%J Probably Incomplete.
7/ Partially estimated.
B/ The charters of the last two participating banks expired before the
«nd of 1856.

IfD

P « e lI'?5
11-26

of chartered banks was larger than, the proportion of their number
£ aXl operating banks. For example, in 1844 banks participating
in insurance were 54 percent of the number of all operating banks
but held TO percent of the obligations of all operating banks; and
chartered banks not participating in insurance constituted only two
percent of all operating banks but held well over four percent of
all bank obligations. Similar relationships can be observed, for
many of the later years in the period, when almost all tanks in the
State were free banks.
The larger average size of chartered banks as compared
with free banks was due to the fact that many of the chartered banks
frari been started early in the State's history and none had gone into
operation later than the 1830's. Consequently they had a longer
time to develop a banking business and, in addition, tended to be
located in the larger cities.
Obligations of participating banlcs. Because of their in
sured status, somewhat more importance attaches to the types of
obligations in insured banks than to those of banks not participa
ting in insurance. Table 8 shows total obligations of participating
banks, broken down into major categories.
In the first year (1Q30) for which data are available
circulating notes of participating banks comprised the largest
type of obligation. Thereafter, deposits exceeded circulating
notes, the difference between the two items tending to become
larger as the period progressed. During the 1830's and l840's
deposits were typically twice, and in the late 1850's and early
l860's approximately three times, the amount of circulating notes.
Among the deposit items, that classified as ’’individual,
partnership, and corporation deposits" in this table predominated
in most of the years included in the insurance period. Such
deposits were almost entirely demand deposits.
"Government deposits" in participating banks consisted,
at various times, of deposits of the State Treasurer, of the
Commissioners of the Canal Fund, and of the Treasurer of the United
States. United States deposits were of importance only during
the earlier years, before the establishment of the Independent
Treasury and when the Federal government followed the policy of
keeping its very substantial surplus deposited in selected State
banks. Beginning in 1337 the Federal surplus was distributed among
the State governments but its importance prior to that date is
reflected in the large volume of "Government deposits" in partici
pating banks in 1835-36. 1/
"Interbank deposits" were relatively important during
the entire period. They were particularly large prior to 1840,
and in several of these earlier years actually exceeded in amount

l/ U, S. Government deposits in participating banks were
$6,049,699 at the end of 1835, and $7,833,039 at the end of 1836.

11-27
'Table 8 * obligations of Banks Participating in Insurance, by Type
^
of Obligation, New York, 1829-1866
(thousands of dollars)

Total ob Circula Total
ligations ting
notes 2/
y

iCad
of
year

1329
1630
1831
1832
1653
183^

U
11,142

26,160
31,093
39,047
47,303

59,666
70,090

1835
1536
1837
1833
1839

V
5,871

Deposits_______________
Individual Govern-- Inter
partnership, inent
bank
and corpor- 4/
5/
ation 3/

U
4,o26
13,^

12,001
12,216 18,162
15,403
14,464

22,327
32,470

18,956

1/
1,702

14,321
11,418

26,655

33,162

21,566

49,866

8,926 23,934
13,050 33,779
14,890 34,517

15-242
12'571

1845
1846
1847
1843
1849

50,587
47,311
54,250
54,655
55,959

15,547
15,767
16,809
20,420
20,570

1850
1851
1852

51,232

19,464

1856
1857

1858
1859
1360

9,380
3,394
9,340
1,392
11,803
1,395
V
1?/f
7
V
U

442
424

1,875
1,291

41,334
33,338

1355

358
354
302
302
459

12,954
15,427

1340
1841
1342
1843
1844

1854

9,538
7,704
9,230
11,175

29,644

9,133
!11,270
3,340
2,776

13,560

1853

870
3,837
1,532
1,000
745

14,271

15,186

21,991

49,806
48,753
36,735
27',419

16,431
17,732
13,350
13,901
6,155

39,840

22,065 44,188
9,937

47,131

5,060 8,722
3,658 14,257

445
725
715
1,317
369

2,135
2,767

11,556

17,680 32,104

3^,598

31,120

8,000

20,602
21,824
20,388

23,677
36,375
33,735 8/
7/
32,889 S/
U

31,363 8/
18,658 30,743
18,610 29,343 w
14,559

13,868

19,744

21,376 w,
W
19,219 0/

24,188
24,060
13,493
l6,9?3
15,555

7,525
6,771
4,127
4,862
4,?84

16,481
17,152
9,309

14,601
18,481

3,973
4,186
3,853

10,600

12,027

10,542

7/
u
y
7/
u

2,276

836
2,860

3,413

V
V
u
V
1/

7,466
9,4c6
3,339

1.662
2 ',503
2 ,C6C

8,490

116

118
143

1865
1866

721

401

320

272

• —

See Table £>.

lol

13,751

Sources:

3; 149
3,004

1364

2,256 17,804
1,160 12,591

837

21,002
20,060

17,112

10,502

12,495
13,710

1861
1862
I863

14,265

10,286
11,283
14,138

11,037

V
1,509
5,335
7,336

2
1,615

5,964
8,059
3,545
14,555

42,732
50,784
32,673

Misee1laneous
liabili
ties 6/

135
351
3^5
--

566
500 8/
500 3/
4oo 8/
4oo 3/
300 of
300 8/
200 8 /

182

1 r\'-7
L’
J"f?
34
29

1,994
3,844
5,478
3,321
1,554

48
2/

30
27

11-28
Table 3.

Obligations of Banks Participating in Insurance, by Type
of Obligations, New York, 1829-1866
(thousands of dollars)
(continued)

l/ Differs in some years from totals published in 1953
the Federal Deposit Insurance Corporation, pp. 62-63,
adjustments in deposit tabulations and inclusion of
miscellaneous liabilities. Data are for reporting banks and no adjust
ments have been made for banks which may not, on any one date, have
been included in official reports.
2/ For some years the sum of "Bank Notes issued and in circu
lation" and "Registered Notes issued and in circulation."
3/ Includes "individual deposits," (sometimes described as
"individual depositors," "deposits," "due depositors on demand," or
"deposits, individual") and "deposites to apply on debts," (sometimes
described as "deposits on debts," or "amounts due not shown under
other heads"). Excludes "dividends unpaid," (sometimes described as
"due individuals," or "due individuals and corporations other than
banks and depositors").
kj Deposits of United States Government, and of New York
State, including deposits of Commissioners of Canal Fund.
5/ Includes deposits of brokers in some earlier years;
excludes deposits of branches in parent banks, 1830-33* This item
was not reported separately beginning in 1834 and may be included in
interbank deposits beginning with that date.
6/ Includes unpaid dividends, which are presumed to have
represented dividends declared but not paid (as distinct from paid
but not called for) and therefore not properly a deposit item.
7/ Not available.
5/ Estimated.
9/ The charters of the last two participating banks expired
before the end of the year.
Annual Report of
because of minor

11-29
ch of the other deposit categories. As the number of chartered hanks
h can to decline, and particularly as these in New York City left the
‘nsurance system and reorganized under the Free Banking Act, "Inter
bank deposits” beceme relatively less important.
"Miscellaneous liabilities", consisting largely of dividends
it is assumed here, had teen declared out not yet paid, com
prised- a mi^or proportion of the total obligations of participating
banks.
v/tiich,

Relative size of participating banks. In a preceding section
it was pointed out that, on the average, participating banks were
larger than free banlcs during the insurance period.
However, there
were also marked size differences among the participating banlcs them
selves. Table 9 shows participating banks grouped by size (as measured
by the amount of deposits plus circulating notes) for three dates:
December 31 ot 1834, 1342, and 1855.
Seven size groupings are used. -The first two,^.representing
less than $200,CCO of deposits and circulation, include what might
be ternied small banks. The next two size groupings, ranging from
$200,000 to $900,000 of deposits and circulation, contain medium sized
banks, while the other three groupings, $800,000 or over contain the
lar^e banks in the insurance system.
When the data for the three dates are compared one najor
difference among the distributions of banks is evident. In both 1334
and 1855 the largest number of participating banks had from
CO,CCO
to $400,000 of deposits plus circulation, but in 1842 by far the largest
number of participating banks had between $100,000 and $200,000 of
such obligations. This is undoubtedly a reflection of the severe de
pression which began about 1339 and reached its bottom in 1842.
The effects of the depression of 1839-1842 may also be ob
served in the fact that in 1342 sixteen banks, or about 20 percent of
all participating banks, fell in that size group while in 1834 there
were no banks in the smallest size group (less than $100,000) and in
1855 only one bank in that group.
Larger size banlcs (those with more than $800,000 of deposits
and circulation) constituted about 1 $ percent of all participating
banks on each of the three dates. As would be expected, they were a
slightly larger proportion of all participating banlcs in 1834 and in
1855 than in 1942.
With banks grouped by size it is possible to measure the
degree of concentration of risk to which the insurance system was ex
posed. It will be seen from Table 9 that in 1834 a sizable proportion
of the risk to the New York system was located in relatively few banks.
For example, two banlcs, constituting less than three percent of all
participating banks, had more than 20 percent of insured deposits plus
circulation. The 13 largest size banks on that date were only 17 per
cent of all participating banks but had about 60 percent of insured
obligations.

Table 9 . Number, Deposits, mid Circulation of Banks Fartic ipat inf-, in Insurance, by o 1ze of iVini;, View
(amounts in thousands)

Size of bank

Number or amount
- total 1/

.rk; X..5U, 1UU2 , U&55

December 31, lB4g
__ December jl, 15^5
December 31, 1034
Deposits and circulation Number
Deposits and circulation Number
Deposits and circulatio
Number
Total Deposits Circulaof
Total Deposits Circulaof
Total Deposits Circula
of
tion
banks
tion
banks
tion
banks

76 $46,934 $32>470 $14,464
1.4,464

Banks with deposits
plus circulation (in
thousands of dollars)
Less than 100
100 to 200
21
200 to 400
27
400 to 800
15
800 to 1,600
7
1,600 to 3,200
4
3,200 and more
2

$32,651

1,274
4,507
3,928
4,960
5,106

#23,725 2/ $8,926

$24,006

$16,481

822
2,767

J.
8

88
1,440
5,Y27
4,136
3,471
5,304
3,8^0

33
398
2,579
2,351
2,859
4,609
3,652

100.0^

100.ofl

.2
2.4

.7
13.9
41.8
23.7
8.1
9.3

$7,524 *

of:
3,4l4
7,393
8,570
9,840

879
2,775
5,247
7,242
7,957

9,550

8,372

2,535
4,ol8
2,919
1,329
1,884
1,179

100.0$

100.0g

8,166

Percent distribu
tion - total 1/ 100.<

100.0#

33
14
8
5
4
1

451
1,819
2,279
3,048
4,094

1,649
1,112
1,012
1,242

9,314
3,484

8,072
3,163

322

100.0/i 100.0$

100.0$

100.Ofl

20
8
3
2
1
iqo.o£

54
1,042
3,148

1,786
612
696
I87

Banks with deposits
plus circulation (in
thousands of dollars) of:
Less than 100
100 to 200
200 to 400
400 to 800
800 to 1,600
1,600 to 3,200
3,200 and more

27.6

7.3

35.5

15-7
17.4
18.3
21.0
20.3

19.8

9.2
5.3
2.6

—

2.7
3.5

16.2

22.3
24.5

25.8

—

17.5
31.9
20.2
9-2

13.0
8.2

19.8
40.7
17.3
9-9
6.2
4.9
1.2

3.9
14.1
12.0

15.2
15.6
20.5
10.7

1.9
7.7

9.6
16.2

17.3
34.0
13.3

9.2

31.0
18.5

12.5
11.3
13.9
3.6

2.3

18.6

46.5
18.6
7.0
4.7
2.3

6.0
23.8
17.2

14.5
22.1

16.0

15.6
14.3
17.3
28.0
22.2

2.5

Table 9.

Number, Deposits, and Circulation of Banks Participating in Insurance, by Size of Bank, Hew Yor* I83 H 18W2
1855 (continued)
“*
*
*
(amounts in thousands)

Sources: "Annual Report of the Bank Commissioners," January 22, 1835, New York Assembly Documents, 1835 ,
document number 7^; January 30, lcft-3, Mew York Assembly Documents, 18^3, document number jUj "Annual Report
of the Superintendent of the Banking DepartmentT^January 7, IB57 , "Hew York Assembly Document, 1857 , document number
1/ Components may not add to totals because of rounding.
2/ Differs slightly from amounts shewn in Table 8 because of rounding and because of discrepancies in
original reports. Table 8 amounts were taken from published sumuary statements while totals here were computed from
statements of individual banks.

II-32
The degree of concentration of risk changed markedly after
-.041 as a result of the exclusion of deposits from insurance. In
tph.2 the ten latest banks, constituting about 12 percent of all partibanks, had 29 percent of insured obligations. Had insurance
•cverage not been changed, the same banks would have had 55 percent of
Insured obligations. In 1855 there were only six banks with deposits
plus circulation of more than $8C0,CC0. Although these banks consti
tuted Ik percent of all participating banks they only had about 20 per
cent of the total circulation. These same banks had more than half
0f the deposits plus circulation of participating banks and more than
two-thirds of the total deposits.
Insured obligations. As more and more chartered banks came
into the insurance system during the early and middle l830 ’s the
•^rotiortion of bank obligations which was insured in New York State in
creased.
Thus by the end of 1337 more than 8 5 percent of the obliga
tions of all banks were protected by insurance. Table 10 shows that
the proportion went even higher during the next three years but it
should be recalled that for these years free tank data were not avail
able and the figures thus overstate the extent of insurance coverage.
Por example, in 1841, the first year for which at least partial in
formation was available on the obligations of free banks, there was
ICO percent coverage of participating bank obligations but this repre
sented only about 75 percent coverage of all bank obligations.
Even without a change in the type of obligation covered by
insurance, the proportion of all bank obligations insured would have
gradually declined during the remainder of the period as a consequence
of the increasing number of free banks and the abandonment of the
policy of granting or renewing individual bank charters. However,
this decline vas enormously accelerated by the withdrawal of insurance
coverage frou deposits and miscellaneous liabilities, as can ce seen
in Table 10. In lckl there had teen complete coverage of the obliga
tions of participating banks, which represented fairly substantial
coverage of the obligations of all banks in the State. One year later
less than 30 percent of the obligations of participating banks, and
less than 20 percent of the obligations of all banks, were insured.
The proportion of all bank circulation which was insured obviously
did not decline to the same degree.
During the remainder of the lS^O’s and into the early l850Ts
insurance portection was important only in so far as it related to
circulating notes. 1/ As late as 1851 more than 70 percent of the
circulating notes of all banks were insured, and there had been relative
ly little change in the proportion of total obligations, either of
participating banks or of all banks, which were insured.
For the remainder of the insurance period, i.e., from about
the middle l85C’s through 1865, insurance protection accorded to bank
1/ After
all payments into the insurance fund were re
quired by law to be used, or held, for the retirement of the fund’s
debt sind could only become available for insurance payments after
February 1, 1666. References to "insurance coverage" in this and the
paragraph to follow should be read with this in mind.

11-33
Table 10. Insured Obligations and Insurance Coverage, New York, 1829-1866
Insured obligations
(thou
d of year
sands of dol
lars ) 1/

1829
1830
1631
1832
1833
183^

it/
$11,142

26,160
31,093
39,04?
47,303

1835

39,666

1837
1638
1639

70,090
42,732
50,784
32,673

1836

1840
1841
1842
1843
1844

^1,334
33,338
3,926

1845
1846
1847
1Q48
1349

15,547
15,767

1850
1851
1852
1853

13,050
14,890

16,809

20,420

20,570
19,464

18,658
18,610

______ Insurance coverage - percent:
Participat
All banks w ':
ing banks:
Total
Deposits Cii'culatioi
total obli obligations
3L
gations

100y. ,
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
27.0
27.7
29.9

28.1

1857

6,771
4,127
4.862
4,934
3,973
4,186
3,863

27.2

1861
1862
1863
1864

1865
1366 6/

90.6 if

76.1
19.7
20.4

29.0
24.5
19-8

*
O.j

31.1

4.9

23.7

32.0

4.1
3-1
2.7
3.0

1,160

22.6
18.4
11.2
8.4

2.2
2.0
1.3
•7
•3

401
—

55.6
—

.7
—

2,256

V
V

76.9
81.0
83.0
86.0 5 /
82.8

39.7
91.2
93-0

90.8 5/
93*5 5/

88.9 5/

94.0 5/'

74.9
-~-

78.4
74.2
75-8
73.9
72.7

70.6
*.-

64.1
88.0

*—
--

69.7
71.3
55.7
44.7

13.0
10.5

29.2

30.6

20.9

17.6

7,525

i860

83.1 5/
86.1 5/

38.0
37.5
33.2
39*6

1855

1659

86.0

21.4
22.6
20.3

1^,559
3,000

1858

80.8
84.8

30.7
33.3
31.0
37.4
38.1

1854

1856

29.5
78.2
79.5
81.9

85.1

28.3

"
__

23-5
20.2
17.3
17.1

16.6

l4.l
13.7
9-9
6.1
3-7
^.5
--

II-33a
ovble 10. Insured Obligations and Insurance Coverage, New York, l82$-l86;
(continued)
Sources:

See Table 6.

1j All obligations of participating banks, l830-l3Ul; circu
lating notes of participating banks, 13^-2-1865. Differs slightly
from data published in 1953 Annual Report of the Federal Deposit
Tnsurance Corporation, pp. 6k-65 because of minor adjustment's”'in deposit
awi inclusion of miscellaneous liabilities.
2/ Excludes the types of ‘banks described in Table 1, note 1.
3/ Deposits, excluding miscellaneous liabilities, in partici
pating bank as percentage of deposits, excluding miscellaneous liabili
ties, in all operating banks.
kj Not available.
5j Exceeds actual degree of coverage because of absence of
free bank lata.
6/ The charters of the last two participating banks expired
before the end of the year.

11-34
^editors declined until it became almost negligible. It is true
that approximately 20 to 30 percent of the obligations of participating
banvs were covered by insurance during most of this time. However,
,j-,e number of such banks and their relative importance in the State's
inking structure was continuously declining. By i860, for example,
percent of the obligations of participating banlcs were insured but
this coverage represented only two percent of the obligations of all
"banks in "the State. Even the proportion of circulating notes covered
by insurance became of minor importance. By 1855 less than one-fourth
of the circulating notes issued by banlcs in the State were insured;
by the early l860’s this proportion had fallen to less than 10 percent.
History of Operation of Insurance System
When bank-obligation insurance terminated in IJev York in

1866 the record showed that the claims of all creditors of partici
pating banlcs in serious financial difficulties had been paid and that
a small surplus remained in the insurance fund. This had been accom
plished only after substantial change had been made in the operating
procedures of the insurance system and at the cost of serious i n
convenience and loss to some creditors.
Participating banlcs in serious financial difficulties. During
the insurance period there were 21 cases of participating banks which
either became insolvent and suspended operations or were in such serious
danger as to warrant disbursements from the insurance fund to protect
their creditors. The 21 cases involved a total of 18 banlcs, three of
which were in financial difficulties on "taro different dates. Table 11
lists the banks concerned and provides information on the causes of
their difficulties and the amount of their obligations.
All of the cases except one occurred during years of eco
nomic crisis and depression. There were five cases during the panic
year of 1837, 11 cases during the depression years of 1840-42, one
case during the 1854 depression, and three cases in the panic year
of 1857- The remaining case occurred in 1848, a year of recovery
which followed a brief downturn in 1847- Because of the concentra
tion in depression years, "asset deterioration" was a principal
cause of difficulty in many of the 21 cases. However, in almost every
case it was found that there were additional causes, the most important
of which were unsafe banking practices, violations of law, and defal
cations.
The 21 distressed banlcs had total obligations substantially
in excess of $7 million and insured obligations of over $6 million
on the last reporting dates prior to their closing or difficulty.
The yearly totals, as given in Table 11, show that the insurance
system suffered its most severe blow in l84l, when four banks with
total obligations of more than $1.8 million failed. Although failures
in I837 involved five banks with almost the same amount of obligations
as in l34l, the first four cases were banks which were restored to
solvency (although three of these failed in later years) so that the
"burden on the insurance fund was light. These four 1337 cases were
the only ones in which banks were restored to solvency; in the re
maining 17 cases the banks concerned were placed in receivership.

II
Table 11.

Case
number

Participating Banks in Serious Financial Difficulties, New York Inr-uraace Systum,
(Amounts in thousands of dollars)

Name and location
of bank

Date

Suspension or difficulty
Principal cause £/

Obligations at last report prior Size
_to suspension or difficulty
^rcup
Total
Deposits
Circu- classilation fication

21 cases - total

I837-I857

$7,267

$3,969

$3,298

5 cases - total

1837

1,797

1,014

783

1 Bank of Buffalo, Buffalo May, 1837

1132^-lbCG

3
(average)

Violation of law;
safe banking
Violation of law;
safe banking

493

311

182

un-

649

457

152

14?

105

Commercial Bank of
Buffalo, Buffalo

May, I837

City Bank of Buffalo,
Buffalo

May, 1837

Violation of law;
safe banking

Sacket's Harbor Bank,
Sacket's Harbor

May, 1837

Asset deterioration

287

239

5 Lockport Bank, Lockport May, 1837

Asset deterioration

221

116

105

618

230

380

18U0

City Bank of Buffalo,
Buffalo

February,
1840

Violation of law;
deterioration

asset

438

169

269

Wayne County Bank,
Palmyra

December,
1840

Violation of law;
safe practices

180

119

Obligations
per ^100
oi’ active
participa
ting banks
$0.58 5/

2.71

2 cases - total

1.94

II -i6
Table 11.

Participating Banks in Serious Financial Difficult its, Hew YorK Insurance
(Amounts in thousands of dollars)

Suspension or difficulty
Case
number

Name and location
of bank

U cases - total

8 Commercial Bank of New
York, New York
9 Bank of Buffalo,
Buffalo

Date

Obligations at last report prior
to suspension or difficulty
Principal cause 2/ Total 3/
Deposits
Ciroulation

18^1

$ 3,8l8

$ 1,038

k$k

333

121

September, Defalcation
l8kl

780

h.hh

November,
l8Ul

Asset deterioration; violation of lav

W+5

2U9

196

k
k

Commercial Bank of
Buffalo, Buffalo

November,
l8Ul

Asset deterioration; violation of lax/

57^

327

21*7

Commercial Bank of
Oswego, Oswego

December,
XQkl

Asset deterioration;
safe banking

3^5

129

216

1,167

636

531

Defalcation

26c

1^5

115

5 cases - total

Size
Obligations
group
per ljp.00
classiof active
ficution participa____ ting banks

16H2

3.5k

Watervliet Bank,
Watervliet

Lafayette Bank, New
York

February,
181*2

Asset deterioration

165

Clinton County Bank,
Plattsburg

April,
181+2

Asset deterioration

319

151

168

Bank of Lyons, Lyons

September, Asset deterioration

21*6

165

March,
18U2

un-

18^2

11-37
Table 11.

Case
number

Participating Banks in Serious Financial Difficulties, New 'York Insurance 'uyutcm,
(Amounts in thousands of dollars)

Name and location
of bank

suspension or difficulty
Date
Principal cause 2J

6 1/ IconV a.}

Obligations at last report prior
Size
Obligations
to suspension or difficulty
group
per ^100
Total 3/
Deposits
Circu- * classi- of active

lation
fication participa__________________________________________ _________________ 4/
ting banks

5 eases - total (continued)
16

Oswego Bank, Oswego
1 case - total

Canal Bank of Albany,
Albany
1 case - total

Levis County Bank,
Martinsburgh
3 cases - total

November,
1842 6/

Asset deterioration

1848
July,
1848

Defalcation

18$4
November,

1854

Violation of law;
falcation

de-

1857

177

947

708

239

947

708

239

166

147

166

147

154

324

430

1.76

.46

3.15

19 Bank of Orleans,
Albion

August,
1857 5/

Asset deterioration; vio-292
lation of law

138

151*

Reciprocity Bank,
Buffalo

August,

Asset deterioration

287

143

l4if

Yates County Bank,
Penn Yan

August,
1857 §/

Asset deterioration

175

132

1857 6/

11-37*
Table 11.

Participating Banks ill Seriou3 Financial Difficulties, Hew York Insurance oyawjm,
(Amounts in thousands of dollars)

^continued}

1/ "Serious financial difficulty" is used here to mean difficulty necessitating payments -s;o irtyured
creditors from the insurance fund, regardless of whether the "bank was ultimately liquidated or restored to
solvency.
2/ In almost all cases insolvency was due to a combination of cauccs, not all of which are known.
Those listed here are "principal" in the opinion of the writer, "based on available information.
3/ Excludes miscellaneous liabilities.
Xj Based on size groupings as showu in Table 4, with number 1 assigned to the smallest grouping
(less than $100,000 of total obligations).
5/ Average annual rate for 36 years, I83O-65.
5/ Approximate dates.

1 1-3 8
The serious natur&ugf the l84l failures, and to seme extent
e in 18^2, is shown in/Table 11 columns which reflect the size
of *7° Panics concerned. During the entire insurance period the
o? t , distressed bank was of small to medium size, falling into
group containing banks with $2C0,CC0 to $UOO,CCO cf total
:':erSits plus circulation. In lQ^l, however, three of the four
''— lures involved banks falling in a larger size group. Per $1C0
:.l'.t'0^igations (deposits plus circulating notes) of active partici'Vinr- banks, the obligations of failing banlcs in iShl were $4.’+U
j® ]_gl;2 were $3*5^* Each of these ratios was larger than that for
3!'y other year during which participating banks failed and was conaI^derably greater than the average annual ratio for the entire insurance
Slr^’od of $0.58 of failing bank obligations per $1C0 of obligations of
^1 participating banks.
Protection of bank creditors. Creditors of a failed bank
,-ay be said to have been fully protected when their claims were paid
7n full within a reasonably short tine after the bank closed for
business. Table 12 shows the extent to which creditors of failing
banks participating in New York's insurance system received payment
for their insured claims and the paragraphs to follow describe the
manner in which these claims were paid.
As shown in Table 12, failing participating banks in New
York had insured obligations of approximately $6.5 million,'
of which $6.3 million, or 98 percent, was restored to the holders.
About one-third of this latter amount was returned to insured creditors
through the proceeds of liquidation, much of it probably within a
reasonable time following closing of the banks concerned. The re
maining two-thirds was either paid out of the insurance fund or made
available to insured creditors by the restoration of bank solvency.
The larger part of this portion was not immediately made available
to insured creditors.
Table 12 shows that all claims against the insurance system
were paid in full, even though two percent of insured obligations was
not paid. This situation came about because some insured creditors
aid not present claims. Failure to make claim is expected of a
very snail proportion of potential claimants under any insurance
system, but the amount involved here was undoubtedly higher than
would normally have been the case, due to the manner in which claims
were paid.
Insured creditors of the five banks which became involved
in serious financial difficulties in 1837 were fully protected, in
terms of the amounts received or made available to them and the
time required for payment* In the first four cases disbursements
from the insurance fund were sufficient to restore the banks to sol
vency, thus making available to insured creditors all of the amounts
due them. In the fifth case the bank was liquidated but apparently
all of the insured obligations were immediately paid by the receiver
or from the insurance fund.
The 11 bank failures which occurred in the three years
1840-42 gave rise to a volume of claims of such magnitude that the
insurance system was not able to make payment within a reasonable time.

11-39
Table

12.

fear and
case
number
s/

21 cases,
total
1837
1
2
3
4
5

Protection of Depositors and Noteholders, Participating Banks in Serious Financial Difficulties, tfevr 'fork
Insurance System, 1829-1866 \j
(Amounts in thousands of dollars)

Insured ob
Payments to
ligations
insured
at date of
creditors by
closing or
difficulty
receiver 3/

Banks placed in receivership
Payments to insured creditors
Claims
by insurance system
against
Percent of
insur
Amount 4/
claims
ance
system

$6,485

$2,123

$2 ,8.13

$2,813

1,550

103.
...

36
»«»
94 *

* 1»

301 6/

747

170 6/
186 5/

999

***
101

.*a
36

8/
212 10/

241
IS?
74

41+6
317

64o

1,724
“ 205

696
58?

1841
T
9
10
11

2,392

181+2
12
13

1,027
230 11/
165 14/

9 * 9

137

1840
6
7

9 9

129

446
317
129

100.0
100.0
100.0

1,724

100.0
100.0
100.0
100.0
100.0

474

532

211

211
1 t^

165

9*9

22
24

241

173

156

t**
t •f
100.0

241

668 11/
813 12/
322 13/

147

I rt

585
612

303

100.0
*•*

**t
*•»
•**
36

"2 8 6
585
612

589 11/

100.0$

Banlcs restored
to solvency
with insurance
aid: disburse
ments

100.0
100.0
ttt

83 V
999

*99
999
9 9 *

9 9 9

•* *
•. •
*t
9

9 9 9

9 * 4

2.1#

97-9$
100.0
100'.0
100.0
100.0
100.0
100.0

***
* ♦•
***
999

• 1t
***

1.0

98.7

100.0 2/

* «*

95-8

4.3

98.8

1.2

100.0
100.0

96.6
100.0

2/
9/

* **
* #f

3.4
2/

98.0

9 * 9
9 9

Protection of insured
creditors: Percent of
insured obligations
Made avail- Not paid
able to 5,/
creditors

100.0 _2/
100.0 2/

•* *

2.0
••*
* 9 9

II-V>

Sable 12.

Year and
case
number
2/

18U2
ll+
15
16

Protection of Depositors and Noteholders, Participating Banks in Serious Financial Difficultu.-l , ii..w York
Insurance System, 1829-1&66 1/ (continued)
(Amounts in thousands of dollars)
Banks placed in receivership
Insured ob
Payments to
ClaimB
Payments to insured creditors
ligations
insured
against
by insurance system
at date of
Amount hf
Percent of
insur
closing 01- creditors by
ance
claims
difficulty
receiver 3/
system

(continued)
$ 306 13/ $
lb9 13/t
177 15 (

186

IBS

185k

125
125

76
37
177

$ 228
93
«••

156
m

4•«
»«•

20
21

509

k6l
I90
1^6

1^9

125

200
160

)
)
)
)

Protection of insured
creditors: Percent of
insured obligations
Made avail - Not paid
able? to
creditors 5/

228
93
«**

100.0#
100.0
«<t

*t1
••«
•*«

100.0

•■•
•••

*•m
•«m

•••
•••

100.0
100.0

*••
••*

100. O'
100.0

...
~

87.7

12.3

20 )
20 )
75

185?
19

Banks restored.
to solvency
with insurance
aid: disburse
ments

99.3/0

87.2

)
)

75
100.0
100.0
100.0
100.0

...
T7T
...
...

0.7^
12.8
•«•

)
)
)
)

______11 r*__
*rM- ■"York
v
t->_rt....
_i_ n
Sources: L. Carroll Root, '
"New
Bank
Currency,”
Sound Currency, February I, 1895; Robert
E. Chaddock,
The Safety Fund Banking System in New York, 1829-1Q66, (Washington: National Monetary Commission, 1910). See also
sources listed for data presented in Table 6.

1/ Differences in amounts and percentages between this table and those shown in the 1953 Annual Report of
the Federal Deposit Insurance Corporation, p. 53 , are attributable to: a) inclusion of circulation fraudulently
issued by seme banks but nevertheless a valid claim on the Insurance fund, b) adjustment in column 2 of all data to
date of closing or difficulty, 3) other refinements of data.

11-41

Table 12.

Protection of Depositors and Noteholders, Participating Banks in Serious Financial Difficulties, l-iew York
Insurance System, 1829-1866 1/ (continued)
(Amounts in thousands of dollars)

2/ For names of banks see Table 11.
3/ Receivers' col.lections. Receivership expenses charged against these amounts, if any, are not known.
%] Smaller than amount shown as "Paymentsto creditors of failed banks'1 in Table 8 because of exclusion
from total in this table of payments on behalf of creditors of banks restored to solvency.
5/ In receivership cases the sum of receivers payments and payments by insurance system as percentages
of insured obligations at date of failure.
6/ Circulation plus estimated deposits. Estimate made by assuming that the percentage increase or decrease
in deposits between last reporting date and date of closing or difficulty was the same as the knovn percentage change
in circulation between the same two dates.
7/ L. Carroll Root, op. cit., reports disbursements totaling $92,000 for this bank, making the total re
demption for these four 1837 cases £156,000. However, insurance fund records show total disbursements for note rcdeinption during 1837-39 as $183,000, or $9,000 less than the total of such redemptions for the five 1837 cases
shown in this table if Root's figure is used. After examining each of these five cases it seemed probable that the
difference was in case number 4 and wus due to the fact that whereas $92,000 of the notes had been redeemed a
portion had been redeemed by State agencies other than the insurance fund.
8/ Circulation reported at time of failure was $269,000 and deposits at last report prior to failure were
$169,000. Since a total of $317 >000 of circulation was redeemed from the insurance fund this is presumed to have
been the actual circulation at date of failure. Deposits on the same date are not known but no claim was made on
fund so that it is presumed that the receivers' collections of $167,000 were about equal to the amount of deposits.
9/ Amount of obligations not paid because of failure to make claim is not known but, if any, is presumed
to have been small.
10/ Circulation at date of failure plus receivers’ payments to creditors and deposits redeemed from
insurance fund.
11/ Case similar to that described in note 8/, as circulation reported at date of failure was less than
circulation redeemed.
12/ Consists of $388>°00 circulation at time of failure and $425,000 deposits paid from insurance fund. Dif
fers from case number 7 (see note 10) in that it appears that in this case receivers' collections were applied to pay
ment of circulating notes.
13/ Estimate partially based on assumption described in note 12/.
14/ At last report prior to failure.

II-k2
When the Bank of Buffalo failed in November l84l, (case 9 in Table 7)
the insurance fund bad already been so far drawn down that the
Comptroller hesitated to make provision for the payment of its in
sured creditors. He was particularly concerned because not all of
the creditors of the three banks which had failed just prior to that
tine had been paid. When seven additional failures followed very
s0on after that of the Bank of Buffalo the insurance system appeared
to have no recourse except to pay insured creditors as proceeds from
liouidation of assets became available.
The situation described above was rectified in 181;? when
the Legislature authorized the issuance of bonds, which could either
be sold to secure sufficient funds or paid directly to creditors of
failed banks. Such bonds were issued beginning in 18^5 but it was
not until I85I, or 9 years after the last of the above failures, that
final payment was made to insured creditors. In the intervening time,
of course, many creditors suffered serious inconvenience, while some
others undoubtedly disposed of their claims for less than the full
value, or lost them altogether. It will be noted in Table 12 that
for those cases in which complete data are available (cases 7, 10,
14-, and 15 ) insured obligations not paid ranged from less than 1
percent to more than 12 percent.
With the issuance of bonds to pay creditors of bank failures
occurring in 1340-U2, future contributions to the insurance fund by
sound participating banks were to be used first to retire this debt.
Consequently, the insurance system was not able to make immediate
provision for the payment of insured creditors of banks failing after
18^5. Fortunately, the first such failure, occurring in 18U8, did
not require any payment from the insurance fund. Insured obligations
of this bank (case 17 ) were fully and speedily paid by the receiver.
The insured creditors of the last four participating banks
which failed were not as fortunate. In 1854- the Lewis County Bank
closed and it was found that a large proportion of its assets was
entirely worthless. Receivers' payments to insured creditors were
equal only to approximately one-sixth of the insured obligations out
standing on the date of failure.
The three banks which closed as a consequence of the panic
of 1857 were in a relatively better position and receivers were able
to reimburse insured creditors for more than four-fifths of the
amount due them. However, in these cases, as well as in the case of
the Lewis County Bank, such payments were apparently spread out over
a considerable period of time.
With the retirement in i860 of the last of the bonds issued
on behalf of creditors of the 18U0-U2 bank failures payment of the
insured creditors of the final four banlcs was started. All claims
made by 3uch creditors were paid by the insurance system. However,
it will be seen from Table 12 that although approximately $150,000
of insured obligations was still outstanding in 1866 only about
$75,COO was presented for payment. The remainder, most of which
probably represented obligations of the Lewis County Bank, had
apparently been thought worthless by the holders and long since lost.

11-1*3

Insurance receipts and expenditures. During the course of
the insurance period total receipts of the insurance system were
$1*.,736,COO and expenditures were $k,72k,CC0. The difference, approxi
mately $13,000, was paid into the State treasury in 1867* Table 13
shows the sources and distribution of insurance income for each year
in the period 1829-1366.
Assessments accounted for more than three-fifths of the total
income of the insurance system. Approximately one-fifth represented
proceeds of borrowings and the remeining income consisted largely
of earnings on investments and receipts from the sale of assets of
failed banks. Of total expenditures, about three-fifths represented
payments to insured creditors of failing banks. The remainder con
sisted largely of payments on debt and operating expenses.
It will be observed from Table 1 3 that assessments were paid
by most participating banks during each year of the insurance period,
beginning in I8 3 I. Although it had been originally contemplated
that each participating bank would pay its entire assessment over a
period of six years, the large losses suffered by the insurance fund
as a consequence of the failures of the early lS^O's resulted in the
levying of deficiency assessments during the remainder of the insur
ance period.
Perhaps the mo3t interesting fact shown by the data in
Table 13 is that assessment income was more than sufficient, to
cover all payments to creditors of failed banks, taking the insurance
period as a whole. The difficulties in which the insurance system
vas placed in the middle l84C’s were not due, basically, to an in
adequate assessment rate but to the unfortunate timing of the various
bank failures. In this connection it might be observed that New
York's insurance system went into full operation only six years
prior to the panic of 1637 and only eight years before the beginning
of one of the three most severe depressions with which this country
has teen afflicted.
Earnings on investments were not a major source of income
during the insurance period. Of the approximately $300,000 of such
income, about half was returned to participating banks, in accordance
with law. Such dividends were, of course, discontinued after l8Ul.
Recoveries by the insurance system on assets acquired from
failed participating banks were only slightly in excess of $ 300,000.
This was about 10 percent of the total amount paid to insured creditors.
The low recovery rate was due to a number of factors, principal among
them being the lapse of time which occurred between the first group
of failures (I840-U2) and the assumption by the insurance system of
the various assets. It was the practice in the case of the l8U0-k2
failures for the receiver to begin immediate liquidation of the
assets, using the proceeds to pay as many of the obligations of the
failed banks as was possible. In 181+5, when arrangements were made
to borrow sufficient funds to pay the remaining creditors, the re
ceipts from liquidation of failed bani: assets were paid into the
insurance fund. However, in many cases too long a time had elapsed
to effect efficient liquidation.

II-UU
Table 13.

Fiscal
fear 1/

J29-1866
1829

1830
1831
1832
1833

Balance
___________________ Receipts________________________ __ _______ Expenditures
Invest Recoveries Borrow Other
Total Payment to Expenses Debt Other
Total Assess
in fund
ings
creditors
at end
ment in
7/
retire
ments 3/
5/
come hj
of fis- 2/
of failed
ment
cal year
banks 6/

$190
$4,736
(average)
« * *

■ * »

1 • *

20
78
173

* *

27
63
99

1831*

283

115

1835

410

133
151
188

1836
1837
1838
1839

5^5
552
725

228

831

143

181*0
1841
1842
1843
1844

572
497
3**7

109
145

387
328
36

1845

59
13
54
79
9U

476
268
109
189

1846

1847
1848
1849

Insurance Receipts and Expenditures, Hew York, 1^2 j-l66G
(Amount3 in thousands at dollars)

373

$3,105
2/
W

27
63
94
105
118
132
111
92
78

308

317

$1,001

5 $4,724

«* *

■ * ft

1 4 »

»*

■ • *

l i t

« * *

* * •

2/
.?/

5
10
3-5

19
29
31
37

„

- -

—

- -

~ —

_ _

_ _
- -

105

- -

___

- -

53
^3
362
322
33

25
6
3

_ _

—

34
27
90
92
129

3
3
2
2
3

_ _

336
430

18
15
57

—

* **

707 $1,001
»»#

■ * *

* • 1

» ■ *

* * 9

_ _

159
23

6
4
5
5
6

22
32
35

566

315
113
525
549

30
32
6
5

460

^59
483
175

3^5
146
537

522
227

84
174

* »•

55
36

» » 1

- -

16
181

* w
- *

7
5
5
5

158

$2,961

1
1
—

- -

_ _
—

- _

- _
___
- -

- -

- - _
—
- -

1
6
12
—

1
34
52

121

2/
2/

II-U5

Table 13-

Insurance Receipts and Expenditures, New York, 3829-1.666 (continued)
(Amounts in thousands of dollars)

Fiscal
Balance _______________________ Receipts____
year 1/ in fund
Total AssessInvestRecoveries Borrow
at end
ments 3/ roent in5/
ings
of fiscome 4/
cal year 2j

1850

1851

$ 49

1852
1653
1854
1855

1856
1657
I858
1059
i860

38
36

213 $ 125 $
025
123
126
121+

122

120

100

146
111
151
1+4
3^

82
71
62
55

8
1
1
2
4

3
5
l
10
2

^3
41
4l
3^
24

1
1
1
1
5

66
61
45

rt.

3
1
1

Other

Expenditure £
Total Payment to Expenses Debt
Other
creditors
7/
ret ire of failed
ment
banks 6/
4i 258

136

128

92
7^

2
1

106

»+5

2
83

26
23

9/
9/

17
11

144
56

9/
9;

9
7
3
2
3

75
25

82
28

2
3

3
146

1863
1861*

77
108

44
42
43
35
3*+

1865
1866

134
13

13 / 25

$ 136
95
93

162

1861
1862

44
40
35
3-1

11/

3
1

2/
1
9/
2/
2
1
1
2/

%
%
9/

Sources: See Table 6.
"
—
-------------- --1/ Usually ending September 30. Totals will not add in all cases because of use of unrounded data.
2/ In cash or invested without adjustment for, debts outstanding but not yet payable. See Table 9 for
condition of insurance fund after talcing debt into consideration at end of each fiscal year.
3/ Includes regular and special assessments, as well as payments in notes of failed banks in lieu of
assessments.

11-46
Table 13-

Insurance Receipts and Expenditures, New York, 1829-1866 (continued)
(Amounts in thousands of dollars)

bj Includes profit arising from sale of 'bonds.
5/ Receipts from assets of insolvent banks but includes amounts recovered from, or paid by, banks
restored to solvency or liquidated in 1837- See Table 12.
6/ Includes payment in cash or bonds to creditors of failed banks placed in receivership and cash
disbursements and cash payments in 1837 to redeem notes of banks restored to solvency with insurance aid.
7/ Includes salaries of Bank Commissioners, interest on bonds issued, and dividends on investment
income paid to participating banks.
8/ Assessments were paid beginning in I831.
9/ Less than $500.
10/ Amount remaining after final settlement with creditors of last participating banks to fail vas
$13>144. However, final settlement was not actually completed until after 1866.
11/ Most of these payments were made after the close of fiscal 1866.

11-47
Insurance fund and assessments. Few York's insurance fund
for the prompt protection of creditors of currently
failing banks only during the first l4 years of insurance (1831-44)
and at the close of the final year (1866). Since the first assess
ments were paid in 1831 there was no insurance fund during the first
tW;, years of insurance. In the period from 1845 to 1966 there was a
balance in the fund in each year but for most of these years the debt
vas in excess of this balance and during all of these years payments
from the fund on behalf of creditors of banks failing after 1845
were prohibited. Table 14 shows the condition of the insurance fund
in each ”ear during the insurance period, taking into account the
indebtedness of the fund, and in addition shows the size of the fund
relative to total and to insured obligations of participating banks.
available

During the years in which the insurance fund was immediately
for bank creditor protection, i.e., from 1831 through 1844,
the average size of the fund was $379,0C0. 1/ It will be observed
from Table 14 that the fund reached a peak in 1839, after which it
decreased rapidly, becoming negative beginning in 1845.
available

It is interesting to observe that on the average during
these first 14 years the insurance fund was about 0*9 percent of
total obligations of participating banks and slightly over one percent
of insvred obligations. These ratios are not markedly different from
comparable ratios for the present deposit insurance fund of the
Federal Deposit Insurance Corporation. This fund was 0.8 percent of
total deposits and 1.4 percent of insured deposits at the end of
1956. From its establishment in 193"+ to date it has never exceeded
0.9 percent of total deposits and has only once (June 30, 1942) ex
ceeded 2.0 percent of insured deposits. New York's insurance fund,
on the other hand, was at one time as large as 2.5 percent of both
total and insured obligations.
Table 14 also makes possible a conparison of the assess
ments paid by banks participating in New York's insurance system
with assessments paid by banks participating in Federal deposit in
surance today. The average annual assessment was $88,OCO under the
Kew York system, which was equal to 0.24 percent of total obligations
and 0.43 of insured obligations. The statutory assessment rate today
for banks participating in Federal deposit insurance is C.C8 percent
and the effective rate, i.e., taking into account net assessment
income credits, is less than 0.C4 percent. Since the actual Kew York
assessment rate was based on capital stock the equivalent average
annual rates on total and insured obligations were not constants.
New York assessments were as little as O.Oo percent and as high as
1.1 percent of total obligations. Thus in several years the rate was
less than the statutory rate under Federal deposit insurance while in
other years it was eight to twelve times larger.

"
1/ Although" it was not until 1645 that the insurance fund was
forbidden to be used for bank creditor protection until all bonds
were retired, as a practical matter the fund was not immediately
available to creditors after l84l because of the large number of bank
failures.

11-48
jable 14,

Insurance Fund and Insurance Assessments, New York, 1829-1866
(founts in thousands of dollars)

Average $
1829
1830
1831
1832
1833
1834

379 4/

.87$ 4/

••*

**•

* **

20
78
173

.08
.25

l.03?S
*•#
*m*

.44
.60

.25
.44
.60

5/
5/
27
63
94
105

.69

118

.78

1.29
1.43

132
111

1839

725
831

-78
1.29
1.43
2.54

1840
1841
1842
1843
1844

572
497
347
1C9
145

1.38
1.49
I.05
.23
.29

1845
1846
184?
1848
1849

(277)
(753)
(669)
(822)
(665)

• *•

1850
1851
1852

(672)
(583)
(497)
(406)
(333)

•**
**»
*#*
***
***

#**
***
#■*
4*4
*4m

125

(279)
(230)
(191)
(153)
(108)

***
•••
***
•*•
* **

*#*
4*■
*••
*■w
ft*

79
66
6l

( 72)
( 38)
2
35
66

#**

***
■«•

.01
.17
.48

.05
1.55
5.69

12.76

22.94

1S35

1836

1637

1838

1853

1854

1855
1856
1857

1858
1859
i860
l36l
1862

1863
1864

1865
1866

283

410
545
552

92
13

♦**
• **
**•

—

.08

r
o
4-

pTscal ConditionRatio of insurance
Insurance assessments levied on
„ear
of insur- fund to obligations of_____ bank capital___________
l/
ance fund: participating banks 3/
Equivalent average
Amount
.annual rate on: 3/
negative
Total obli*- Insured
amounts in gations
obligaTotal ob- Insured obtions
() 2/__________
____________ ligations ligations
.43?

***

***
ra#

.10
.20

.24
.22

.20
.19

.20
.19
.13
.24

.26
.18

2.54

.24

1.38
1.49

53
^3

•13

3-89
.84
.93
■*#
++m
**#
m*•

—

362

.13
1.09

322
33

.68
.0?

3^
27
90
52

•07

129
124
124
120
38

.06

.17
.17
.24
.24
•25
.26
•33
•32

.26

■13
•13
4.05
2.4?
.22
.22
.17
•5^

.45
.63

.64
.66

.67
.83
1.11

•32
.28
M
.27

1.C4

.28

J+3
41
41
3*+
24

.29
.22
•19
.17
.17

1 .C8
1.51
2.05

21
20

2.88
--

5.17
-

.98
1.47
.93
.88

.99
l.c6

11-40
'"able l4.
1

Insurance Fund and Insurance Assessments, New York, 1829-1866
(contlnoed)
(Amounts in thousands of dollars)

Sources:

See Table 6.

1j Usually ending September 30*
2/ Balance in fund at end of year less debt outstanding.
3/ Ratios computed from data before rounding.
%j Excludes 184-5-66, when debt of insurance fund exceeded
■balance on hand (l845-6l) and when fund could not be used for payment
of creditors of failed banks (1861-66).
5/ Assessments were paid beginning in 1831.

1 1-5 0

Appraisal of Supervision and Regulation of Insured Banks
As indicated in an earlier section, participating "banks
were supervised by three different agencies between 1829 and 1866.
Urtil 18^3 the three Bank Conanissicners were charged with this duty.
Supervision was vested in the Stats Comptroller from 1343 to 1351
and in the Superintendent of the newly formed banking departcent
beginning in 1851.
Adequacy of examination, 1831-43. Regular examination of
all participating banks was required by law until 1843; after that
date examinations were made only when there was reason to believe
that a bank was making false returns or was insolvent. On balance,
it appears that examinations during the earlier period were inadequate,
while those of the later period were thorough but of little help in
preventing conditions which could lead to failure.
This judgment on bank examinations during the years to
l643 is based on indirect evidence; the actual reports on indivi
dual banks, if any were ever made, are not now available. Thus,
adequacy of the examinations can be judged only from the fact that
in the later years several of the bank failures disclosed the existence
of long standing practices which should have been discovered by
examiners.
The report of January 26, 1842 revealed that the Commercial
Bank of Oswego, which failed in December l84l, had been "controlled
by irresponsible persons, and ... its funds were to a large extent
applied to the payment of the shares and otherwise appropriated to
the private speculations of its managers" from the time of its
organization in 1836. 1/ Similarly, the failure of the Commercial
Bank of Hew York in September l84l was attributed to "extravagant
speculations" of officers and directors, starting in 1836. 2/
Hie Commissioners' report made in 1843 noted similar cases
of long periods of mismanagement and fraud culminating in failures.
Thus, investigation of the failure of the Uatervliet Bank revealed
"a series of gross frauds ... which 'had been carried on for several
years" 3/ Similarly, the Clinton County Bank was found to have been
grossly mismanaged during almost its entire period of operation, 4/
while three Buffalo banks, in a "fraud ... heretofore unprecedented
in the history of banking in this State
were found to have
issued about $425,000 in banknotes in excess of the legal limit. 5/
There may have been several reasons why cases of gross mis
management apparently never drew the attention of the Bank Ccirmisaionersj at least so far as their published reports reveal. Unl/ '^\rmual Report of the Bank 'Commissioners,'’ January
1842, New York Assembly Documents, 1842, document number 29, p.
2/ p i d . , pp. 13 -lU.
3/ "Annual Report of the Bank Commissioners,” January
1343, New York Assembly Documents, 1843, document number 34, p.
4/ Ibid., pp. 14-15.
5/ Ibid., p. 21.

2^,
17•
3^>
7*

11-51
doubtedly the most unfair explanation was advanced by Abijah Mann,
who quoted a colleague: "bank commissioners ... were placed there
like our dogs to watch a meat market, and were as easily subsidized
by suitable food." 1 / There is, it should be remarked, no other
evidence that the examiners *.rere subject to bribery, nor is Mr. Mann
considered a dispassionate commentator on the insurance law. 2 /
Rather, it appears that proper examination before lo4j was prevented
lay: l) the magnitude of the task, 2 ) the examiners' insufficient
authority, 3 ) the lack of experience or ability of the examiners.

The 1829 law required that each bank be examined three
times a year. During the first year in which the system was in
operation there were 29 participating banks, thus requiring each
of the three examiners, on the average during the year, to make
about 30 examinations. At that date the number of examinations was
probably not excessive (FDIC examiners today make about the same
number per year), although it must be remembered that the three
Commissioners were also charged with receiving reports from the
banks and preparing an annual report to the legislature. However, by
l839 the annual number of examinations required of each examiner
reached about 100; a number certainly beyond the capabilities of
the most skillful examiner.
Squal in importance to the burden of work placed on the
examiners was the fact that although they possessed sweeping in
vestigatory powers they could not close a bank unless there had
been a violation of law. As the 181+3 report pointed out:
Its ^the bank's^ administration may exhibit the
most dangerous improvidence, its discounted debt may
be distributed in such large sums to particular
individuals, or so inadequately secured as to render
its collection extremely doubtful, the officers of the
bank may be found to be the principal borrowers,
and everything conspire to cause a well grounded
belief that its managers are seriously hazarding or
impairing its capital ... But so long as a bank does
not violate any law, it is usually placed beyond the
reach of the Commissioners.... 3/
Both the limitation of authority to close a bank and the
fact that so many banks had to be examined fail to explain why
the Commissioners did not at least call attention in their published
reports to specific cases of mismanagement. There were, it is true,
many instances in which the Commissioners warned against stockholder
laxity, nevertheless, one cannot but feel that part of the explana
tion was lack of experience, and perhaps ability, of these first bank
examiners.
l/ Flagg, op, cit., p. 3~
2j See, for example, Redlich, op. cit., pp. 9^, 265*
3/ "Annual Report of the Bank Commissioners", January 30*
184-3, op« cit., p. 9 .

11-52
Adequacy of examination, l64^-6>» The elimination of
regular bank examination after" 1x5%3? for which was substituted
special examinations by the supervisory authority for banks reporting
falsely or believed to be in serious difficulty, meant in effect
almost no examination. In the few instances in which the supervisory
authority did make an examination the work was extraordinarily
thorough. 1/ Nevertheless the examinations could only serve to ex
plain how a bank had been brought to the point of failure since they
came far too late to enable preventive action b y the supervisory
authority.
No accurate tabulation is available of the number of bank
examinations made between iQV-r and 1865. It could scarcely have
been large; and was probably less for the entire 21 years than the
number of examinations conducted by the Bank Commissioners in any
single year from 1831 to I8U3 . Betvreen I8U5 and 185k statements
indicating that 10 banks had been examined were noted by the writer.
In each of five of these cases examination was followed by failure
or closing. In the others corrections were made, although one bank
eventually failed, or the information which prompted the examination
proved to have been faulty.
That the situation was a considerable source of irritation
to the supervisory authorities is evident from several annual
reports. In his report for the year 18W3 the Comptroller requested
that the lav be changed to permit annual examination of the partici
pating banks, pointing out that "whatever might have been the object,
,., the effect of the /present/ law is to prevent examinations that
might be useful." 2/
In even more bitter language the Superintendent of the
Banking Department assailed the law in 185?:
It confers a power utterly useless in its operative
effect as to the public safety, and leaves upon the
minds of the people an impression that the Superinten
dent can exercise some power and control over our banks,
beyond that connected with the currency they issue. It
is true he can enter upon the examination of the affairs
of a bank which he suspects of making an incorrect or
imperfect quarterly report, or is in an unsound or
unsafe condition; but all experience teaches us that
an insolvent bank never exposed that insolvency, or any
danger of such a result, in its quarterly report.
Figures and affidavits are never made by bank officers
to expose insolvency or defalcations. They, the
figures, are most useful adjuncts to conceal the
real condition of affairs, and the law is keeping the

1/ See, for example, the report of examination
County Bank, "Annual Report of the Superintendent of the
partment," January 5, 1855, New York Assembly Documents,
ment number 10, pp. 110-150.
2/ "Annual Report of the Comptroller," January
New York Assembly Documents, I8U9 , document number 5, P«

of the Lewis
Banking De
1855, docu
184-9,
3&.

11-53
promise of protection "before the public eye alone, and
throwing an ostensible responsibility upon the Superin
tendent, which it is utterly impossible for him to
fulfil. The lav, vith its present provisions, is
simply an inoperative statute, promising beneficial
results from the vigilance of the Superintendent,
and utterly useless in producing such effects as are
apparently promised by it, however watchful and
energetic he may be." 1/
Such antagonism towards the law vas not shared by all of
the men who served as Superintendent of the Banking Department. In
the later years, particularly after i860, the reports indicate a
general satisfaction with the la'.r as it stood, reflecting either
the virtual elimination from banking of the type of individual
responsible for frauds of the early years, or resignation to the
impossibility of strengthening the examination provisions.
Bank reports. An important supervisory function was the
collection and publication of bank data. Until 1843 annual reports
on the condition of participating banks were submitted by the Bank
Commissioners. During the period of supervision by the Comptroller
quarterly reports were made by the banks but were only occasionally
published in official reports. After formation of the Banking Department there was a noticeable improvement in the reports and,
beginning in 1854, detailed asset and liability statements were pub
lished quarterly for each bank.
The regular submission and publication of bank data was a
significant forward step in the development of bank supervision in
Kew York. However, it was not immediately successful in achieving
the sought-after goal, i.e., sufficient publicity to enable the
public to guard against banking with unsafe institutions and to bring
pressure upon such institutions to reform.
The problem of false reporting was probably never com
pletely solved, although it appears to have been most pressing during
the earlier years. There was, for example, the case of large amounts
of unreported circulation of a number of Buffalo banks, described
earlier. 2/
Another problem was the attempt of banks to adjust their
accounts in order to present the most favorable statements on the
reporting date. Not only did this make an accurate appraisal of
the banks difficult but it also was an upsetting factor in financial
circles. On the whole, however, it appears that the supervisory
authorities made diligent and increasingly successful efforts to
secure and publish the most accurate data possible.
Banking practices. Perhaps the most frequent complaint by
Bank Commissioners during the earlier period vas lack of interest
by stockholders in the daily business of their bank. Typical of the
1/ "Annual Report of the Superintendent of the Banking De
partment," January 5, 1859; New York Assembly Documents, 1859j docu
ment number 5# PP* 14-15.
2/ See above, p. II-50.

11-51+
various statements on this subject was that made in_the l8Ul report:
"The only effectual safeguard, /against bad banking/ at last, is
in the vigilance and care of the board of directors -- they can,
without doubt, do more to prevent this and all other evils, ... than
can be done by legislation". 1/
The first reports of the Bank Commissioners tended to dis
cuss general monetary conditions and contained relatively few refer
ences to individual banks. After the panic of 1837, and particularly
after 18^0, the reports turned more to the cause of specific bank

failures. Only a few suggestions for changes in legislation were
during this period, the two most prominent being to withdraw
insurance protection from deposits 2/ and to allow the date at which
reports were made to be set by the Bank Commissioners so as to pre
vent window dressing. 3/
made

Reports by the Superintendent of the Banking Department to
the legislature after 1851 devoted more space to individual banks in
difficulty, although general monetary conditions drev attention in a
number of cases. Whatever the type of report, banks participating
in insurance occupied an increasingly subordinate role as their
charters expired.
Appraisal of New York's Insurance System
New York's insurance system operated 37 years, a period
longer than that for any other State bank-obligation insurance system.
Its accomplishments and failings have been stated, or are clearly
implicit, in the preceding sections. This section is in the nature
of a summing-up, rather than additional analysis.
Attainment of objectives. It was stated earlier that the
proponents of New York's insurance legislation had two objectives:
l) to guard against the destruction of circulating medium due to
bank failures and, 2) to protect the "small" bank creditor against
loss. Because neither objective was completely attained there has
been a regrettable tendency to overlook the partial but nonetheless
important success which New York insurance did in fact attain.
The system's first severe test came in 1837, when the panic
of that year resulted in a large number of bank failures in many
States. Although there was a very substantial decline in the amount
of circulating medium in New York, the situation was not made still
more difficult as a consequence of bank failures. It will be re
called that of the five banks in serious financial difficulties in
that year, four were rapidly restored to solvency, while the obliga
tions of the fifth were speedily made available to the holders. With
out insurance this could not have been done.
1/ "Annual Report of the
1842, op.cit., p. 8.
2/ "Annual Report of the
18^1, New York Assembly Documents,
3/ "Annual Report of the
1842, op. cit., p. 20,

Bank Commissioner?’, January 26,
Bank Commissioners", January 25,
l34l, document number 6U, pp. 16-17.
Bank Commissioners", January 26,

II-55
During the years J.8U0-U2, insurance operations were less
Nererthe?.ess, hundreds of thousands of dollars were paid
out of the insurance fund to creditors of failed banks. Had this
amount not been available, or if it had only become available after
long periods of time, the impact of the depression would have fallen
.particularly hare on the affected communities and the general effect
upon the State would almost certainly have been more severe.
successful.

After 18^-5 the New York insurance system was virtually in
effective as a protector of circulating medium.
This was primarily
due to the continually diminishing number and importance of banks

participating in insurance and to the withdrawal of insurance pro
tection from deposits.
The fact that the insurance fund was "mort
gaged" and not available to creditors of a bank failing after 1845
vas of minor significance in this regard.
The record of protection afforded all creditors of failing
banks - "small" creditors as well as "large" - was surprisingly
good. As shown in Table 7, approximately 98 percent of all insured
obligations vas eventually made available to the holders, either in
the form of receivers' dividends or insurance payments. If one
neglects the time lapse between failure and payment the record is
comparable with that of Federal deposit insurance. During the period
in which all bank obligations were insured (cases 1-16, Table 12)
99 percent of the obligations of failing banks was made available
to the holders. This is about the same as the proportion of total
deposits which has been restored to depositors in insured banks re
quiring disbursements by the Federal Deposit Insurance Corporation.
Small as well as large bank creditors undoubtedly suffered
from the inability of New York's insurance system to make immediate
payment in all cases of bank failure. However, it should be remembered
that there was immediate payment in the IS37 cases, and reasonably
prompt payment in the first few cases of the 1840-42 group. Even if
the insurance fund had been able to make immediate payment in every
case, payments would have been slower than under insurance today
because such a large part of the insured obligations consisted of
circulating notes, many of which circulated at some distance from the
place of redemption.
Comparison with Free Banking system. From 1838, when the
Free Banking Act was passed, through 18 6 6 there were 57 free bank
failures. These banks had a known circulation at time of failure of
$3-1 million and their deposits were probably of the order of magni
tude of $6 to $10 million. Average obligations of failed free banks
per hundred dollars of total free bank obligations were about $0.40
per year during the period 1836-66, a ratio slightly lower than for
participating banks. 1/
Losses to creditors of failed free banks cannot be accurately
determined because of the absence of records of payments to depositors.
The loss on circulating notes amounted to $400,000, or about 13 per
cent of circulation outstanding at time of failure. It is quite
probable that losses to depositors were relatively larger, since
holders of circulating notes enjoyed a preferred position by virtue of

1/ See Table 11.

11-56
the fact that certain securities were pledged, by each bank for the
redemption of its circulating notes. If depositor losses are con
servatively estimated at $2 million which is one-third of the
minimum estimated deposits in failed free "banks, it will be observed
that total losses to creditors of free banks were in the neighbor
hood of ^2.5 million.
The record of protection afforded the creditors of free
banks is much poorer than that of protection to creditors of banks
participating in New York's insurance system. This is so because
noteholders who made claims on the insurance fund were reimbursed in
full in the case of all 21 failed participating banks, and depositors
who made claims were reimbursed in full in the cases of 16 of the 21
failed banlcs. Further, there is no reason to assume that depositors
of the five participating banks which failed after 18^2 received any
less protection than depositors of the failed free banks.
It is interesting to speculate on the protection which would
have been afforded bank creditors had the original flew York insurance
plan remained intact during the entire period 1829-1866. In other
words, would insurance of bank obligations have been more, or less,
successful if the plan had included all banks and all obligations.
Naturallyj no precise answer can be given since it cannot be deter
mined what influence insurance protection would have had upon
failures among free banks.
Had free banks been included in the insurance system the
additional revenue to the insurance fund from assessments paid by
these banks would have amounted to approximately $7 million during
the period 1333-1866. Even if the added investment income which the
enlarged insurance fund would have provided is ignored, it will be
seen that this amount would have been more than sufficient to pay
the approximately $2.5 million of losses to all creditors of free
banks and, in addition, the losses suffered by depositors of those
few chartered banks which failed after l8-r2. The insurance fund
at the end of the period would probably have been completely re
stored, i.e., it would have been equal to $3 million, or three per
cent of total bank capital of about £l°Q million. 1/ Since total
bank obligations in the years near the end of the insurance period
exceeded $300 million, an insurance fund of $3 million would have
been slightly less than one percent of such obligations, and thus
of about the same relative size as the present deposit insurance fund
of the Federal Deposit Insurance Corporation.
Despite the fact that the revenue of the insurance fund would
have been sufficient to meet all losses and restore the fund to its
statutory size, a borrowing power would still have been essential.
In its absence the insurance system would have been in even more
difficulty in l8J;G-42 than it was in fact when it included only
chartered banks. Cf the 57 free bank failures, 25 occurred during
I,
This percentage m s calculated as of 1863-64, before
the free and chartered banks began winding up their affairs as a
consequence of passage of the national Hanking Act.

1340-42. 3y 1842 free banks would have paid assessments of approxi
mately £200,COO, but the 25 failures involved a total circulation of
31.2 million and possibly another $2 million in deposits. To make
immediate disbursements the fund would therefore have needed a
"borrowing power about ^3 million greater than that which it secured
from the New York legislature in 1345.
If insurance had applied to all operating banks it is
doubtful that the assessment rate could have been safely lowered during
the insurance period. It will be recalled that the rate vas one-half
0f one percent on capital which, cn the average during the period,
was equivalent to about one-quarter of one percent per year on total
obligations. Although a lower rate would have been sufficient to
cover only losses, it would not have been sufficient to make the
necessary disbursements during the insurance period, to pay the cost
of heavy borrowing which would have been required as a consequence
of failures during 164q-42, and to restore the fund to three percent
of total bank capital. Failures of free banks occurred in a scattering
of individual years during this period but were concentrated in 184041, 1354, 1857, and l86l. In 1857, for example, obligations of failed
free banks were probably in excess of $1 million and possibly approched $2 million. The actual debt burden arising from bonds issued on
behalf of creditors of failed participating banks was $5^0,000; this
amount would have been two to three times larger had free banks been
included in insurance.
Deficiencies of the insurance system. New York's insurance
system suffered from a number of defects which were either inherent
in the insurance law itself or arose out of its administration.
Most important of these were: l) failure to provide for borrowing
power until 1645, 2 ) an unrealistic assessment base and, 3 ) inadequate
supervision. The inadequacies cf supervision were discussed in the
preceding section and it remains only to point out here that more
effective supervision most probably would have prevented several of
the failures which developed because of fraudulent or unsafe banking
practices.
Failure of the original law to provide for a borrowing
power turned out to be the fatal flaw in the operation of the New York
insurance system. Without this power insurance authorities were help
less when the large and unezcpected demands were nade upon them as a
consequence of the depression which began in 1839* Had authorities
been able to make immediate payment of insured obligations in 1840
and. lS4l several of the later failures might possibly have been
avoided. But even more important, the protection accorded creditors
of these banks would have been much improved.
In addition, when the insurance system was, finally, per
mitted to borrow it was a mistake to provide that lenders to the fund
would have first claim upon the receipts of the insurance fund. As it
turned out, this requirement was not needed and merely had the effect
of making the creditors of banks which failed after 1845 wait for
unnecessarily long periods of time before they could be paid.
It was pointed out earlier that the assessment rate was
more than sufficient to meet all claims tade against the insurance
system. However, the rate was thoroughly impractical in its applica
tion, since it applied to bank capital rather than to bank obligations.

11-58
<Ehe actual annual rate was one-half of one percent of capital stock;
and it will be recalled from Table 1^ that this was equivalent, on
the average over the period, to about one-quarter of one percent on
total obligations.
If the computed equivalent rats had been the
actual rate the insurance fund would have been approximately 15 per
cent larger at the end of 1 8 3 9 than T./as the case. This is because,
"by relating the rate to obligations rather than capital, the amount
paid by the banks would have been higher during good years - such as
1835-36 - and lower during depression years. With capital as the
assessment base the amounts paid by any one bank tended to be fairly
constant - or at best to change infrequently. Thus they had little
relationship to the amount of insured obligations and, in addition,
were apt to be particularly burdensome to the bank at precisely
the wrong time. Table 9 shows, for example, that relative to total
obligations the highest rates were in the depression years of 181+2
and 1357. y
Conclusion. New York's system was reasonably successful
in attaining the objectives of bank-cbligation insurance. Its
record was much better than these of a number of States which later
adopted insurance plans. Although the New York system had several
serious flaws it was, after all, the first to be established and
its pioneering efforts were Influential in the development of bankobligation insurance in other States and, ultimately, for the entire
country.

l/ Excluding 1865, when the last two participating bankswere in process of liquidation because of the pending expiration of
their charters.

CHAPTER III
INSURANCE OF BATIK OBLIGATIONS D! VERMONT, 1831-1866

Vermont was the second State to use the insurance principle
roviding for the protection of "bank creditors. The plan was
^ 'tocdied in "An Act regulating the chartering of banks," passed on
vember 9, 1831, a^out two years after adoption of bank-obligation
^asurance in Mew York State. Banks participated actively in the
Vermont system through the end of 1858 'but it was not until 1866,
vriien final creditors' claims were settled, that the system itself
v>pinoperative •

Review of Vermont Banking History to 1831
The first incorporated "bank in Vermont was the Vermont State
Bank, chartered by the legislature in l8c6. This bank was owned and
managed by the State, and operated offices in a number of towns.
Several years after it opened the bank encountered serious financial
difficulties and by 1812 its business was being closed, with financial
assistance from the State legislature. Final liquidation was not
completed until 18^+5•
With the cessation of active banking operations by the State
Bank, Vermont was left with no institution to provide circulating
medium. As a result, a long-standing prejudice against privately
owned banks was finally overcome and two bank charters were granted
by the legislature in l8l8. The banks, at Windsor and Burlington
respectively, immediately went into qperation. Additional charters
were granted in succeeding years and by 1831, the year of adoption
of the insurance system, ten chartered banks were operating in Vermont.
33ie business of these early bank3 was regulated by their
respective charters, which contained restrictions typical of the
time. For example, interest was limited to six percent, circulation
was restricted to a mra-tinum of three times capital, and loans and
discounts could not exceed deposits plus three times capital.
Character of the Insurance Plan
The essential features of Vermont’s insurance legislation
of I83I were copied from the plan adopted by New York two years
earlier. In fact, creation of an insurance fund to pay creditors of
failed banks was described at the time in Vermont as "providing
security according to the New York system against the failures of
banks." 1/ Because of the similarity of the two insurance plans,
this section will deal with the relatively few differences between
them and the later amendments to Vermont’s legislation.
Objectives of the insurance legislation. Only scattered
references to the debates preceding adoption of insurance in Vermont
have been located. Although these references reflect a real concern

1/ Vermont Watchman, November l'6j "ifljl.

Ill-2
oVer the problem of bank failures - referring, for example, to the
"necessity of security against the losses and ruins" 1j - they are
jjot sufficiently detailed to attempt an analysis of the motives behind
passage of the legislation. However, it may reasonably be presumed
that the Vermont legislators sought the same objectives as did their
counterparts in Kew York: first, to prevent destruction of circula
ting medium and, second, to protect the bank creditor of limited means
against loss.
Participation of banks. As was the case in New York, Vermont
abandoned the original intention of eventually bringing all banks
into the insurance system. In 1839 five banks were given charters
which included among their provisions exemptions from the insurance
law, and in l340 new legislation provided that all banks subsequently
chartered or rechartered were to have the option of entering or re
maining outside of the insurance system. Previously there had been
no option; unless specifically exempted each bank chartered or re
chartered after I83I became subject to the insurance legislation. 2/
If after 1840 a bank chose not to participate in insurance its direc
tors were required to give personal bonds, equal in amount to the paidin capital of the bank, to the Treasurer of the State.
In I85I the Vermont legislature provided for the establish
ment of free banks. These banks did not participate in insurance.
Although there was no specific prohibition of their participation
neither was any provision made for their inclusion in the system. It
seems that their participation was never intended. 3/
Insurance fund. In providing for its insurance fund, Vermont
established higher assessment rates and a larger maximum size than
was the case in New York. Annual assessments of three-quarters of
one percent on paid-in capital were to be paid by Vermont banks until
an amount equal to four and one-half percent of capital had been
paid by each bank. This contrasts with an annual rate of one-half
of one percent on capital and a maximum contribution of three percent
of capital for New York banks.
Whenever the Vermont fund fell below four and one-half per
cent of the total paid-in bank capital, assessments were to be resumed
until it was restored to its maximum size. The special assessment
rate was to be determined by the State Treasurer but was not to exceed
the regular rate, kf
Administration of the insurance fund was also delegated to
the Treasurer, who was charged with investing the fund in securities
and dividing the income, after payment of administrative expenses,
among participating banks in proportion to their contributions. The
fund itself remained the property of the banks and was listed among
their assets in statements of condition. Investment of the bank fund
was to be made in approved bank stock or other securities.
17 Ibid..
2j An Act regulating the chartering of banks, November 9,
1331, section 1.
3/ An Act to authorize the business of banking, November 17,
1851, section 35*
k/ An Act regulating ..♦, section 8.

III-3
Obligations insured. In providing that insurance would
apply to all debts of participating tanks, 1/ Vermont never seems
to have been troubled by the question that later was to plague Hew
York: whether all debts meant circulating notes only, or those
liabilities plus deposits. At no time was there uncertainty in
Vermont as to the inclusion of deposits. This was quite clearly
indicated at the time of passage of the Act of 1840, giving banks the
option of either contributing to the safety fund or posting bonds
with the Treasurer of the State:
If the directors of any banking corporation subject to
the provisions of this chapter, shall execute bonds to
the treasurer of the state to the amount and with the
security required ... to be approved by the bank com
missioner, and deposited with said treasurer, conditioned
that such directors shall at all times pay and redeem,
according to law, all the bills issued by such bank,
and shall pay and refund all deposits made in such bank,
when such payments are demanded, while such directors
are in office, such bank shall thereafter be exempt
from all payments required ... to the bank fund ... 2/
Method of paying creditors of failed banks. Payment to
creditors of a failed bank was to be made from the fund if any
deficiency remained after the receiver paid his final dividend upon
the assets of the insolvent bank. Thereafter the time limit for
presentation of claims was to be fixed by the Chancellor. Vermont
never made provison for earlier payment of insured creditors.
Supervision and Regulation of Participating Banks
Bank supervision. Vermont's insurance legislation did not
introduce banks supervision to the State. Although the insurance law
contained the same basic supervisory provisions as the New York law,
Vermont already had a rudimentary supervisory system in the person
of the Bank Inspector. This individual was appointed by the State
legislature to report on the condition of the banks and he had been
performing this function for a number of years prior to 1831*
The bank supervisory system established by the insurance
legislation was at first superimposed on the already existing system.
The three "Bank Commissioners of the State of Vermont," provided
for in the 1831 law, were to examine each of the participating banks
at least once each year, but these banks also remained subject to
examination by the Bank Inspector. It was not until 1839 that the
Inspector's jurisdiction was restricted to banks not participating
in insurance.
The Bank Commissioners were to be appointed annually, two
by the participating banks and one by the State legislature. However,
in 183T the number of commissioners was reduced to one, to be selected
by the General Assembly. The commissioners were to be paid from the
fund at the rate of $4.00 per day, plus expenses.
1/ Ibid., section 9«
2/ An Act relating to banks, October 28, 18U0, section 39*
Emphasis added.

Ill -4
For a time there appears to have been a considerable difference
in authority granted the two supervisory agencies. The Bank Commis
sioners possessed the very considerable authority to make thorough
examinations on the basis of full access to bank records. 1/ The
Bank Inspector apparently possessed no such authority, as is indicated
"by the fact that, on one occasion, he was refused access to the books
of a bank suspected to be in serious financial difficulty. His
principal duty seems to have been to verify the condition reports
of the banks on the basis of such information as the banks were willing
to supply. However, in 1837 new legislation gave to the Bank Inspector
approximately the same examination powers possessed by the Bank Com
missioners.
Statutory limitations on bank operations. Generally, the
participating banks chartered under the Act of 1831 and the Act of
1840 were subject to the same provisions relating to bank operations. 2/
However, there were certain features of the 1840 Act which differed
from, or were in addition to, provisions embodied in the 1631 Act.
Specific statutory limitations on bank operations during the period
of insurance in Vermont in the Acts of I83I (as revised in 1839, 1840,
and 1849), are show in Table 15 .
The Act of 183I, dealt largely with the operation and adminis
tration of the insurance fund, and with the duties of the Bank Com
missioners* Until passage of the Revised Statutes of 1839 and the
acts relating to banks in 1840 and 1849, most regulations on a bank's
operations were included in its charter.
The commissioners were charged with seeing that participat
ing banks operated within the limitations set forth in their charters
or by general legislation. For example, if the statutory provisions
were violated in any way with respect to amount of circulation out
standing, payments due the Treasurer, capital stock outstanding, pay
ment of bills, permission to examine officers under oath, and inspection
of books, the commissioners had the authority to declare such banka
insolvent. However the commissioners' do not appear to have possessed
authority to enforce remedial recommendations regarding unsafe bank
ing practices.
Number and Obligations of Banks
Number of banks. Shortly after passage of the Act of 1831
three banks made contributions to the insurance fund and the follow
ing year four others followed suit. In 1&37 more than half of all
Vermont's banks were participating in insurance and by 1843 partici
pating banks were four-fifths of all operating banks.
In terms of number of participating banks, the peak years
of participation were from 1841 through 1848, during which time
thirteen banks were continuously members of the insurance system. Of
1/ The section of the act granting this authority was an
exact copy of the New York section, which was discussed in Chapter II,
P- 23.
2j The number of banks participating in insurance to which the
1840 provisions applied ranged from one in 1840 to nine in 1848. The
remainder operated under provisions of the I83I Act, as revised in l839»

III-5
Table 15.

Statutory Limitations on Bank Operations

Item

Act of l8!+0
Act of I63I
(with 1839 revi
sions )__

Act of 18^9

Responsibility of offi

cers., directors, and
stockholders:
Losses resulting from
loans made in viola
tion of legal limi
tations

Not speci
fied

Liability of stock
holders

Not speci
fied

Directors li Not specified
able to full
extent of
loss
Not individual
ly liable for
debts con
tracted

Limitations on loans
and investments:

Loans to officers,
stockholders, and
directors

jfi of capital
stock

Not speci
fied

Directly or
indirectly
570 of paid
in capital
stock, at
any one time

Total to directors,
officers, and stock
holders

As of 1339,
15$ of capi
tal subject
to consent
of direct
ors

At any one time
5$ of paid-in
capital
aggregate not
stock
to exceed 3$
of paid-in capi
tal stock for
each director

Maximum to single
borrowers

As of 1339,
L0$ of paid-in Not specified
capital, sub
$2,000 sub
ject to con ject to con
sent of di sent of direct
rectors
ors

Other restrictions

As of 1839/
Loans prohibited Not specified
loans proh.1- until \ capital
bited until
stock paid in
entire amount gold and silver
of capital
stock paid in
gold or silver
coin

Ill-6
Table 15.
Item

Statutory Limitations on Bank Operations (cont'd)
Act of 1831
(with 1839 revi
sions)____

Act of lSkO

Act of I8U9

Limitations on owner
ship of property:
Ownership of real

Not specified

estate

Forbidden except Same as 1840
that necessary
for accommoda
tion of bank itself

Limitations relating to
circulation:

Maximum amount of
circulation

Deposits and
Three times
twice paid-in
paid-in
capital stock
capital stock

Not specified

Limitations on borrowings:

Maximum

Not specified

Deposits and
twice capital
stock paid in

Not specified

No dividend
until deficit
of capital
made good

Not less than
$50,000 or
more than

Limitations on payment
of dividends:

If capital is
impaired

Capital stock requirements:
Minimum

Not specified

When to be paid

50$ upon com

$250,000

mencing opera mencing opera
tions; no time tion, remainder
within 2 years
limit set for
payment of re
mainder, except
in case of rechartered bank
in which case
full amount to be
paid within one year
Reduction of

Not specified

Permitted only in Not specified
case of rechar
tered bank; not
to be reduced
below original
amount paid in

Ill-7
these thirteen banks, four were subject to the 1831 law while nine
were operating under the provisions of the 1840 law.
After 1348 the number gradually began to decline as more
and more of the banks proceeded to exercise their option of with
drawing from insurance. By 1859 all banks had withdrawn from insur
ance but the insurance fund remained in the hands of the Treasurer
until 1866 when final settlement was made with the creditors of the
Danby Bank. Table 16 shows the number of banks, by insurance status,
for each year of the insurance period.
Bank obligations. Obligations covered by insurance included
all debts, i.e., deposits, circulation, and miscellaneous liabilities.
Thus coverage was the same under Vermont's insurance system as in
New York (until 1242), Indiana, and Michigan.

The obligations of both participating and nonparticipating
banks are shown in Table lb. It will be observed that during the
first nine years of operation less than half of all obligations were
in participating banks. However, by the end of 1840 almost 56 per
cent of all bank obligations were afforded protection by insurance
and for the following eight years more than half of all obligations
had insurance protection. Maximum protection was reached in 1845
when over j8 percent of all obligations were covered; thereafter
insured obligations relative to total bank obligations began to
decline and by 1850 nonparticipating banks again held the major
portion of bank obligations.
Vermont banks, both participating and nonparticipating,
were primarily banks of issue. As can be seen from Table 17, the
amount of circulating notes in the two types of banks considerably
exceeded deposits, the typical ratio being about 5 to 1. Deposits
in this instance include all deposit liabilities; because of the
■unavailability of detailed statements it is not possible to provide
a breakdown of this item.
Relative size of participating banks. It appears that
participating banks were generally smaller than nonparticipating
banks. Table 18 shows participating and nonparticipating banks
grouped by size (as measured by circulation plus deposits) for three
year-end dates: 1833* 1843, and. 1849For the years 1833 fiLnd. 1843 most participating banks had
less than $100,000 of deposits plus circulating notes and none had
more than $150,000 of such obligations. In 1849 the typical par
ticipating bank had deposits and circulation of from $100,000 to
$150,000 and there was one bank with obligations in excess of $200,000.
By way of contrast, the majority of nonparticipating banks had deposits
and circulation of more than $100,000 in all three years: 1833 > 1843,
and 1849.
Examination of Table 18 shows that there was no marked
concentration of risk for the insurance system in either 1833 or
1343, and only a small degree of risk concentration in 1849* During
the latter year two banks, constituting 18 percent of all banks, had
29 percent of insured obligations.

Ill -8
Table l6 . Humber and Obligations of Vermont Banks, by Insurance Status,

1631-1858

—
Year

Total

Obligations (in thous ands)of;<
Number of banks
Not
parParticipating
Participating
NonparticipaAll
lsanks
in insurance
ticipaNumber Percent ting in
banks Amount Percent ting
of all insurance
of all banks
banks
banks

1831
1832

13
17

3 3/
7

23.1

1333
1334
1835

19
19

9
9

47.4
47.4

10
10

19
19
19
19
17

9
10
10
10
10

47.4

10
9

1841
l842
1843
1844
1845

13
13
13
13
13

72.2

1846
1847

76.5
72.2

1849

21
23
27

13
13
13
11
10

47.3
37.0

31
32
33
40
42

9
9
9
9

29.O

4l
41
4l

7
6
4

1836
1337

1838

1339
1840

18^8
1850

1851
1852
1853

1854
1855

1856
1857

1858

17
17

41.2
44.4

52.6
52.6
52.6
58.8
76.5

81.3
76.5
76.5

10
10
10

9
7
5
4
3
4
4

$1,501
$
1,647 5/

1,856
2,511

1,734y
2,255

2,249
1,338

1,791 5/

1,080

1,513
2,033
1,688

1,900
2,768
2,019

4^
579
697
1,000

911
1,196

748

45.3
55*9

1,220
590

1,353
787
1,179
1,552
1,321

75.5
72.9
77-9
76.3
78.3

1,388

73.0
72.4
58.7
49.7
36.4
31*1

2,673
3,475

21.4

22
23
24
31
33

4,099
4,577
5,552
4,832
4,571

1,276
1,427
1,659
1,269
1,323

17-1
14.6
9-8

34
35
37

4,765
5,024
3,693

780

22.5

---

1,159
1,511

47.0

873
1,059
1,029

1,936
1,186
1,329
1,265

28.1
27.3

37-6
39.3

48.9

4
5
8
12
17

61.9

V
30.2 $1,048
1,068 5/
35.1

644
307

438 5/
293
334
481
317
512

832
333
1,344
2,210

28.9

2,823
3,150
3,893
3,563
3,248

16.4
12.8
8.3

3,985
4,380
3,386

31.2

29.9
26-3

Source: Vermont Senate and House Journals, I83I-I836;
Reports of Auditor of Accounts, 1837-1358.
1/ End of year, 1331-1836; October dates, 1837-1858.
2j Consists of circulating notes, deposits, and miscellaneous
liabilities.
3/ Banks chartered November 1831 . Contributions by these
banks to the fund were not made until the following year (1832).
hj Not available.
5/ Excludes one bank not reporting.

III-9
liable 17.

Year l/
1831
1832
1833
183^
1835
1836
1837

1838

1839
1840
1641
1842
1843
1844
1845
1846
1847
1848
1849

1850
1851
1852
1853
1854
1855

Deposits and Circulation,, "Veraont
Status and Year, 1831-1858
Participating in insurance
Deposits 2j
Circulation
3/
& 412,873
535,465
600,4o4
898,395
3/

719,193
880,582
924,230
616,755

1 ,150,890
618,4l4
1,018,477
1,357,809
1,102,490
1,140,277
1 ,667,576
1,018,281
1,140,369
1,078,539
1,024,690
1,147,752
1 ,386,436
1,015,201
1,027,974

1856

636,786

1857

53^91
252,336

1858

3/
40,867
43,107
96,393

101,900

3/
153,582
178,242

105,252
130,895
202,068
168,445
160,882
194,214
218,397

247,259

268,174

167,663
189,004

186,55c
251,100
279,259

272,858
250,497

294,527
143,507
109,797
55,112

Banks by Insurance

Not participating in insurance
Circulation
Deposits 2j
3/
$ 821,306

928,229
928,123
1 ,165,060

3/
$ 227,196
139,768

231,012
345,450
5/

a 2/
738,243
1,036,592
1,016,751

201,227

433,060

107,679

408,569 y
229,879
263,893
335,999
293,129
419,556
685,716
715,201
1 ,181,439
1,777,488
2,352,337
2,641,379
3,408,730
2,971,510
2,676,369
3,333,372
3,741,026
2,762,806

172,813

159,991

29,743 v
63,160
64,359
94,866

68,438
92,733
146,C87

117,980
162,655

432,549
471,147
508,311
483,500

501,380
572,505

651,085
638,421
622,667

Source: Vermont Senate ana House Journals, 1831-1c$36~>
Reports of Auditor of Accounts, IS37-1853.
l/ Data for 1S3 I-1S36 are for end of year; for 1837-1858,
October dates.
2j Includes interbank deposits. For most years the amount
of such deposits is negligible.
3/ Not available.
5/ Excludes one bank not reporting.

Muml-i-., lvj...ulta, u.n<l Clroulullun of Vtirau.iit. Utinl-.u, ti'J lnauinniii; VIVuXaxr wv\

Banks with deposits plus
circulation (in thou
sands of dollars) of:
Less than 5°
50 to 100
100 to 150
150 to 200
200 and more

2
3
2

28.6

42.8
28.6

6
4

3
3
1

42.9
42.9
14.2

16. T

50.0

33-3

1
2

100.0$

33. ^
66.6

1
2
6
l

1
$578

Banks with deposits plus
circulation (in thousands
of dollars) of:
Less than 50
76
250
50 to 100
252
100 to 150
150 to 200
200 and more

100.0#

13-1
43.3
43.6

3/
.
S/
100.0$ $1,102 100.0$
$799

242
393
155

30.6
49.8

19.6

68
516

518

6.2
46.3
47.0

$333

60
273

I8.0
82.0

CO
OJ
on
•s
H

Amount of deposits plus
circulation - total

100.0$

1 ?/

100.0$

12 3/ 100.0$

154
746

180
206

100.0$

9.1
18.2
5^5
9-1
9-1
O

Number of banks - total

"
~
~~
YJ
Participating Mot participu.- Participating Wot participain insurance ting in insur- in insurance ting in insurance
ance
Number Percent Number Percent Number Percent Number Percen
or
or
distridistrior
distrior
distri
amount bution amount bution
amount bution amount bution

H
O

Size of bank

1O33 TJ
Participating Not, participain insurance tin^ in insurance
Number Percent Number Percent
or
distrior
distriamount bution amount bution

.V Vi'ivV., V'1
.;,;,,

-------------------- -

H
O
O

Tab-Le- 10.

3.2
11.6
56.2
13.5
15*5

100.0*,

1
3
6
2

16.7

$1,3^3 100.0

^3
271
659
370

Source: Vermont Report of Inspector of Banks, 1833; Reports^of Auditor of Accounts, 1843 and 1849»
"
1"f Year-end~dates .
2j Differs from number and deposits of operating nonparticipating banks shown in Table 16 due to
unavailability of individual statements for three banks.
3/ Differs from number and deposits of operating participating banks shown in Table 16 due to
unavailability of statement for one bank.

8.3

25.0
50.C

3.2
20.2
49.0
27.6

Ill-11
History of Operation of the Insurance System
During the insurance system's twenty-eight years of opera
tion only two participating "banks failed. Neither of the hanks was
0f especially large size. Nevertheless, after meeting claims of
creditors of the first hank the resources of the insurance fund were
inadequate to pay in full the creditors‘claims in the second failure.
Participating hanks in serious financial difficulty. The
two participating hanks encountering difficulties were the Essex
County Bank, which failed in 1839 just prior to the severe nation
wide depression, and the Danby Bank, which failed during the panic
of l857- However, in the first case failure may be attributed to
unsafe and unsound banking practices rather than to asset deteriora
tion.
The Essex County Bank was chartered November 7, 1832, with
authorized capital of $40,000. It failed October 12, 1839> and
its assets passed into the hands of a receiver on November 4, 1839.
From the time it was organized until 1838 it operated, according
to its statements, with a paid-in capital of $20,000. 1/
The Bank Inspector was extremely critical of the operations
of the Essex Bank as early as 1856. In particular, he was disturbed
by the fact that immediately after the bank opened loans to the
stockholders had been made on the security of the bank's stock to an
amount almost equal to the total stock subscriptions. He was also
concerned by other evidence of a self-serving management and by the
fact that the bank was maintaining its credit by secretly giving
its own banknotes as collateral for loans obtained from other banks. 2/
However, when a committee of the State legislature inquired into the
condition of the bank later in the sane year it concluded that the
bank was "perfectly solvent, and in good condition." 3/ In reaching
this conclusion the committee apparently relied heavily upon an
examination by the Bank Commissioners. But when, several years after
failure of the bank, a legislative committee again inquired into the
bank's operations, it was concluded that the officers had looted
the bank and that, in effect, the Bank Inspector had been correct
in his original charges. 4j
The Danby Bank was somewhat larger than the Essex County
Bank. It was chartered November 13, I85O, with authorized capital
of $50,000, all of which was paid in by the end of 1852. It failed on
September 4, l857> the day it was unable to redeem its notes on
demand in Boston, and a receiver was appointed on December 29 of the
same year.
~
1/ In 1838 paid-in capital was increased to $24,000 and by
October 1, 1339, to $25,000. Of the approximately $1,117 which should
have been contributed to the safety fund, on the basis of paid-in
capital, only $825 had actually been paid as of 1839*
2/ Journal of the House, 1836, pp. 50-57; Journal of the
Senate, 1840, appendix XIV-XIX.
3/ Journal of the House, 1836, p. 219*
5/ Journal of the House, 1842, pp. 106-112.

game

ye®1-*

During its first five years of operation the Danby Bank chose
t0 t>e a member of the bond security system and in compliance with the
A.ct of 1840 annually renewed its bonds to the Treasurer as security for
tills and deposits. It was not until 1856 that the bank exercised the
oration described earlier and became a member of the insurance system,
ijjie bank had therefore paid into the insurance fund only $750 when it
failed.
Protection of creditors of failed participating banks. Pro
tection afforded creditors of the two failed partieipatings banks is
shown in Table 19- It will be observed that over two-fifths of total
insured obligations was eventually restored to the banks' creditors
and that a substantial portion of the remaining obligations was never
presented for paymentIn the cases of both failed banks there is some uncertainty
as to the amount of insured obligations at date of failure, and the
degree of protection given creditors. The receiver of the Essex County
Bank reported that as of the date of failure the circulation of the bank
was $70*6GO and that its borrowings amounted to $3*800, the two com
prising the $74,COO of insured obligations shown in Table 19* 1/ How
ever, three years later, after the time for presentation of claims had
expired, more than $3°,000 of circulating notes was reported as "still
outstanding.” 2/ In view of the fact that the suspension of the bank
was directly attributable to "fraudulent misconduct of its officers and
stockholders", 3/ one possible explanation for the amount of circulating
notes still outstanding may have been that they were illegally issued
or held and never presented for that reason. Another explanation is
that the holders believed that they would secure a larger recovery by
selling the notes to the bank’s debtors, who in turn could use them
to offset their liabilities to the bank. This explanation is suggested
by reason of the fact that is discussing the receivership of the Bank
of Bennington, a chartered bank not participating in insurance, the
auditor of accounts in 1845 stated: "a portion of the bill holders ...
seeing little prospect of obtaining anything by delivering up their
bills to the receivers ... have neglected to present their claims,
prefering ... their chance of selling their bills at a discount to the
remaining debtors to the bank. This has left a large amount of bills
yet outstanding ..." 4/ Whatever the explanation, it appears that the
whole of the bank’s circulation eventually came into the hands of the
receiver, since the final receivership-reoort shews that $75>000 of
circulating notes of the Essex County/were burned by the receiver. 5/
The amount of Essex County Bank circulating notes deposited
with the receiver for payment was $34,400. An additional $5>SOO was
received by him and, apparently, offset against indebtness of the
holders to the bank. 5/ It is also likely that the receiver was able
to offset the $3.>8CO of bank borrowing, since the money had been
secured from a heavy borrower.
1/ ^Report of the Committee Upon the Affairs of the Essex
County Bank," Journal of the House, 1842, p. 110.
2/ Ibid., p . 1X1.
3/ Report of the Bank Commissioner, Journal of the Senate,
1844, p. 101.
hj Annual Report of the Auditor of Accounts, 1845, p. 83.
S/ Aanual Report of the Auditor of Accounts, 1859, P* 193 •
5/ "Report of the Committee ...,»op. cit., p. 111.

III-13
Table 19. Bank Creditor Protection and Insurance
Disbursements, Vermont, I83I-I858 1/
(Amounts in thousands)

Item

Total obligations
"at date of failure total
—

Total

$ 151

Circulating notes
Deposits or other
liabilities
Total payments to credi
tors

Obligations not paid
Not presented for
payment
No funds available

$ 29

46. %
26

59-3#

65
47
72.3$
$

Danby Bank
(failed 1857)

149

A rj^

percent of total ob
ligations
Payments by receiver
Payments from insurance
fund:
Claimed
Paid:
Amount
percent of claims

Essex County
Bank
(failed lS39)

34
67
17

34.9/o

10 3/

16 3/

31 4/

34
100.0#
$

79 2/

30
30
“*

13
41.9p
$

54
37
17

2j All data. pfl.rtia.T1y watimate d! F o r a discussion see
section entitled "Protection of creditors of failed participating
banks,", p. III-12.
2j Hie receiver reported circulation of $92,000. The amount
shown here excludes: $9,784 described as "In Suffolk Bank, redeemed"
and $2 ,871 , "In Bank, counted as circulation." Annual Report of the
Auditor of Accounts, 1865, p. 50*
3/ Assanes deposits or other liabilities paid through offset.
5/ Excludes interest on claims of approximately $4,000.

Ill-14
Many of the claims comprising the $34i4#D',
wesB contested by the receiver,
who apparently believed they consisted of banknotes redeemed by agents
of the bank prior to its failure and, instead of being destroyed, were
being presented again for no "honest or honorable purpose." 1/ How
ever, ift 1850 the courts apparently decided that most or all of the
total represented valid claims against the insurance fund for, under
court order, payments totaling $34,300 were made out of the insurance
fund to creditors of the Sssex County Bank between 1851 and 1855* In
IQ59 the receivership was terminated after payment of residual claims
and receivership expenses, amounting in all to about $1 ,COO. 2/
Summarizing, it appears that all claims against the insurance
fund arising out of failure of the Essex County Bank, amounting to
£34,000, were paid in full, and that an additional amount of insured
obligations amounting to about $10,000 were paid by the receiver,
largely through offset. The remaining $30,000 was never presented for
payment, either because it did not constitute a valid claim against
the fund or because it was sold to the bank's debtors and eventually
came into the hands of the receiver in settlement of their debts. If
the latter process did in fact take place, then holders of the notes
at the time of failure of the bank made some recovery; but this recovery
was not comparable to that secured by a noteholder who, at date of
failure of the bank, was at the same time indebted to the bank.
The degree of protection given creditors of the Danby Bank
is also difficult to detenaine. Table 19 shows total insured obliga
tions of the bank, at date of failure, as $83,000. This total is
partially estimated, since it consists of $79,000 of circulating notes
reported outstanding by the receiver plus the amount of deposits shown
on the last condition report prior to failure and assumed to have been
still on the books of the bank at date of failure.
As in the case of the Essex County Bank,a large amount of
circulating notes was not presented to the receiver of the Danby Bank
within the one-year period allowed for the making of such claims.
Again, there may have been two reasons for this. First, the bank may
have had a considerable circulation in the western States - since it
had made large loans in those States, most of which, proved uncollect
able after the panic of 1857 - and one year may not have provided
sufficient time for the return of notes circulating so far from the
home office of the bank. The second explanation is similar to that
advanced in the case of the Essex County Bank, namely, that holders
preferred to sell their notes to persons indebted to the bank rather
than to present them to the receiver. The auditor of accounts re
ported in 1859 that the receiver burned $105,000 in notes of the Danby
Bank. Seme of this represented notes not tabulated as "in circulation"
at date cf failure - having been previously redeemed by agents - but
the fact that the total was $105,000 suggests that the second explana
tion for the large amount of notes outstanding may be correct. 3/
~

l/ jfeport of the
2/ It is assumed
of liquidation and did not
3/ Annual Report

Committee
op. cit., p« H0»
that this anount was cSllected from proceeds
come from the insurance fund.
of the Auditor of Accounts, 1859, P* 86.

Ill-15
Summarizing, of the total insured obligations at date of
of $ 83 ,COO it is assumed that the receiver was able to offset
the estimated $4,000 of deposits, and it is known that he did offset
jjll,0CO of circulating notes.
1f Of the remaining circulation,
$3l,0C0 was presented for payment and $37,000 was still outstanding
when the time expired for the presentation of clains. Some recovery
may have been made on the second amount by the holders through sale of
notes to persons indebted to the bank, but the amount of such recovery,
if any, is not known. Of the $31/000 presented to the receiver for
payment, it appears that the receiver was only able to collect about
$1,000 to pay such claims. Accordingly, the $13,000 which was still
in the insurance fund at the time of failure of the Danby Bank was
paid to these claimants, although because of extensive litigation
even this was not fully paid until 1866.
failure

Insurance receipts and expenditures. In the Vermont insur
ance system, the insurance fund consisted of the accumulated assess
ments paid by participating banks, less withdrawals to pay the
creditors of failed banks or to refund assessments paid by banks
whose charters had expired. Neither investment income of the insur
ance fund nor its disposition could affect the size of the fund.
Table 20 shows, for the 27 years of active insurance operations, the
amount in the insurance fund at the end of each year and the items
affecting the size of the fund; the table also shows the disposition
of income received from investment of the fund.
During the early insurance years there was a tendency on
the part of Vermont officials to take account of investment income
and its disposition in computing the size of the fund. This may
account for the fact that for most of the years until 1814-1 the amount
reported as the insurance fund will not correspond with the accumula
ted assessment income shown in Table 20. However, beginning in 1842
the amount reported as standing to the credit of the fund at the end
of each fiscal year corresponds precisely with accumulated assessments
to the end of that fiscal year, less any withdrawals for the reasons
indicated earlier.
It appears to have been the policy of the State Treasurer
to keep the insurance fund fully invested at all times. Until 1852
a portion of the fund was loaned to individuals but the major portion
was loaned to the State. After that year all of the fund was loaned
to the State. It is probable that the item "collected on safety fund
notes," which appears in the reports of the State Treasurer for most
of the years prior to 1852, represented repayment by individuals of
loans from the insurance fund.
It will be observed that payment of the creditors of the
Essex County Bank, which was made in three installments between I85I
and 1855> did not exhaust the insurance fund. The total claimed
($34,000) was larger than the amount in the fund when the claims were
first presented in 1842, but by I85I, when payment was finally ordered
by the court, the fund had grown to more than $40,000.

1/ Annual Report of the Auditor of Accounts, I865, p. 50.

■j_L'*XO
It appears from the records of the State Treasurer that
most of the cash needed to pay the creditors of the Essex County Bank
vas secured through a State loan of $25,000. It is supposed that the
State was required to borrow this amount since, at the time of the
court order, virtually all of the insurance fund had been loaned to
the State. To secure the necessary cash the State undoubtedly issued
new securities, which were described in the reports of the State
Treasurer for a number of years thereafter as the "Safety Fund loan”,
■but which actually did not represent borrowing by the fund itself.
The amount shown in Table 2C as paid to the creditors of
failed- banks is $3>750 less then the total paid as shown in Table 19.
The difference is accounted for by the payment of $3,750 to the
creditors of the Essex County Bank out of accumulated interest income.
The reason for payment in this manner is not given in the records.
It will also be recalled from Table 19 that, because of a
lack of sufficient money in the insurance fund, $17,000 in insured
claims vss not paid in the case of the Danby Bank. Table 20 shows
that the necessary amount would have been available if refunds
totaling about $13,000 had not been made to a number of banks with
drawing from the insurance system. These refunds were apparently
made contrary to law, after a number of banks had exercised their
option of withdrawing from insurance and substituting bonds to pro
vide for the security of depositors and noteholders. The receiver
of the Danby Bank brought suit against the State Treasurer, seeking
to have the amount involved paid to him on behalf of the remaining
claimants of the Danby Bank. Although the Supreme Court of Vermont
agreed with the receiver that the refunds had been unauthorized,
since the charters of the banks had not expired, it would not agree
that the State was liable for the payments, nor would it agree that
the Treasurer in office at the time the suit was filed was personally
liable. 1/ The effect of the decision was to make it impossible for
the receiver of the Danby Bank to secure the amount necessary to make
final payment on the insured claims arising from the failure of the
bank.
Although the insurance fund would have been sufficient, in
the absence of the illegal refunds m^de to several banks, to pay all
insured, claims in the cases of the two failed banks, it is apparent
from Table 20 that it would not have been sufficient to pay the
relatively large amount which was never claimed because the ownsrs
of the obligations saw fit to dispose of their claims in other ways.
The amount not claimed is shown in Tible 19 as $b7,000; about half
of this total would have been available if the income secured from
investment of the fund, after payment of the bank commissioners*
salaries, could have remained in the fund. However, it was all re
paid to insured banks in accordance with law.
Table 20 also provides information on assessments paid by
the banks as a ratio of total bank obligations, and. on the size of the
insurance fund relative to total obligations. The average annual
assessment rate was0.21 percent, and ranged from a low of0.02 percent
of total obligations to a high of0.72 percent. Thus the rate for some
years was considerably below the statutory rate of approximately
l/ hReceiver of Danby Bank v.‘State Treasurer,", Vermont
Reports, Volume 39> 1866-67, p. $2.

Ill-IT
-Table 20.

Insurance Receipts and Expenditures, Vermont Insurance
System, 1831-186?

— ' ' '
Insurance Fund . _
Amount in fund Assessment income Expenditures
at end of fiscal Total Aapercent-Paid to Refunded
year:______ ____
age cf
credi- to "banks
Total
As
percentbankobtors
of
Year
2j age of bank
ligations failed
y
banks
obligations

1836-

bB $21,113

1831
1832
1833
163k
1835

-447
447

2,700

V
l.93$ $62,072
^*

.10
.08

4,110

•39
.41

1836 6,000
1837 10,674
1838 15,528
1639 19,233
1840 20,700

1.22
1.47
I .87
2.77

22,320
26,730

1.65
3*39

1841
1842
1843
1844
1845

2.50

32,055

2.07
2.59

34,185

—_

44-7

.10

V
3,947
§/

.31
•31
.22

.60 7/ , y
6,200
M 63

29,543

.21#

2,688
§J

.22 1J
.22 ‘
•39
.25
.32

ft
9,285
2,813
2,513
2,100

•32
•32
.24

1,875
2,414
1,013
563

.14
.12
.09
.05
.04
.04
•31
•15

.16
.16

1846 36,030
1847 36,^44
1848 39 >57
1849 40,143
1850 40,216

2.60

1851 15,204
1852 15,791

1.19
l.ll
1.10
1.66
2.22

563
4,438
2,438
9,532

•72

2.74
2.64
4.24

719
113
750

.09
.02
.24

1853

1854
1855

16,229
21,041
29,400

1856 21,410
17,022
1658 13,012
1S591857

13,125

1-99
3.33
3.02

3.18

665

2,813

$43,723
-

5/
$18,199
----

Expense
Salary
Income
of Bank paid tc
Commis banks
sioner
3/
3/
C>3,536 v32,771
-136
240

___

---—

260
---

- - -

- -

---

232
77

180
116

- —
—

250
18

124
48
1C4
176
140

5,927
1,639
1,757

164

1,874

- -

108

1,867

128

2,132

176
152

817

172

1,022
S78
427
1,021
1,359

- -

---

- -

---

489

25,575
3,850

.22

• *
- -

183
140

---

156
159

1,173
8,710
- - -

13,125

4,500
4,500
_

125

140

1,199

1,130

- -

1,404

7,310

1/ Usually ended September,
2/ As reported by the State Treasurer, except for 1832-34,
1836, and 1840 which are estimates. Fund for l84l m s reported in
cluding interest, which has been excluded here. Other reported amounts
prior to 1842 may also have included interest or may have shown fund
net of interest due to "banks; eitaer method was incorrect. For some
years between 1859 and 1867 the fund varied slightly from the amount
shown.

Ill-17(&)

rpofcle 20.

Insurance Receipts and Expenditures, Vermont Insurance
System, I83I-I867 (continued)

3/ Data are probably incomplete for earlier years.
%] Average for 27 years, I832-I85S.
5/ Excludes S3,751 reported by Treasurer as having been
paid, billholders of Essex County Bank out of interest incone.
6/ Included in amount shown for next reported year.
7/ Computed using estimated obligations.

applicable today under Federal deposit insurance, while
^ other years it was as much as nine times this rate. On the
average, the insurance fund was equal to just under 2 percent of
total obligations, or almost three times the present relative size
0f the deposit insurance fund of the Federal Deposit Insurance

0 03 percent

Corporation.
Appraisal of supervision and regulation of participating banks.

Banks participating in Vermont's insurance system received
It is apparent from the reports that a
number of dedicated and conscientious individuals exercised super
visory authority during the insurance period. However, it must also
te added that during the early insurance years bank supervision in
Vermont was less than satisfactory.
reasonably good supervision.

After 1340 the Bank Commissioner and the Bank Inspector
yere usually the same individual. But prior to that time there was
evidently some friction between the two officials. This is strongly
indicated in the ease of the Essex County Bank. Whereas in 1836 the
Bank Inspector was seriously - and justifiably - disturbed over the
management of that bank, the Bank Commissioners made what appears to
have been only a cursory examination and found nothing wrong. Further,
the commissioners made no attempt to assist the Bank Inspector when
he attempted to inquire more closely into the condition of the bank.
Since at that time both authorities were examining participating
hanks the only conclusion which can be drawn is that the Bank Com
missioners were less interested in carrying out their duties than
they were in contesting with the Bank Inspector for authority over
participating banks. Cn the other hand, it is possible that the
diligence of the Bank Inspector in this case - as well as his stated
opposition to bank-obligation insurance in general - stemmed partly
from the fact that he was interested in protecting his own position
In the supervisory area.
The failure of the Danby Bank in 1857 cannot be attributed
primarily to supervisory laxness. The difficulties of that bank
developed out of the unwise policy of making a number of large loans
in an industry and area - railroads and western States respectively which were particularly hard hit by the panic of 1857. Although
such a lending policy is properly subject to criticism by bank
supervisors - and was so criticized as early as 185^ - there is
little more thafc supervisory officials could do then (or can do
today) when the bank is not insolvent and the disagreement is over
the judgment exercised by bank officers.
The Bank Commissioners did not, nor could they be expected
to, immediately develop a system of examination which resembles that
which we have today. Despite their authority to examine fully into
the affairs of the bank, considerable reliance seems to have been
placed upon statements made by bank officials under oath. It is not
entirely clear when, if ever, the Bank Commissioners began to rely
upon their own appraisal of assets. Nevertheless, it is evident
from their reports that by the 1840's they paid considerable attention
to the character of a bank's assets, rather than to its volume, and
assigned classifications to assets of the kind now being used by bank
supervisory authorities.

One of the major difficulties of bank supervision in Vermont
•ag the insurance period seems to have "been a reluctance on the
art 0f the State legislature to fully support the Bank Commissioners.
? the early years the legislature was caught up in the jurisdictional
dispute between the Bank Inspector and the Bank Commissioners, apparent
siding with the latter. But even after this dispute was resolved
the legislature acted on few of the suggestions made by the various
commissioners for improving the supervisory system. In 1855 the Bank
Conmissioner commented:
I do not find any recommendation of any bank commissioner
has ever been followed by the Legislature. From which
it is fair to infer, that the State has been singularly
unfortunate in its selection of Commissioners, or else
the control of Vermont legislation, upon this subject,
has fallen into hands which would accord to the banks
the largest liberty. 1/
Ibis remark seems to have been somewhat extreme, since there is
evidence to indicate that at least a few recommendations had been
adopted by the legislature over the years. However, the Bank Comnissioner was probably correct in his implicit assessment of the
attitude of the legislature towards a more strict supervisory system.
Appraisal of Vermont's Insurance Plan
Vermont's insurance system had only a limited success in
attaining the objectives it sought. As has been described earlier,
sane replacement of circulating medium destroyed because of bank
failure, and some protection of bank creditors, was accomplished
through insurance. However, this protection was far less than was
possible or desirable. Taking the long view, perhaps the most impor
tant success enjoyed by Vermont's insurance system was the introduction
of important bank supervisory legislation.
The fact that
72 percent of all claims against the
insurance fund were paid out of the fund obscures two important de
ficiencies in the degree of protection accorded creditors. First,
in both cases of bank failure, payments from the fund were made many
years after the claims were presented - and thus far too late to pro
vide much protection against the consequences of destruction of the
circulating medium. Second, more than two-fifths of the obligations
of the failing banks were never presented for payment, and one of the
reasons for this may well have been that holders had more faith, in
their ability to recover something on the notes themselves than on
the ability of the insurance fund to provide the necessary amounts.
So far as bank supervision is concerned, the importance
of the insurance law was that it introduced the idea that bank
examiners should have complete access to bank records. Although it
does not appear that supervisory officials made full use of this
power - at least in the early years - the principle was undoubtedly
important in the eventual development of effective supervisory
procedures and of a sound banking system.
1/ "Bank Commissioner*8~5eport,” Report of Auditor of
Accounts. 185 5•

±11-20

The insurance plan adopted by Vermont suffered from certain
in the failure to provide for a
in which assessments were levied.
It will "be recalled that New York remedied the first of these defects
in its plan, but Vermont never did so. The drawback of levying
assessments on capital rather than on insured obligations has been
discussed in Chapter 2 in connection with the Hew York insurance plan.

internal weaknesses, particularly
■borrowing power and in the manner

The basic difficulty in Vermont did not stem from the plan
itself but, instead, from the inability of the State to select one of
a number of plans for the protection of bank creditors and stick to
it. It will be recalled that in 1839, only a few years after the
insurance plan was adopted, several banks were exempted from partici
pating in insurance; and that in the next year a general law gave
to all chartered banks the option of remaining in the insurance system
or withdrawing and providing for the security of bank creditors by
other means. Finally, free banking was authorized in Vermont in 1851,
with none of the banks included in the insurance system. In view of
these developments it is not too much to say that bank-obligation
insurance was never really tested in Vermont.
It can easily be seen that many of the difficulties en
countered by the insurance system were a reflection of the legal
problems created by the State. For example, the Danby Eank had
remained outside of the insurance system for a number of years; when
it finally entered the system it had an opportunity to make only a
partial contribution to the insurance fund before it failed. Another
illustration is the mistake by the State Treasurer in refunding to
banks withdrawing from the insurance system the amounts they had
contributed to the fund. This was perhaps not so much his fault as
the fault of the legislators who had provided for a general banking
system in which there was considerable uncertainty as to the responsibili
ties of the individual banks.
How bank-obligation insurance would have fared in Vermont
if the insurance system had embraced all banks is a legitimate
subject of inquiry. It appears that the fund would have become liable
for the payment of the obligations of four - or possibly five additional failing banks between 1831 and 1858, and that the amount
involved would have been upwards of $100,000. The additional assess
ment income would have been more than sufficient to pay this amount
of claims, but would not have been sufficient to pay them at the times
they would have been made. This is because most of the failures of
nonparticipating banks were clustered in the depression years of the
early l840fs or the panic of 1857* Accordingly, it seems reasonable
to conclude that bank-obligation insurance in Vermont could have been
made to operate successfully if the State had required all banks to
participate and if a borrowing power had been granted to insurance
authorities.
Comparison with other insurance systems. Vermont's Insur
ance system is most logically compared with those adopted in Hew York
and Michigan, since all three insurance plans were the same and all
were placed into operation within a seven-year period, I829-I836.
In such a comparison it is clear that the Vermont system did not
operate as successfully as did New York's, but was far more successful
then the Michigan insurance system. As will be described in the
following chapter, the Michigan system collapsed within a short time

Ill-21
after it "began operation and was not able to provide any protection
insured bank creditors.
The superiority of Vermont's insurance history over that
0f Michigan steamed almost entirely from two facts: first, the
V e r m o n t system was in operation for a number of years before the first
failure occurred, thus providing time during which an insurance fund
could be accumulated; second, Vermont was free from the difficulties
which Michigan faced at that time as a consequence of the unprecedented
migration to the State. The reason for the more successful operation
of New York's plan was probably also due to two facts: first, the
Eew York legislature made significant improvements in the plan,
particularly with respect to borrowing powers; second, although New
York abandoned the idea of including all banks within the insurance
system, the transition from an insurance to a bond-security plan was
accomplished in a more orderly manner and over a longer period of
time.

CHAPTER IV
INSURANCE OF BANK OBLIGATIONS HI INDIANA, 183^ -1865
Indiana was the third State to make use of the insurance
principle in providing for the protection of bank creditors, and
the first to establish a mutual guaranty system for this purpose. The
plan was put in operation in iQj^-, following by several years legis
lation in New York and Vermont designed to protect "bank creditors
through the establishment of insurance funds.
It became inoperative
when most of the participating banks converted to national banks
after 1864.
Review of Indiana Banking History to 1865
Banking prior to l83^« Two banks were chartered in Indiana
shortly before the adoption of the State constitution in 1816: the
Farmers and Mechanics Bank of Madison and the Bank of Vincennes.
The former was apparently ably conducted and satisfied the modest
banking requirements of it3 immediate area, but hostility on the part
of the Bank of the United States forced it to cease operations about
l825* 1/ Hie Bank of Vincennes had failed earlier so that by 1825
there was no bank in operation in Indiana. 2/
State Bank of Indiana. By the end of 1833 it had become
evident that the Federal charter of the second Bank of the United
States would not be renewed in 1836. Since much of Indiana’s
currency consisted of notes of this bank, it was feared that its
removal from the national scene would result in a severe contraction
of the State's circulating medium. The State constitution of 1816
prohibited the establishment of any bank except a State Bank with
branches and, consequently, an act chartering the State Bank of
Indiana became law on January 28, 183^ • The charter was to run to
January 1, 1857, with an additional two years provided for winding
up the bank's affairs.
Although the charter of the State Bank of Indiana seems to
have been modeled in part on that of the second Bank of the United
States, in structure the new bank was much different. As was pointed
out in Chapter I, the State Bank of Indiana was not a large central
bank with branch offices scattered throughout the State, but instead
a federation of independent banks. Apparently this odd and sometimes
confusing, structure was devised in order to circumvant the State
constitution and permit the establishment of what was essentially
a unit banking system.
1/ The closing was voluntary and as late as 1835 notes of
the bank still circulated at par. There is some evidence that the
bank briefly resumed operations in 1832,
2f Scae private banking may have been done by merchants, but
there is no record of such activity. Most of the early settlements
in Indiana were in the southern part of the State, along the Ohio
River, and the banking business was probably handled by Cincinnati
banks.

IV -2
The entire capital stock of the State Bank was divided among
the s o - c a l l e d Branch Banks. The act required that all banking be
done through these Branch Banks, each of which had its own officers
and board of directors. Further, each Branch Bank distributed its
earnings separately, to its own stockholders.
While the State Bank
liad a president, cashier, and board of directors located at Indiana
polis* their function was simply to supervise the activities of the
branch Banks. 1/ They may be compared with present-day State super
v i s i n g authorities, though their powers included activities which
w o u l d now b e regarded as central bank functions. 2/
As originally established the State Bank consisted of ten
Braach Banks, each with a capital of .,ol6o.COO. By 1839 three addi
tional Branch Banks had been placed in operation and the number there
after remained at thirteen. 3/ With these additions, plus some
further subscriptions to stock by the State, the capital of the State
Bank, i.e., the Branch Banks combined, was raised to over $2,7C0,CC0
in l84l. In 1843 the legislature made provision for a reduction of
capital, after which tine it remained at about $2,000,000.
Of the original capital of $1,500,000, half was taken by
the State and half reserved for private subscription. Individuals
•were required to pay $13.75 in specie per $50 share, with the remainder due in two equal, annual instalments. Because of the scarcity
of funds for investment, the State agreed to loan subscribers the
two annual payments. To secure the necessary funds for such loans,
as well as to pay for its own stock, a State bond issue of £1,300,000
was authorized in the original act.
One-half of the capital of a Branch Bank had to be paid in
specie, 'j>5°>000 by the State and $3C',000 by individuals, before it
was allowed to open. Subsequent payments also had to be in specie.
By the fall of 1834 the requisite amounts had been secured and on
November 19, 1834, the Governor issued a proclamation declaring the
State Bank ready for business. The Branch Banks opened their doors
about ten days later.
Not long after its start, the State Bank was faced with the
panic of 1837, followed by a severe depression which lasted from
1839 until 1842. Although many Western banks were not able to sur
vive this combination of events, the State Bank of Indiana came
through successfully. Indeed, in August of 1842 the cashier was able
to inform an eastern magazine that "the paper of this bank is the
1/ Banking in the™capital city was"done"'by the Indianapolis
Branch Bank. The term survives today in the name of Indiana’s oldest
bank, the National Branch Bank of Madison, Indiana.
2/ Throughout the remainder of this chapter all references
to the State Bank, or its successor the Bank of the State, should be
understood to mean the system of banks comprising the State Bank of
Indiana. Branches of the State Bank and the Bank of the State are
referred to here as the Branch 3anks, though at the time they were
simply called "the branches".
3/ The original Branch Banks, comprising the State Bank of
Indiana, were located at Bedford, Evansville, Indianapolis, Lafayette,
Lawrenceburgh, Madison, New Albany, Richmond, Terra Eaute and Vincennes.
Three additional Branch Banks were established: at Fort Wayne in
November l835> at South Bend in November 1838, and at Michigan City in
December of the same year.

IV-3
standard currency in the West, from Pittsburg to New Orleans." 1/
Free banking. Following the depression, the State Bank had
a prosperous, relatively uneventftil career until the expiration of
its charter in 1857. Eowever, it did not continue to enjoy a mono
poly of banking in the State since a new constitution, adopted in
i851, permitted the legislature to provide for the establishment of
free banks. An act so doing became lav on May 28, 1852, despite a
veto by the Governor. Within six months 15 banks were formed and
two years later, in 1854, about 90 free banks were in operation.
Many were organized to meet the legitimate banking needs of their
respective communities but others appear to have been unnecessary or
even fraudulent.
In 1855 disturbances in the money market, combined with a
lack of public confidence in the new banks, resulted in the failure
of many of the free banks. The legislature revised the law in that
year but the free banking principle was retained and the law itself
remained the basic banking law of the State until well after the
conclusion of the Civil War.
Bank of the State of Indiana. The new constitution also
empowered the State to create a bank with branches, but ownership by
the State of the stock of any bank (except for that already held in
the State Bank of Indiana) was prohibited. Substantial opposition
to the State Bank had developed, apparently because of its conserva
tive management, and it proved impossible to secure a renewal of its
charter. However, with a great deal of effort - some of it of a very
dubious nature - a charter was secured on February 24, l855j> for a
new system of banks, the Bank of the State of Indiana.
The Eank of the State of Indiana was very similar to the
State Bank of Indiana except that the State no longer held stock in
the Branch Banks and did not have the right to name the president
of the system. Twenty Branch Banks were provided for and by 1858
all were in operation. 2f At the peak, in 1862, combined Branch
Bank capital amounted to over $3> 300*000. Many of the old. Branch
Banks were brought into the new concern along with their key person
nel so that the Bank of the State of Indiana was in fact the State
Bank of Indiana in slightly altered attire.
Shortly after beginning business the new banking system,
like its predecessor, was faced with a country-wide financial crisis
which lasted from 1857 to 1859* It managed to survive the storm and
only went out of business when most of the Branch Banks converted to
1/ Letter,' August 24, 1842, Letterbooks of the State Bank
of Indiana, MSS, Indiana State Library Archives, Indianapolis, Indiana.
Hereafter the Letterbooks are referred to as "Indiana Letters/’
2j Branch Eanks comprising the Bank of the State of Indiana
were located in Bedford, Connersville, Evansville, Fort Wayne,
Indianapolis, Jeffersonville, Lafayette, Laporte, Lawrenceburg, Lima,
Logansport, Madison, Muncie, Mew Albany, Plymputh, Richmond, Rushville, South Bend, Terra Haute and Vincennes.

IV-4
national "banks beginning about 186k.

Character of the Insurance Flan
Purpose of the Insurance plan. No direct evidence is
available on the functions which the Indiana legislature intended its
insurance program to fulfill. Nevertheless, the clearly understood
relationship between banking and the area’s money supply, and the
fact that no limit was placed on the amount of deposits and bank
notes protected, indicate that the chief function of the insurance
system was to protect the State from a collapse of its circulating
medium caused by bank failures.
That the connection between bank lending and the circulating
medium was recognized is indicated by the fact that the State Board
began one of its first resolutions with the words: "Whereas the prime
object of this, as well as all other well regulated banks, is to
increase and regulate the circulating medium, to encourage trade and
industry and to afford safe depositories
1/ Similarly, in a
circular letter to the Branch Banks, the president of the State Bank
flatly asserted in 1837: "Hie institution was intended to furnish
a sound currency on a specie basis.'1 2/
A second function which may well have been considered was
that the insurance program would be of particular benefit to the
holders of circulating notes in the event of a bank failure. Bank
notes, especially those of small denominations, had a tendency to
remain in general circulation, and bank failures often resulted in
particular hardship upon tradesmen and laborers who customarily were
paid with such notes. However, there was no greater protection given
to noteholders than to depositors.
Obligations insured. The Indiana plan for the protection of
bank creditors was embodied in three short sections of the act estab
lishing the State Bank. Unlike the other five State programs for in
surance of bank obligations instituted prior to i860, it did not pro
vide for the creation of an insurance fund. Instead, the Branch Banks
were made "mutually responsible for all the debts, notes, and erjagements of each other". 3/ The principal items covered by the mutual
guaranty plan were circulating notes and individual deposits.
Methods of paying bank creditors. Payment of the debts of
a failing Branch 3ank was to be made by the other members of the
system if, after the assets had been liquidated and the stockholders
had made their required contributions, a deficiency existed. The
directors of the State Bank were charged with the duty of calling upon
1/ Resolution of November 21, 183^, Journal of the State Bank
of Indiana, MS, Indiana State Library Archives, Indianapolis, Indiana.
Hereafter, references to this volume are identified as "Journal".
2/ May 22, 1837, Indiana Letters, op. cit..
3/ An Act establishing a State Bank, January 28, 133^-, sec
tion 9* Its counterpart in the charter of the Bank of the State of
Indiana vas worded in similar fashion and had the same section number.

IV-5
Branch Banks for the necessary sura. 1/ If the amount realized
from liquidation of assets and from contributions of the stockholders
was not sufficient to meet all debts within one year, the State Bank
obliged to have the Branch Banks make up the deficiency then
existing, at the same time turning over to them the remaining assets
in return for such payments. 2j The same plan for the mutual guaranty
0f bank creditors was carried over into the charter of the Bank of
■the State of Indiana. jJ
Admission of banka to insurance. Indiana's insurance pro
gram was restricted to the Branch Banks. These banks automatically beCGiae
participating banks upon their formation, in much the same
fashion as national banks become insured today. I'To provision was made
or contemplated for the inclusion of any other banks in the insurance
program. Indeed, for the first 17 years of its operation all Indiana
hanks were included since no other class of bank was permitted in
the State.
Supervision and Regulation of Participating Banks
Supervisory authority. Responsibility for operation of the
mutual guaranty system was given the President and Board of Directors
of the State Bank and, after 1&57, to the same personnel in the Bank
of the State of Indiana. Wo other supervisory body was created. How
ever, the General Assembly of Indiana did reserve to itself the right
to investigate the Branch Eanks and had the power, as did the Governor
of the State, to institute court action to stop their operation or
close them entirely. 4/
The Board of Directors was made up of four members appointed
by the General Assembly and one representative from each of the Branch
Banks. Consequently, there were seventeen directors of the State
Bank (except for the first few years) and twenty-four of the Bank
of the State. The President of the State Bank was chosen by the State
legislature 5/, but this provision was dropped from the charter of
the Bank of the State, and the president thereafter chosen by the
Board of Directors from among its own members. 6/ Salaries and all
other expenses arising from supervision of the two banking systems
were met by assessments levied on the Branch Banks. Except for the
president and cashier of the State Board it is unlikely that members
of the board were expected to give full time to their duties.
1/ An Act establishing ..., section 46: An Act to establish
a bank with branches, March 3* l£55, section 4l. In the remainder
of this study these Acts will be distinguished only by the year in
which passed, i.e., 1834 or 18552j Section 47 (1834); Section 42 (1855 )•
3/ Sections 3, 41, and 42 (1855 ).
Section 23 (1855)* Unless there is specific mention other
wise, it should be assumed that statements as to the various regula
tions and provisions apply to both banking systems.
5/ Section 32 (1834).
%j Section 29 (lS55)»

It will be noted that in neither system were the State repreflfca-tivesa majority of the Board of Directors, even though the State
S+ one time held 50 percent of all Branch Bank stock. As the presi
dent pointed out in his first report to the legislature:
The state only appoints such a portion of the
officers, that she can, through then at all times
know the true situation of the institution; but
the control has been wisely committed to persons
chosen by the stockholders, that the steady course
of individual enterprise :aay never be interrupted
by political changes and revolutions. 1/
Bank examination. The supervising authority had araple
access to information. The law required that it examine each Branch
Bank at least once every six months and could do so more often if it
saw fit or if the directors of any Branch Bank so requested. 2/
Also, the Branch Banks were required to send condition reports to
the Board every month and could be inade to do so more frequently if
the Board desired. 3/
Functions of supervisory authority. As the supervisory
authority for the Branch Banks the State Board was charged not only
with examination of the banks but also with responsibility for the
naintenance of a stable banking system. Consequently, it was given
broad powers, some of which went much further than those given State
supervisory authorities today. The most striking single power pro
vided that the State Board could close a Branch Bank without the
necessity of appealing to the courts or to any other State agency or
official, kj Such action required a two-thirds vote of the Board and
could be taiten if, in the Board’s opinion, a Branch Bank was guilty
of any of the following offences: (l) had become insolvent, (2) was
"mismanaging its affairs" so as to endanger the interests of the other
Branch Banks, (3) had violated any of the provisions of the act
creating the system, or of any other act pertaining to it, (4) had
refused to comply with any legal directive of the State Board. 5/
A rather important power of the State 3oard related to the
volume of business done by the Branch Banks. The 1834 act limited
debts due the Branch Banks together, i.e., the State Bank, as well
as those due an individual Branch Bank, to not more than twice the
paid-in capital. Debts (exclusive of deposits) owed by the Branch
Banks, separately or together, were limited to twice the paid-in
1/ "Communication from the President of the State Bank to the
Senate", December 5; 183^-j Indiana State Journal, 1834-5# pp. 60-62.
Underscoring in original. Directors of the individual Branch Banks were
elected by stockholders, except for three appointed by the Board of Di
rectors in the case of the State Bank and two in the case of the Bank
of the State. The State appointed directors were less than a majority
of the directorate of each Branch Bank. The acts made no mention of
the voting rights of State-held stock and it does not appear that the
State voted its stock. For requirements to be met by Branch Bank di
rectors see section 71* 75 (193^); sections 66, 68 (1855)*
2/ Section 4l (1834); Section 36 (1855)*
3 / Section 43 (l334); Section 38 (l855)*
5/ Section 44 (1334); Section 39 (l&55)•
5/ Sections 44, 49 (1834); Sections 39* ^ (1855)- A perma
nent record of the vote of each director had to be made in these cases.

IV-T
■nital. l/ In IQ3 S this section was amended to permit the Branch
Banks, at the discretion of the State Board, to increase their loans
and discounts to not more than three times the amount of paid-in
capital at any one date and to average not more than two and one-half
times paid-in capital over the fiscal year. Essentially the same pro
visions irere carried over into the charter of the Bank of the Stats
in l8p5 *
In addition to setting an upper limit beyond which the loans
and discounts of the Branch Banks could not be expanded, the State
Board vas also given the further power to vary the ratio of loans
and discounts to capital so that, at the lower limit, loans and dis
counts of ar„y or ail of the Branch Banks could be held to one and
one-quarter times the paid-in capital. 3/ In contrast to the former
provision, this was not typical of bank restrictions of the time and
appears to resenble the authority over reserve requirements granted
the Federal Reserve Board almost one hundred years later.
It was probably the case that the framers of the law were
not interested in the amount of loams and discounts per se but in
the quantity of circulating notes. Since the granting of a loan
commonly resulted in the creation of circulating notes it was
assumed that a limitation on loans and discounts was at the same
time a limitation on circulation. So strong was this feeling that
in its first order to the Branch Banks the State Board apparently
forgot that its authority was expressed in terms of loans and dis
counts and ordered: "Until the next quarterly meeting of the Board
the several Branches shall not issue paper beyond once and a quarter
the Capital paid ..." hj The president of the Madison Branch Bank was
quick to note that the Board had technically exceeded its authority
and he therefore ignored the order. The reaction of the State Board,
expressed in a letter from its president, is significant: "I do not
see how you cannot be mistaken in the intention of the parent Board
to limit the loans and the discounts of the branches to once and a
qtr. the Capital until the 2nd Monday of February next:— and in
this way you should have construed the Resolution on that subject.
Our Board has no power to limit the issue of Bank paper ..." 5/
The treatment of deposits in these restrictions should be
noted. The 183^ law excluded deposits in limiting debts owed by
the Branch Banks while the 1855 law restricted loans and discounts:
"to an amount the average of which, for each fiscal year, shall not
exceed their deposits and two and a half tines the capital stock
actually paid in ..." 6/ Apparently deposits were not thought of
as a function of bank lending operations and, further, were tradi
tionally considered to be in specie. Thus, as the 1855 provision

1j
2/
3/
<-J
5/
%j

Section
(163*0*
Section 86 (1855 )*
Section Uo (183*0; Section 35 (1855 )November 20, 183^, Journal op. cit..
January 15 , 1835, Indiana Letters, op. cit..
Section 86 (1855'*

j.v-o
demonstrates, deposits could "be included in the base against which
iije voivme of loans and discounts was measured.
Despite the powers given the State Board, the Branch Banlcs
-etained a great deal of autonomy. Directors of each were chosen
ty the stockholders with the exception of a minority appointed by
the state Board and, within the limits set forth by the act, the
daily business of a Branch Bank was its own affair. 1/ Two points
at which the authority of the Board touched this business might be
cited: (1) no corporation could be indebted to a Branch Bank for
aore than $5?COO without consent of the Board, and (2) the Board
tad the power to limit the dividends of each Branch Bank to prevent
capital impairment. Contrariwise, the 3oard had the right to close
a Branch Bank if it was not able to pay a six percent annual
dividend. 2/
Statutory limitations on bank operations. The architects
of the Indiana system were evidently concerned over the possibility
that the Branch Banks mi^ht engage in types of business other than
banking. 3/ Consequently, after granting the usual banking powers
the legislature went on to prohibit bank activity in two important
areas. First, in a provision obviously aimed at speculative land
boons, the Branch Banks were not permitted to deal in real estate,
except to the extent necessary for the locations of their buildings.
All real estate obtained through mortgage foreclosure had to be
offered at public sale at least once each year. 4/ Second, both
the 1834 and 1355 laws forbade the State Bank to "use or employ
any part of its capital stock or other funds in the buying or
selling of goods, wares, or merchandise, or in any other business
or dealing, than is by this act authorized or permitted." p/
A number of other restrictions, similar to those in
other States at that time, were placed on the activities of the
Branch Barlcs: (l) loans for which Branch Bank stock was offered as
security were prohibited; (2) loans to individuals who were in
arrears in any payments due the bank were prohibited, unless the
amount due was retained out of the new loan; (3 ) security was
never to be lessened when renewals were granted; (4) directors
receiving loans were to be subject to the same terms as other
borrowers; (5 ) the officers and directors of the State Bank or
any of the Branch Banks could not endorse for one another, nor
could they vote in matters pertaining to themselves; (6) loans of
$500 or more required the consent of five-sevenths of the directors
and (7) dividends could not be paid an individual indebted to a
Branch Bank, although the sum due could be retained to his credit
at the bank. 6/
1/ In the case of the State Bank, each branch was permitted
from seven to tec. directors, the number being determined by the State
Board, which also appointed three of the directors; Section 67 . Branch
Banks of the Bank of the State could have between five and ten direc
tors, the number still determined by the Board. However, in their
case, the Board could only appoint two of the directors; Section 62,
2/ Sections 79, 54, and 57 (1834); Sections 74, 49, and 52
(1355).
3/ It was not unusual to find banks which also dealt in
other businesses. This was particularly true of unauthorized banks.

IV-9
As vas the case with almost every charter granted at that
time, a maximum rate of interest was established on loans and dis
counts.
In the case of the State Bank the rate was six per cent, 1/
but this was modified in the charter of the Bank of the State to
whatever rate was legal in the State. 2f A popular method in the
;,'est of evading such a limitation was to loan bank funds through
■brokers.
There is no evidence that the State Bank had resorted to
this practice but the implication is there since in 1855 it was
specifically prohibited in the charter of the Bank of the State. 3/
Provisions affecting notes issued by the Branch Banks were
less stringent than those of most States. Failure to redeem notes
in specie entitled the holder to receive 12 percent interest from
the time of refusal and also made the offending Branch Bank subject
to closure. 4/ The issuance of post-notes; i.e., notes payable on
c’.emand in specie after a stated period of time, was permitted. 5/
Notes less than five dollars were prohibited, although for a short
time in the early l840*s, when the suspension of specie payments led
tc a scarcity of small change, notes as small as one dollar were
allowed. To guard against counterfeiting and to provide a uniform
currency, the plates from which the notes of the Branch Banks were
printed were held by the State Bank, which in turn furnished the
Branch Banks with the required notes. 6/
Liability of bank stockholders and officers. The provi
sions of the 183-:- and 1655 acts creating the Branch Banks we re not
entirely clear as to the liability of bank stockholders. 7/ How
ever, it appears from a close examination of the relevant provisions
that stockholders were subject to double liability in the event of
a bank failure. 8/
So far as the officers and directors of the Branch Banks
(and also of the State Bank and Bank of the State) were concerned,
the act required that a failure be presumed to have resulted from
their fraudulent action and placed upon the burden of proving other
wise upon the officers and directors. 9/ If they were unsuccessful
their liability to the creditors of the bank was unlimited.
Number and Obligations of Indiana Banks, 1835-64
The thirty years during which Indiana's plan for the insur
ance of bank creditors was in effect may, for purposes of analysis,
1/ Section 13 (1834).
2/ Section 13 (1855 ).
3/ Section 13 (1855)Section 8(3834); Section 8 (1855 ). The same penalty was
provided in the event of a refusal to redeem deposits in specie.
Other States often provided that the charter was forfeited if specie
payments were suspended.
5/ Section 5 (183*0; Section 8 (1855 ).
Section 62 (183*0; Section 57 (1855)*
7/ Section 102 (183*0; Section 90 (1855)oJ See William F. Harding, "The State Bank of Indiana",
Journal of Political Economy, December 1395# PP* 6-7.
9/ Sections 100, 101 (1834); sections 88, 89 (1855)*

IV-10
be divided into two sub-periods: 1835-51 and 1852-64. The former
extends from the first full year of operation of the State Bank sys
tem to the last year in which banking in Indiana was restricted to
the Branch Banks; 1/ the latter begins with the addition of free
banks to Indiana's banking system and ends when most Branch Banks
were preparing to convert to national banks. 2/
Table 22 shows the number of Branch Banks and their princi
pal obligations for each year of both periods. Table 23 shows total
circulation and deposits of individual Branch Banks for six selected
date s.
Number and obligations of Branch Banks, 1835-51* Except
for the first few years, 13 Branch Banks were in operation during
this period. Ten of these had commenced business near the end of
1834, one had started in 1835, and two in 1838.
The importance of circulating notes relative to deposits,
which was noted earlier, is illustrated by Table 22. It will be
seen that after 183? the amount of circulating notes was generally
three to five times as large as total deposits. The reverse situa
tion during the first three years, 1835-37 # was due to large deposits
which the Federal Government maintained with several of the Branch
Banks. These deposits were a part of the large U. S. Treasury sur
plus which was deposited in selected State banks throughout the
countiy. Beginning in 1837 the surplus was withdrawn from the banks
and distributed among the various States.
The record of combined circulation and deposits of the
Branch Banks between 1835 and I85I reflects the intense prosperity
period of 1835-36, the depression of 1839-^2 # and the recovery and
subsequent period of stability of 1843-51* The severity of the 183942 depression is indicated by the fact that circulation and deposits
declined about 45 percent in these years. This was probably the
most trying period with which the Branch Banks were faced but no
failures occurred. However, a contemplated increase in the number
of Branch Banks was effectively checked and the number remained at
13 during the remainder of the period.
It will be noted from Table 23 that except for the first
year there was no marked concentration of risk for the insurance
system. For exarrple, in 1851 the Madison and Indianapolis Branch
Banks were the two largest banks, yet they had only about 21 percent
l/ It may be assumed that there were several private banks
in operation during the entire th£rrty years but data relating to
them are lacking. Those few which issued banknotes, in apparent vio
lation of the State constitution, were listed in the various banknote
reporters of the period. However, their business was undoubtedly
small and there does not appear to be any record of protest by the
Branch Banks that their monopoly rights were violated.
2/ In 1665 the State legislature gave the Branch Banks
official permission to liquidate and convert to national banks. How
ever, it is clear that some had begun to do so in the preceding year.
See John Jay Knox, A History of Banking in the United States, (New
York: Bradford Rhodes & Co., 1900), p7 700.

IV-JJ.

Table 22.

Year 2/

1335

1836
1337
1333
1639
1840
1841
1842
1843
1844
1845
1846
1847
1848
1849
1350

1851
1852
1553
1354

1855
1856
1857

1858
1859
i860

1861
1862

1863
1864

Number
of
Branch
Banks

10
11
11
12 y
13
13
13
13
13
13
13
13
13
13
13
13
13

5,603
3,910
3,941
3,695
3,652
3,722
2,182
2,602
3,538

_______

Circula1
Deposits
tion
Indivi- Inter■ Govern Miscel
Total dual
bank
ment
laneous
3
/
and
liabil
dJ
ities
business
*

1,53^
1,927

2,380
2,952

1,732
3,676
1,530

989

2,985
3,031
3,136

710

1,828
2,311

354
291
437
496
623

621
586

3,960
4,458
4,260
4,071
4,177
4,870

3,101
3,667
3,337
3 ,6c6
3,552
3,304
3,422
3,935

5,094
4,829
3,977
4,084
4,195
4,076
5,657
5,202
6,997
5,376
7,898
7,648
4,419

3,861
1,233
3,832
994
946
2,995
748
3,336
813
3,385
3,278 5/
798
4,502
1,141
4,303
899
5,764
1,233
4,822 5/ 1,054
2,382
5,516
5,680 5/ 1,968
1,560
2,859

4,163

20
20
20
20
20
20
20
20
/

Total
obliga
tions

3,266

13
13
13
13
13

Obligations, Indiana Branch Banks, 1835-64
(Amounts in thousands of dollars)

852
7C8
767
755
935

380

226

1,126

432
336
394

899
431
323

2,345
763

320
298
272

272
183

157

272
llS
140
157

184

189

293
359
410
556
453

54
52
76
121
104
154
107

556

118

48
92
61
92
192
101
184
81
134

476

630

171

805

320

716

107
42
28
32
—

108
171
630
274
121
599
605
176
625 5/ 173 5/
986
155
834
65
46
1,187
979 5/ 75 5/
2,040
342
1,745 5/ 223 5/
2,756
103

—

—
-

—
— —

1/ Sources; Harding, op. cit., Table IV;Annual Reports of
the State Bank and Bank of the State.
2j Most reports of condition were made in the second or
third week of November.
3/ Includes deposits of both the Federal and State governments.
After 1856 such deposits were apparently included with individual and
business deposits.
4/ Michigan City Branch Bank was formed in December of 1838,
after the report from which 1838 data were secured was submitted. It is
possible that the data also do not include circulation and deposits of
the South Bend Branch Bank which was formed just prior to the 1838 re
port .
5/ Sstimated by subtracting from circulation and deposits for
all Indiana banks, as shown in l8?6 report of the Comptroller of the
Currency, the respective amounts attributed to free banks, taken from
State Auditor reports for the indicated years. Since the two sets of
reports were presumably for different dates, and also because data for
free banlcs were not always complete, the resulting estimates can only
indicate the order of magnitude of the individual items.

' n

I c t r

L t i I.

L C Ji 1

IA I*\

| jf

Jil V

l i i ' l

W u u i

1V ..11 f

H im

(A m oun t t> I n t li u u a a i ^ u

I* * ;\ t

i*. \ . t

v j

oV d o l l u r s ' )

ClrcuKVtluti feWo tk^^ooltG

1035
Total
Branch Banks, total 2/
$3,265
Branch “banks located at:
149
Bedford
Connersville
Evansville
176
Fort Wayne
964
Indianapolis
Jeffersonville
Lafayette
La Porte
Lawrenceburgh
Lima
Logansport
Madison
Michigan City
Muncle
New Albany
Plymouth
Richmond
Rushville
South Bend
Terra Haute
Vincennes

248

251

1851

1843

.100.0$ $2,602
4.6
5.4

29.5
7.6
7.7

100.0#

172

6.6

144
284
355

10.9

5-5

13.6

$4,672

100.0g

55^5-------------------------T5C5------------

$3,939 100.0$ $5#646

193

4.0

327

6.7
8.6

331
3^6

10.5

381

419
511

277

10.7

443

3.0

474

134

3.^
8.4
8.8
9.7

9.1

364

9.7

450 11.4

9.2

310

4.0

387

6.9

1.9

420

7A
4.1
k.7
3.6

265

26/
654
338

455
244

3.^

8.3
5.8
3.1

3.6
6»3

125
524

1.6
6.6

4.5

389

8.0

190

251

4.4

4.8

465

8.2

443
553

5.6
7.0

189
155

6.0

349

7.2

367

9*3

^73

157

6.0

4.6

8 .1

191
322

4.9
8.2
7.3

290

175
684
271
356
514
295

2.2
8.7
3^
4.5

211

224
395
324

3.3
8.4
4.1
3-8
5.7
5-1

247

514

15.7

191

202
35^

617
331
556

261

114

6.6
5.8

5.8

3.9
2.3
7.8
4.2
7.0

6.3

7.6

231

8.9

10.6

185

109
229

309

307

9.3
7.0

215

517

100.C$

8.0
6,6

241
182

9.5

1 0 0 . $ 7,896

241
244
325
228

203

8 .1
6.6

TlJ Source: Annual Reports of the State Bank and Bank of the State.
2/ May differ from totals shown in Table 22 because of rounding.

MfeU ~~

Percent Total Percent Total Percent Total Percent Total Percent, Total Percent
of total
of total
of total
of total
of total
of total

313

289

231
217

323

6.5
3.8

IV-13
of total circulation plus deposits.
Number and obligations of Branch Banks, 3852-64. The number
of Branch Banks remained at 13 through 1856. When the Bank of the
State of Indiana succeeded the State Bank there vas a net increase of
7 Branch Banks, as 8 new ones were formed and 12 were continued in
the old locations. Only Michigan City was not represented after 1856.
Total circulation and deposits of Branch Banks increased
substantially during this period, reaching a high of almost $8 million
in 1862. This was a reflection of the increased number of Branch
Banks and, after i860, of the impact of the Civil War upon the
State's economy. These data, which are shown in Table 22, also re
flect the panics of 1854 and 1857* both of which were weathered
successfully by all of the Branch Banks. As in the first period, no
Branch Banks failed, and the Branch Banks of Indiana thus compiled
a remarkable record for stability over a thirty-year period marked
by at least two severe depressions.
The volume of circulating notes continued to exceed total
deposits in this period, although in the later years deposits tended
to grow faster than circulating notes. The sharp decline of circula
tion in 186U is presumably explained by the deliberate withdrawal
of notes from circulation as the Branch Banks prepared to convert
to national banks.
The distribution of total circulation and deposits among
the individual Branch Banks during this period, as shown in Table 23,
indicates that, to the end, the Indiana insurance system was not en
dangered *>y a concentration of risk in one or a few Branch Banks.
Number and obligations of all Indiana banks, 1852-64. Table
24 shows the number and obligations of all Indiana banks in the
period 1852-64, by class of bank. The Table includes the free banks,
which were authorized in 1852 but did not participate in the insurance
program.
The number of free banks increased rapidly after 1852,
reaching a high of 91 in 1855* Since the number of Branch Banks re
mained the same until 1857 only about 13 percent of all Indiana
banks were participating in the insurance program in 1855* However,
the larger size of the Branch Banks is indicated by the fact that
even in 1855 almost half of the total circulation and deposits of
all Indiana banks was protected by insurance.
The failure of many of the free banks in 1855 and in
several of the following years, and the increase in the number of
Branch Banks in 1857, resulted in a marked rise both in the proportion
of all banks participating in insurance and the proportion of total
circulation and deposits so covered. After 1857, and until the
final year of the period under review, Branch Banks constituted more
than half of all banks and their combined circulation and deposits
amounted to about three-fourths of the State total.

X 1 i£ i i t ; 1 v j t i J

(Amounts

All banks

1 i l i ll t i

lAV/r^-CH

Branch Banks

Free Banks

Year 2/
Humber
1852
1853
1854
1855

1856
1857
X858
1859
1860

1861
1862
1863
1861+

28
43

103

104
53
46
38
37
40
38
38
34
30

Obligations
6.184
9,563
15,472
9,084
7,196

Number

Obligations

Number

Obligations

1,090

5,094
4^829
3,977
4,084
4,195

15
30
90
91
40
26

7,450

13
13
13
13
13
20
20

7,161

5,657

5,202

5.000
3.001
2,962
1,807

1,959

9.185
7,672
10,155
10,248
6/541

20
20

6,997
5,876
7,898
7,648
4,419

7,038

4,076

3 or dollarQ)

in thouE

18
18

4,734
11,495
6/

2,188

1,796
2,257

2,600

2,122

y
%
u

Branch Banks
as
-U a
U percent
1 VjV 111/W
of all, banks
46.4

30.2
12.6
12.5
24.5
43*5

52.6

54.1

50.0
52.6
52.6
58.8
66

Percent of total
obligations in
Branch lianks____

82.4
50.5
25.7
45.0
58.3
57.9
75.9
72.6
76.2
76.6
77.8
74.6
67.6

1/ Sources: Free bank data from Annual Reports of Auditor of the State, except as indicated belo^fi
For State Bank and Bank of State data see Table 22, note 1.
2/ Dates of reports of free banks and Branch Banks Generally differed, in any one year, from two to five
months.
3/ Maurice 0'Rear, An Analysis of Commercial Banking in the State of Indiana, unpublished dissertation,
Ifaiversity of Chicago.
”
~
4/ Circulation as reported by Ross (see note 6) for 15 free banks plus deposits as reported in January
I853 to Auditor of State by 10 free banlcs.
5/ Condition as of July 1, 1855, as reported in Governor's message (see note 4) plus deposits as reported
by 46 banks on same date.
6/ "Report of the Joint Select Committee to Investigate the Condition of the Free Banks", Indiana Documents,
---------------1853-54, pp. 915-918.
7/ Estimated from "Governor's Message to the General Assembly", January 4, 1855, Indiana Documents, 1853-54,
and Auditor of State Report of condition of free banks as of January 1856.

iv-15
History of the Operation of the Insurance Plan
Branch Bank record. During the 30 years of operation of
Indiana’s insurance plan creditors of the participating hanks enjoyed
a degree of security unmatched by any other plan for the insurance
of bank obligations. Not a single depositor or noteholder suffered
a loss because of inability of a Branch Bank to meet its obligations.
No Branch Bank failed, though one suspended operations for
a few months at the instigation of the State Board. The lending
policies of the Lawrenceburgh Branch Bank had drawn the criticism
of the Board for a number of years, beginning in 1839* 1/ Unable
to resolve the difficulty, the State Board closed the bank in the
fall of 18^3 and the president announced that: "receivers are now
in possession of the effects of the branch. Until redeemed by them,
its paper will be taken as heretofore by the other branches ..." 2/
The situation of the branch, which apparently first appeared
hopeless, was better than expected and only a few months were re
quired to rights its affairs. No assessment was levied on the other
Branch Banks, nor is there any evidence that a creditor of the
Lawrenceburgh Branch Bank suffered a loss. The 1844 Annual Report
to the State legislature noted: "the Lawrenceburgh Branch ... by
order of the State Board, has been restored to its former functions
and franchises, under auspices altogether favorable to its future
prosperity and usefulness. The re-installment took place on the
26th day of February last ..." 3/
This seems to have ended the
controversy and Lawrenceburgh continued to maintain one of the
most active banks in the mutual guaranty system.
Comparison of records of Branch Banks and free banks. Un
fortunately, the creditors of banks not participating in the Indiana
insurance program did not fare as well. Between 1354 and 1363 no
fewer than 68 free banks suspended operations. Fifty-three did so
in the period l8f>4-55> while most of the remainder were not able to
survive the panic of 1857 * It will be recalled that at one time about
90 free banks were in operation so that the failure rate was well
over 50 percent.
Losses suffered by creditors of the failing free banks do
not, at first glance, appear to have been excessive. Free banks
were required to secure their circulating notes by depositing Federal
and/or State bonds with the State Auditor equal to 100 percent of
the face value of the notes. 4j Examination of the reports of the
1/ January 22, 1839* Indiana Letters, op. citTI
2/ "Report of the President of the State Bank," December
1843, Indiana Documents, 1342-43.
3/ "Annual K^port of the President of the State Bank,"
December 1844, Indiana Documents, 1343-44.
4j This requirement was changed to 110 percent in 1855-

IV-16
State Auditor indicate that about $230,000 was lost by noteholders.
At its peak, circulation of the: free banks was about $9,000,000 so
that the loss amounted to less than three percent of the total.
Table 25 provides information on losses to noteholders.
Table 25
Losses to Noteholders, Indiana Free 3anks, 1855-62 1/
Note circulation
Amount of
Humber of
at time of
circulation
suspension
not
redeemed
Year
suspensions
1855

1856

1857
1358
1859
i860

1861

1362
Total

53
-

10
1
2

$2,860,134

$155,^23

67,740

153,5 W

908

48,551

1
1

40,226

$3,103,367

6,034

$229,197

l/'Annual Reports of the Auditor of the State.
It is probable that the actual loss to holders of the
notes at time of suspension was gieater than the indicated sum. In
the chaotic situation which characterized the free banking system
in 1854 and for several years thereafter it is likely that many
noteholders were persuaded by the banks or by speculators to part
with their notes at substantial discounts.
It may be presumed that depositors in the free banks
suffered a relatively greater loss than noteholders. Deposits had
no special security beyond the general assets of the bank and the
liability of the stockholders. Little information is available on
these losses but when it is recalled that many of the banks were
recklessly and even fraudulently operated it may be presumed that
depositors were inadequately protected.
Losses to depositors in the case of the free banks take
on added significance when it is pointed cut that deposits constitu
ted a larger percentage of combined free bank deposits and circula
tion than was true for the Branch Banks. In three of the years
between 1&53 and 1364 deposits in the free banks exceeded circula
tion and over the entire period deposits, on the average, were
about equal in amount to circulation.
Appraisal of the Supervision and Management of the Branch Banks
Supervision of banks included in Indiana's mutual guaranty
system appears to have been of particularly high quality over the

IV-17
entire period. 1/ The State Board was diligent in requiring that
the Branch Banks conform with charter provisions. What discretionary
authority the Board possessed vas used primarily to insure the sound
ness of the individual Branch Banks and of the system as a whole
even, as critics sometimes maintained, at the expense of depriving
the State of the quantity of circulating medium which it needed.
Between 1834 and 1842 there occurred the Specie Circular
of 1836, the withdrawal, beginning in 1837 , of the large deposits
of the Federal Government, the financial crisis of 1837 culminating
in the countrywide suspension of specie paynents, and, finally, a
second suspension of specie payments followed by prolonged and
severe depression. In addition, the State of Indiana contracted
during this period for the construction of an elaborate system of
internal improvements which later had to "be abandoned. That the
Branch Eanks of Indiana were able to survive this combination of
events, so disastrous for many of the nation’s banks, can be
attributed in part to the kind of supervision they received.
Adequacy of examinations. Examination of the Branch Banks
by the State Board was required at least once every six months.
From the success of the system in avoiding bank failures due to
large defalcations or to mismanagement, it must be assumed that
examinations were well conducted over the entire period. Certainly
this was the case under the first president, Samuel Merrill, con
cerning whose examinations the cashier of one of the Branch Banks
later commented:

As no notice was ever given of the time these
examinations were to be looked for, no special pre
parations could be made for them by the officers
of the branches, and they were always of the most
searching and thorough character. So searching and
thorough were they that fraud and mismanagement
could hardly have escaped detection. 2/

Some of the problems which faced these bank examiners
were similar to those which examiners meet today, while others
were peculiar to the time and area. Examination policies in 1840
are illustrated by the following letter, quoted in its entirety: 3/
1/ Three men served as president of the State Bank, between

1834 and 1857, while the Bank of the State had only one president
during its relatively short life. This position, similar to that of
a State Bank Commissioner today, was filled by Samuel Merrill,
James Morrison, and Ebenezer Dumont for the State Bank, and by Hugh
McCulloch for the Bank of the State. McCulloch later became the
first Comptroller of the Currency, following which he served as
Secretary of the Treasury in three administrations.
2/ Hugh i-lcCulloch, Men and Measures of Half a Centurys
(Hew York: 1888), p. 114.
Zj Harch 9, 1840, Indiana Letters, op. cit..

IV-18
Ste. Bank March 9, 1840
Sir:
You are appointed an Examiner on the part of
the State Bank to visit and examine the 3ranches at
Fort Wayne, South Bend, and Michigan City, previous
to the May Session of the State Board. You can con
sult your convenience as to time, but perhaps it
would be best to go on horse back from your place
to Fort Wayne, thence 80 miles to South Bend, Thence
37 to Michigan City, Thence by Laporte 82 miles to
Logansport. I annex a copy of Interrogatories pro
pounded to the Branches.
Yours Truly,
S. Merrill, Presd.
Question
No. 1.

Do you know of any proceedings in your Branch
which are not allowed by the Charter, and if
so what are they?

No. 2.

For what period are your notes discounted, and
what is the usual requisition on renewing
notes?

No. 3*

Are there any Directors in your Branch who do
not regularly pay the usual curtailments
on their loans, and if so who are they, and
on how many occasions since they have been
Directors have they neglected to pay such
curtailments?

No. 4.

Are any of your stockholders permitted to re
new their loans without curtailment, and if
so what is the amount of their loans and the
stock held by them?

No. 5*

Can your stock be sold at par or over for
cash, or on short credits, or if not, what
prices can it be sold in either way?

No. 6.

Are Notes renewed for persons who do not or
cannot make any curtailment without requiring
better security for the same, and if so what
are the reasons for granting such favors?

No. ?■

When notes are renewed without curtailment,
are any reasons spread on the minutes by any
of the Directors to prevent their being
liable in their individual capacities for
losses if such should occasion the insol
vency of the Branch?

IV-19
Ho. 8.

What is the amount due your Branch from persons
who do not pay regular curtailments on their
notes, and do any such persons obtain new dis
counts and if so, who are the persons obtaining
these discounts, and what is the amount due from
each?

No. 9 . What is due from each of your Directors?
No. 10. What amount is due from stockholders who owe more
than their stock and what is the amount of their
stock?
No. 11. What amount of stock is owned by persons who
owe nothing or less than their stock?
No. 12. What is the amount of actual payments on Bills
and Notes the last SO days and what is the
usual proportion of payments?
No. 13* tflaat is the amount of your Loans in the hands
of Dry Goods Merchants and what amount of money
has been loaned to this class of borrowers
within the last 90 days?
No. 14. Do you know of any Loans being made by our Branch
in the name of one person for the benefit of
another, or do you know of any Directors or
officer of the Bank who use the names of others
to diminish their apparent indebtedness, and
if so state the particulars?
No. 15* What is the suspended debt in your Branch, what
part of it is in suit, what part is considered
doubtful, and what part desperate?
No. 16 . What is the usual premium charged on the purchase
of Bills of exchange at the principal points
where they are payable?
No. 1 7 . What is the amount of purchased notes on hand,
and what is the average discount charged?
No. 18. What amount beyond your present discounts could
your Branch loan cgiarterly which would be punctually
paid on an average of not more than six months?
No. 19* What preference if any is given to Directors
and Stockholders?
No. 20. When business paper— of Merchants, Farmers,
Manufacturers, exporters of produce, and other
classes of business men apply for Loans— what
is the order in which they are preferred?
No. 21

Are new discounts ever made to persons who suffer
their paper, either for collection or loans to lie
under protest?

IV-20
Loans to officers, directors and stockholders. It will "be
noted that a number of the questions in the above letter deal with
loans to bank officers, directors, and stockholders. This is, of
course, still an object of inquiry today, but the problem was much
©ore acute at that time. Excessive loans of this sort were dangerous
for a bank, not only because through constant renewal they turned into
long-terms loans 'out also because they provided opponents of banking,
ttiio were then particularly strong, with telling arguments for the
aboliton of all banking. Indeed, Merrill commented in a letter to
Henry Clay in l8Ul: "Nearly all of the difficulties in managing our
institution have arisen from the large loans to Directors and stock
holders in a few br. who subscribed stock not for the Dividends but to
borrow money.’* 1 /
The letters of the President of the State Bank testify both
to the concern with which supervisory officials viewed such loans and
to their efforts to restrict them so far as possible.
One of the earliest and most serious cases involved the
Lafayette Branch Bank. Apparently the cashier and several of the di
rectors had borrowed quite heavily. The State Board strongly condemned
this but the Board of Directors of the Branch Bank refused to do so.
Thereupon., the State Board declared that either the offending officers
leave or the 3ranch Bank would be suspended. One of the letters
dealing with this case illustrates the attitude of the State Board;
The requirement of Mr. ____ 1s resignation was not
considered by any one of the State Board as a matter
personal towards him, but he had been guilty of several
matters which the Branch board had refused to disapprove
... All that the State board expect is that your branch
shall by its safe, prudent and honorable management,
recover and retain public confidence ... I suppose this
might be done much more effectually even than by re
moving the Cashier if your Directors who are large
borrowers would resign and their places could be supplied
by prudent, sensible men, iaot borrowers ... If you think
this can be brought about and it should be done very
little inquiry will be made as to the Cashier and if he
be as he ought to be, the agent of safe and prudent
Directors, it is their business alone to select him.
But to have Directors generally large borrowers, receiving
special favors of the Cashier and each other; suffering
their own notes to be under protest: refusing to dis
approve misconduct in their agents: and favors at the
expense of the bank granted by the Cashier to the Di
rectors: such acts when taken together are of a character
not to be tolerated. The State board must have assurance
that matters will be managed otherwise or your branch
must and will be suspended. Either Mr. ___ or the
persons who have been tempted ... to use him to their
own purposes must leave the branch. 2 /
1/ May 29/ 1841, Indiana Letters, op. cit..
Underscoring
in the original.
2j June 6 , 1838, Indiana Letters, op. cit.. Underscoring
in the original; names deleted by author.

IV-21
The Lafayette affair was ended, with the resignation of the
Cashier, but in the Lawrenceburgh case it will be recalled that sus
pension of the Branch Bank was the ultimate decision. Although the
latter bank had violated a nusiber of regulations of the State Board,
its major offense was the favoritism shown certain of the stockholders
and directors in making loans. In 1839, for example, Merrill wrote:
I
must fear that there are almost no stockholders
in the Law. br. who hold the stock for any other purpose
than to borrow money ... I fear too that there are at
least three directors in the branch who would fail at
once if they were called upon to pay even an eighth
every three months ... I do not doubt the good intention
of your Cash, according to his notions of propriety
but I believe he manuvers too much. 1/
So critical was the problem of loans to stockholders of the
Lawrenceburgh Branch Bank that, on one occasion, Merrill took the
unusual step of writing directly to one such borrower, suggesting
that if his loans and those of the other stockholders were not re
paid the Branch Bank would have to be suspended. 2/
Although the Lafayette and Lawrenceburgh cases were perhaps
the most serious, they were not the only ones to come to the attention
of the State Board. Loans to stockholders and directors in the
Branch Banks at Bedford, South Bend, and Michigan City also drew the
criticism of the State Board. The Board did not object to all such
loans but only to those which gave evidence of becoming permanent.
Perhaps the best indication of its position is found in a letter
from Merrill to the Cashier of the Lawrenceburgh Branch Bank:
Though it may not be wrong to loan money to a
Director for the promotion of public improvement, or
for some useful object in the same manner as would be
allowed to others, yet if Directors are suffered to
renew their notes without curtailment the reason
for each proceeding should appear on the minutes, and
if the building a Mill or other sufficient cause be
alleged for the grant of such a favor I suppose no
complaint could be made. I notice that Mss. _____
and ____ have several times renewed their notes
without any reduction. If there be any special
cause why they are more favored than others, it
would be well to state the same in a Resolution of
your Board, to be forwarded up to the State Board ...
but if you have inadvertently made allowances in
these cases which should not have been it would be
well by Resolution of your Board, to condemn the
practice and abandon it hereafter. 3/
1/ August 3. I&39» Indiana Letters, op. citTI
2/ December 3, 1842, Indiana Letters, op. cit..
3/ March 3 , 1840, Indiana Letters, op. cit.. Names deleted
by author.

VI-22
Limitation, of loans and discounts. The power of the State
Board to vary the maximum ratio of loans and discounts to capital
has been discussed earlier. From the nature of the period following
the great depression of the early 1340*s, it is doubtful that much
use was made of this power. However, in the earlier years the
recoI'd indicates that it was used frequently.
At the commencement of operations in 1634 loans and dis
counts were ordered held to the lowest level; i.e., one and a
quarter times capital. 1/ In the prosperous period which followed,
loans and discounts were permitted to increase almost to the limits
set forth in the charter. However, in May of 1836 the State Board
anticipated the panic which was to engulf the nation's money markets
one year later. In view of the "state of the currency and exchange
in the West, and the heavy demands made by the Secretary of the
Treasury on the ... branches", the Board resolved that ’’the Branches
be advised to prepare at the close of this present quarter to re
duce their discounts to an amount not exceeding twice the amount of
capital paid in, that they be advised to act with great Caution
as to the Species of Business they encourage by Bank facilities." 2/
In November of the same year the restriction on discounts
was lifted, only to be returned the next spring as a consequence of
"the rapid withdrawal of the United States Deposites, and the con
fusion that now prevails in the money market." 3/ As was noted
previously, several of the Branch Banks were among the banks used
by the Federal Government for the deposit of its surplus balances.
In June 1836, an act for the distribution of the surplus among the
States was passed, to take effect January 1, 1837* It is possible
that the Indiana deposit banks received their call for the deposits
about April 1, 1837*
From the letters Merrill wrote in the months immediately
following this order, it appears that difficulty was met in only two
cases. On July 21, iQjl, Hugh McCulloch, then Cashier of the Fort
Wayne Branch Bank, was ordered to explain his tardiness in reducing
discounts, 4/ Later in the same year, Merrill informed the Lafayette
Branch Eank that the State Board would be forced to exercise its
right to suspend a Branch Bank for failure to obey its orders unless
a reasonable explanation of its course was provided. 5/ Evidently
these warnings were sufficient and the erring banks brought back
into line.
It soon became apparent that orders respecting the contrac
tion of Branch Bank discounts ran counter to the Board's desire to
encourage loans to individuals engaged in the export trade. Not only
was the export of the surplus produce of the State essential to its
economic growth but also, as is indicated in several of the questions
in the examination letter, the Board felt that paper arising from
the trade was ideally suited for the Branch Banks* portfolios.

1/
2/
V
5/
5/

See p. IV-7 above.
May 19, 1836, Journal, op. cit..
Ibid., May 18,15377"
July 21, l&37j> Indiana Letters, op. cit..
September 8, 1837, Indiana Letters, op. cit..

IV-23
However, when the discount line was reduced the Branch Banks complied
by allowing their holding of bills of exchange and other short
paper to run off. At the same time, the volume of accommodation paper,
i.e., renewable notes of individual borrowers not based on a particu
lar commercial transaction, remained stationary. Consequently,
starting in 1837, orders of the State Board relative to the ratio of
loans and discounts to capital became more selective.

In November of 1837, the Board notified the Branch Banks
that "whereas it is of great importance to the interests of this
State that such bank accommodations should be extended to the ex
porters of produce ..." they were authorized to extend their dis
counts to two and one-quarter times paid-in capital by “discounting
such paper". 1/ Later orders continued to favor this kind of paper
and, at the same time, struck directly at accommodation notes. In
August of 1839, discounts were restricted to one and one-quarter
times capital, unless on prompt paper of not more than six months. 2f
As Merrill explained in a critical letter to the South Bend Branch
Bank: "One of the orders or rules of the State Board for the govern
ment of the branches requires in substance that the branches respec
tively shall not discount accommodation notes exceeding once and a
fourth the capital actually paid in." 3/
On occasion the State Board singled out individual Branch
Banks in its orders. The banks at Lawrenceburgh, Madison, and Kew
Albany were ordered in 1839 to keep at least one-third of their
total discounts in bills of exchange not having more than four months
to run. bj In 1840, the South Bend Branch Bank was ordered to hold
its discounts to one and one-quarter times its paid-in capital and
was forbidden to renew accommodation notes unless at least one-tenth
of the principal was paid at each renewal. However, it was speci
fically authorized to discount up to $30,000 in new bills of exchange,
provided they were not presented by individuals already indebted to
the branch. 5/
Real estate loans. In the course of steering the Indiana
banking system through its difficult early years, supervisory
authorities had to contend with the effects of the speculative land
boom which raged in the middle 1830*s. The 1835 Annual Report of
the State Bank to the legislature took a strong stand against loans
based on real estate security. 6/ Private instructions which went
to the Branch Banks indicate that the concern was real. In a letter
to the officers of the Lafayette Branch, Merrill wrote: "As we have

1/
2/
3/
5/
5/
b/

November 25, lei37> Journal, op. cit..
Ibid., August Ik, iSyf.
October 27, 1840, Indiana Letters, op. cit..
August 14, l839> Journal, op. cit..
November 11, lSUO, Journal, op. cit..
Report, December 12, 1835, op. cit..

IV-24
ao difficulty in securing loans on real property not subject to such
variations in price we reject in all cases where there is any sus
picion of a high valuation and in general we take no town lots unless

in very special cases." 1/ The fact that the Branch 3anks weathered
the collapse in land values which took place soon after, and which led
to the failure of many western 'banlcs, is indication that the policy
was successful.
Internal improvements loans. Merrill and the State Board
had no illusions as to the danger the State internal improvements
program held out for the Branch Banks. An 1340 letter emphatically
warned against any "connection with the Internal Improvements of the
State which it is highly important both for our credit and interest
to avoid." 2/
Since the State was a stockholder and was represented in
the management of the State Bank, the Branch Banlcs could not entirely
ignore the program. However, they endeavored to serve only as trans
fer agents for internal improvement funds raised by the State through
bond sales in the East and abroad. Money was advanced the State by
the Branch Banlcs, which were then repaid out of the receipts of bond
sales. However, when the State ran into difficulty in placing its
bonds the Branch Banks found that they had in fact made long-term
loans of about $700,000• This was the full extent of their partici
pation, and although it resulted in some difficulties seems to have
done no permanent danage.
Policy during suspension of specie payments. The Branch
Banks, along with all other western banlcs and most banks in the
country, were forced to suspend specie payments twice within five
years after they had opened for business. The dates at which banks
in the various States suspended differed but, in general, the two
periods of suspension were from the spring of 183? to the summer of
1838 and from the summer of 1839 to the summer of 1342. The State
Bank of Indiana suspended specie payments in May 1337, and resumed
in August 1838. It suspended again in November of 1839 and resumed,
never to suspend again, in June of 1842.
In periods of suspension there was a strong temptation for
unwise bank management to expand loans and discounts, even if pro
hibited by law. The reason, of course, was that banks were free of
i/ February 1, IH36 , Indiana Letters, op. cit.. Town lots,often located in towns not yet in existence, were a particular
favorite of speculators.
2/ September 23, 1840, Indiana Letters, op. cit..
How dis
astrous such an alliance would be was illustrated by the case of the
State Bank of Illinois. From the beginning the State regarded the
bank as an important agent in its plans for internal improvements.
To pay interest on the funds borrowed for internal improvements' pur
poses it invested heavily in bank stock, paying for the stock in ad
ditional state bonds which the bank was unable to dispose of. The
decline in value of the bonds was an important factor in the failure
of the State Bank of Illinois in 1842.

IV-25
obligation Of having to redeem their notes in specie and could
tfaus operate on a smaller reserve. Such a policy usually proved to
•be disastrous, however, because of the abnorraally large demand for
specie when the breathing spell ended.
Supervisory authorities in Indiana did not permit the Branch
Banks to become vulnerable in suspension periods. In March 1037,
loans and discounts of the State Bank were the highest since 1834,
amounting to well over $4,000,000. They then declined until the
gnnimer of IS38 . The resumption of specie payments at about that time
led to a new rise which carried loans and discounts to just under
$5,COO,000 in March 1339* The second suspension of specie payments,
occurring in 1839, lasted until 1842. During this period loans and
d i s c o u n t s showed some variation in response to the needs of the
community but the trend was downward, so that when resumption took
place in June of 1842 the total was well under $3,000,000.
ITote circulation showed the same general movement. A peak
was reached in April 1837 , after which the trend was downward until
the late summer of 1838. Another high was reached in June 1339, and
thereafter circulation declined until November 1842.
Political entanglements. The bitter contest in 1832 be
tween the major political parties over the rechartering of the second
Bank of the United States made banking a leading issue in almost
every political campaign during the 1830's and 1340's. The anti
bank forces, and especially the hard-money wing of the Democratic
party, lost few opportunities to criticize banks, particularly the
chartered institutions. In some States the failures of several of
the leading banks were in great part due to such politically inspired
attacks.
The State Bank of Indiana vas not able to sidestep this
problem completely. 1/
Nevertheless, it appears to have been the
conscious policy of the supervisory authorities to avoid those
practices which always provided fuel for anti-bank forces. Post
notes, for exariple, were in Merrill's opinion only justified in
periods of crisis. 2/ When he discovered that the Lawrenceburgh
Branch Bank vas issuing such notes in 1839 he ordered it to stop and
informed the Branch Banks that they were not to accept the notes. 3/
The avoidance of excessive lending to directors and stockholders has
already been cited. Another unpopular activity of banks involved
securing higher rates of interest than were permitted, through the
device of "purchasing" notes or bills of exchange rather than dis
counting them. Typical of a number of letters by Merrill on this sub
ject was one to an official of the Bedford Branch Bank: "The power

1/ One of the most severe political attacks was Hiade in a
report by Mr. Judah of the General Assembly, January 29, 1838. Journal
of the House of Representatives, 22nd Session of the General Assembly,
1837 -3^* 2j Post-notes were redeemable by the issuing bank only after
a stated period, usually six months to a year, after the date of issue.
They commonly did not pay interest.
3/ October 3, 1839, Indiana Letters, op. cit..

TV-26
to in the last query seems to "be given by the Charter, but
if exercised should be met with much caution." 1/

referred

Supervision after 184-5. After emerging from the depression
period, the Branch Eanks apparently continued to receive supervision
which seemed directed to maintaining their soundness. Correspondence
is not available for this period but continued maintenance of high
capital ratios and substantial specie reserves testify to this policy.

The policy of favoring borrowers who were engaged in the
export of surplus produce seems to have been continued and even in

tensified.

Advances to exporters commonly took the form of dis

counting bills of exchange drawn on eastern and southern importers.

Although several of the Branch Banks did a substantial amount of
such business from the beginning, in 1835 the "bills of exchange1' part
of loans and discounts for all Branch Banks combined amounted to less
than 25 percent. However, by the 1850's "bills of exchange” accounted
for well over 75 percent of the discount business of the State Bank.
The change in this aspect of the Branch Banks' business is illustrated
in Table 26.
Perhaps the clearest indication that the State Bank con
tinued to be managed in a conservative manner is supplied by the fact
that the most frequent and telling criticism of the system was on
the ground that it was not expanding the volume of currency as rapidly
as vas desirable. So effective was this charge that it was impossible
for the State Bank to secure a renewal of its charter.
The organization of the Bank of the State of Indiana, as
indicated previously, was effected only after some dubious, and
possibly fraudulent, activities on the part of its promoters. As a
result the public was understandably suspicious of the new system.
Nevertheless, it
very largely redeemed its reputation as a result of
the very excellent management provided for it. Hugh
McCulloch, a former president of the branch of the
Second State Bank of Indiana located at Fort Wayne,
was chosen as president of the new bank; and James
M. Ray, former secretary of the board of directors
and cashier of the Second State Bank of Indiana,
was appointed cashier. 2/
Although little is known of the quality of supervision
accorded Branch Banks during the later years, the fact that the banks
weathered the panic of 1357 without even suspending specie payments,
1/ December 27» 183^, Indiana Letters, op. cit..
2/ See Maurice O'Rear Ross, An Analysis of Commercial Banking
in the State of Indiana, unpublished dissertation, University of
Chicago. P.oss refers to the State Bank as the "Second" State Bank
,fbecause the old Ban!: of Vincennes, chartered before Indiana became a
State,had for a very brief period operated as the State Bank of
Indiana."

IV-27

Table 26 . Discounted Bills of Exchange, State Bank of Indiana, 1 8 3 5 -5 7
(Amounts in thousands of dollars)

--------------

Year

1835

1836
1837

1838
1839
1840
1841
1842
1843
1844
1845
1846
1847
1348
1849
1850

1851
1852
1853
1354

1855
1856
1857

Total loans
and discounts
2/
1,3X1
3/
3/
3/
3,940
3,3H
3/
3/
1,970
2,980
3,028
3,019

3,439
3,589
4,125
4,358
4,250
5,037
4,199
4,679
3/

798

Percent of
loans and
discounts

Discounted
bills of
exchange

24.9$
3/
3/

376
u,
2/*
3/
724
842
3/
3/
3&6

if. 4

25.4
3/

y ,
18.6
14.9
39.5
45.O
3/

443
1,197
1,359
3/
1,791
1,912
2,415
2,835

52.1

53.3

58.5
65.0
65.1
68.3

2,7 65
3,439
3,335
3,654
3/'
299

81.0

78.1
3/
37.5
_

1 -1 _ _

* _

T IT ^ _____ _____________

Data are for one date in each year, usually in November.
2/ The sum of "bills discounted" and "discounted bills of
exchange".

3/ Wot available.

IV- £8
in contrast with most other banks, is indication that the quality of
continued to "be high.

supervision

Appraisal of the Insurance Plan
In view of this fact that there were no failures among
banks participating in Indiana's insurance system, an appraisal of
that system must ascertain whether or not it vas singly an unimportant
appendage of the two successful banking systems which existed between
1834 and 1364, In other words, would creditors have fared just as
well if Branch Banks had not been responsible for the unpaid debts
of a failing member?
To fully appreciate the success of participating banks in
Indiana, the banking experiences of several other western States
might be cited. Two major banking crises occurred in these years:
1839-^2 and 1857-59* When the first ended banking in the West had
virtually disintegrated. In Michigan only an insurance company was
left to do any banking. 1/ Ohio had eight banks in operation, where
scarcely five years before there had been 35* The situation in
Illinois was succinctly described by one observer with the comment "all
the banks of Illinois have ceased to be", 2j while in Wisconsin the
few banks which had been chartered were gone and only the Wisconsin
Marine and Fire Insurance Company of Milwaukee was left to meet the
banking requirements of the northern Illinois and southern Wisconsin
area.
Similarly, the years 1857-59 witnessed many bank failures.
The most important single failure in the West - and possibly in the
entire country - was that of the Ohio Life Insurance and Trust
Company of Cincinnati. 3/
However, there were numerous others,
especially among the free banks of Indiana and other States. Not only
did all of the Indiana Branch Banks survive this crisis but they were
among the very few banks in the entire country which did not suspend
specie payments.
Five factors could be cited to account for the success of
Indiana's Branch Banks: (l) the excellence of the supervision and
management of the Branch Banks, (2) the restrictions of law under
which the Branch Banks operated, (3 ) the large aiaount of paid-in specie
with which the Branch Banks began business, (4) the avoidance of
complete entanglement in the State's internal improvements program,
and (5 ) the fact that no single Branch Bank became so large as to
dominate the system.
1/ The panic of 1837 ant^ the depression of 1839-42 are discussed in some detail in Chapter V, dealing with insurance of bank
obligations in Michigan.
2j George W. Dowrie, Tae Development of Banking in Illinois,
1817-63, University of Illinois Studies in the Social Sciences, II, 131.
3/ The panic of 1857 is discussed at somewhat greater length
in Chapter VI, dealing with insurance of bank obligations in Ohio.

IV-29
While these factors were important, by tbemselvea they are
not a sufficient explanation of that success. Why, for example, was
the supervision excellent? For the most part, officers of Branch
Banks were inexperienced hankers in the early years, and even the
president of the State Bank was new to banking. Harding has stated
flatly: "the officers of the State bank were practically all without
experience in banking.” 1/ This is borne out in an examination of
the letters of the first president which shows that one of his impor
tant tasks was to instruct many of the Branch Bank officers in some
of the elementary principles of banking.
Granted that over-all supervision was of a high quality,
why were the restrictive previsions of law observed at all? Michigan,
for example, had excellent supervision of banlcs operating under its
insurance plan but the main task of the examiners seems to have been
that of closing up banks which refused to abide by the lav. Certainly
the Indiana restrictions were not unique. For example, the requirement
that loans and discounts, as well as circulation, not exceed a cer
tain multiple of the paid-in capital is found in almost every bank
charter granted in the West at that time. Other restrictions, such
as the prohibition of real estate dealings and the limiting of loans
to directors and officers, were also common.
Similar questions might be asked regarding the other factors
cited. How were the Indiana banks able to avoid becoming too closely
allied with the internal improvements program? Granted that the law
made possible a commencement of operations with a large specie re
serve, why vas a substantial reseI’ve maintained during the entire
period? In both cases higher profits lay in the opposite direction.
The answer to these questions is not found in differences
between Indiana and its neighboring states. Indiana was virtually
a frontier state when it established its new banking system in 183^.
In the following years it was subject to the same waves of immigration
and settlement, and suffered the same spells of feverish speculation
in land, as did the other western States. The major occupation was
agriculture and its industries were largely those connected with the
preparation and export of surplus produce to the East and South.
With the possible exception of Madison there were no commercial
towns of any size in 1834. Even when the insurance plan ended Indiana
was still an agricultural State and could boast of no cities comparable
to Cincinnati or Chicago.
The key to an understanding of the success of the Indiana
State Bank is found in the character of its insurance plan and of
bank supervision. A number of essentially independent banks were
placed under the general supervision of a common board of directors
and president. Since each bank also had its own officers and board

1/ Harding, op. cit^ pp. 33-3^

IV-30
this would not appear, at first glance, to differ materially from
the systems in other States, except that the supervisory authorities
in other States were more often called Bank Commissioners rather
than directors. However, there was two important differences:
first, the supervisory board was made up almost entirely of represen
tatives from each of the participating banks; second, supervision in
Indiana included some functions of central banking.
Having each bank represented on the supervisory board could
have been quite dangerous. In the event of violation of the law or
the Board's directives by a Branch Bank, the same body would have
been prosecutor, jury, and judge. Hie errors of one bank might well
have been overlooked in hope that the favor would be returned in
another instance. What made it work was the fact that the banks
were mutually liable for the debts of a failing member.
The Branch Banks themselves were the ones immediately and
directly affected in the event of the failure of any one, so each
was vitally interested in the proper operation of every other Branch
Bank. Since each was represented on the State Board, this interest
could be, and was, translated into effective action. Add to this
the fact the scope of the powers of the State Board and the important
differences between the banking systems of Indiana and other States
become clear.
Insurance of bank obligations in Indiana was a success
because it helped make possible the operation of a banking system in
which no bank failures occurred. Thus it achieved what is perhaps
the ultimate goal of an insurance plan for the protection of bank
creditors.

CHAPTER V
INSURANCE OP BANK OBLIGATIONS IN MICHIGAN, 1836-1842

Michigan was the fourth State to make use of the insurance
principle in providing for protection of hank creditors and the third
to establish an insurance fund for this purpose. An "Act to create
a fund for the benefit of the creditors of certain moneyed organiza
tions" became lav on March 28, 1836, shortly after Michigan had
organized as a State and almost a year before it was admitted to the
Union. The law became inoperative about 1842 as a result of the com
plete collapse of the Michigan banking system.
Review of Michigan Banking History to 1844
Michigan's banking history to 1844 opens with the stablishment of a fictitious bank and closes at a time when banking had
almost disappeared in the State. In the interval there had been a
meteoric rise in banking activity, followed by a collapse of awescoe
proportions. To an important degree the development of Michigan
banking during this period was closely allied with population changes
in the territory and State, a discussion of which is included below.
Michigan population changes, 1805-1844. The present State
of Michigan was originally part of the "Old Northwest" Territory.
The Michigan Territory, which included what is now the State of
Wisconsin as well as Michigan, was settled more slowly than the other
sections of the "Old Northwest", i.e., Ohio, Illinois, and Indiana.
During the early decades of the 19th century much of Michigan's small
population vas of French-Canadian origin, attracted to Michigan
by the fur industry.
During the 1820's settlers began to arrive in Michigan from
New York and from several of the New England States. This movement
was relatively slow, as is indicated by the fact that in the census
of 1830 the population of the Michigan Territory was reported at
slightly over 30*000 people. Only 16 counties, several of which
were located in what is now Wisconsin, reported any residents at all.
For reasons which are still not altogether clear a veritable
craze for Michigan land swept through the northeastern States begin
ning about 1832-33 * This "Michigan fever," as it has been called
by historians, saw tens of thousands of people, and sometimes entire
villages, leave their homes in New York and New England to settle
in Michigan. The magnitude of the influx - which probably reached a
peak in IS36-37 - is reflected in the census figures which show
Michigan population in 1840 in excess of 200,000 people, or about
seven times the number in 1830.
County census figures provide even more dramatic examples
of the consequences of the "Michigan fever." In 1840 thirty-two
counties reported a population, compared with fewer than 16 (for the
State of Michigan) in 1830 . Among these were Lenawee County with
less than 1500 people in I83O but almost 18,000 residents in 1840,
and Wayne County, which includes the city of Detroit, with fewer than
7,000 residents in I83O but more than 24,000 in 1840. Among the
counties reporting population for the first time in 1840 were

V-2
Calhoun and Jackson, with. 11,000 and 13,000 residents respectively.

Banking to 183*+. Though Michigan was one of the last States
to be carved out of the "Old Northwest" Territory, the first bank
charter granted in the Territory was to a Michigan bank. In 1806 a
charter for the Bank of Detroit was secured by several Boston specu
lators. The institution was possibly fraudulent and certainly did
no actual banking business in Michigan It closed in 1807 and there
was no bank in the Michigan Territory for the following ten years.
In 1817 a charter was granted the Bank of Michigan, at
Detroit, which bank did a modest but successful business during the
l820‘s, becoming one of the leading Western banks in the l&30's. Its
monopoly of banking in Michigan was not disturbed until 1827, when
the Bank of Monroe received a charter from the legislature. This
was followed with charters for the Farmers and Mechanics Bank at
Detroit in 1829 and the Bank of the River Raisin at Monroe in 1833Thus by 183^ there were four operating banks in the Michigan Territory,
all of which were located at either Detroit or Monroe. The latter,
at the west end of Lake Erie and about 25 miles south of Detroit, was
at that time one of the important settlements in the Territory.
Bank legislation, 1835-37♦ The daily arrival of new settlers
enabled Michigan to organize as a State in 1835 and brought demands
for still more banking facilities. During the two years 1835-36
twelve new banks were chartered so that when Michigan was admitted
to the Union in 1837 there were 16 authorized banks, most of which
were in active operation. 1/
The flurry of bank chartering legislation in 1835-36
apparently caused the Michigan legislature to give some thought to
the consequences of possible bank failures. Accordingly, on torch 28,
1836, an insurance system almost identical with that adopted earlier
in New York and Vermont was established.
Even the granting of 12 bank charters in 1835-36 did not
satisfy the demands for banking facilities in the new State. As
migration from the East continued additional applications for charters
were made to the legislature. When that body met in January of 1837
it not only had to consider these demands but was also faced with
indications of a developing nationwide financial crisis. The solution
adopted was to pass the country's first free banking act, which per
mitted any 12 citizens to establish a bank upon meeting stated re
quirements. The rapid drafting and adoption of the law - it became
effective on March 15 , 1837 - vas possible because the Michigan legis
lature simply used a preliminary version of New York's famous Free
Banking Act of 1838.

1/ Michigan organized as a State in 1835 but a dispute
with Ohio over the boundary delayed its admission to the Union until
I8 3 7 .

tf-J

The destruction of banking, l838-f
+U. By the spring of
2_838 the number of banks in Michigan load increased from 16 to more

than
as free banks were opened in almost every community in the
State. Banks were organized so rapidly that fraud and deception be
came commonplace. Difficulties were further compounded for the State
by the panic of 183? followed a year later by a severe depression.

By mid-1839 probably no more than ten of the free banks
were still in operation and by 1S40 all had closed. Although some
had voluntarily liquidated, most failed during the second half of
l833* The chartered banks were also experiencing difficulty and by
lQi+3 not a single bank was operating in the State. 1/ Only the
Michigan Insurance Company of Detroit, an institution which was not
chartered as a bank, was apparently doing a banking business at this
time. An end was written to this period of banking history when
the Supreme Court of the State ruled that the Free Banking Act was
unconstitutional and. that the free banks had never enjoyed legal
existence.
Purpose and Character of the Insurance Plan
The heart of Michigan's insurance plan was an insurance
fund which was to stand as a guarantee for the obligations of failed
participating banks. In this, as well as in virtually every other
respect, the plan was the same as that adopted by New York State in
1829.
Purpose of insurance. There is almost no information
available on the motives which led Michigan to adopt an insurance
program. They ware very likely the same as those which actuated the
New York legislature in 1829 and which were discussed in Chapter II.
In other words, the Michigan legislature hoped to protect the State
against destruction of circulating medium as a consequence of bank
failures and, in addition, sought to protect the small bank creditor,
who was usually a noteholder.
Obligations insured* The insurance pi an extended protection
to "such portion of the debts, exclusive of capital stock, of any
of the said corporationswhicn shall become insolvent, as shall re
main unpaid ..." 2f Thus insurance applied to circulating notes,
deposits, and miscellaneous liabilities of participating banks.
There is no indication, either in the act or in contemporary
records, that the Michigan legislature meant by the term "debts" any
thing other than the items noted above, '/hether at a later time it
would have been claimed - as was the case in New York - that insurance
had been intended to apply only to circulating notes cannot be known
because of the early collapse of the insurance system in Michigan. 3/
1/ Several of the chartered banks which closed in the early
184-0’s were later reorganized and resumed business.
2/ An Act to create a fund for the benefit of the creditors
of certain moneyed organizations, March 28, 1836, section 4.
3/ It is interestingto observe that if there had really been
some uncertainty in Hew York as to the extent of insurance coverage be
cause of the precise meaning of the term "debts" such uncertainty should
have been resolved by, or reflected in, the Michigan law. That this was
not the case strengthens the conclusion in Chapter II that insurance
was originally intended to apply to all bank obligations in New York.

v-4
Insurance fund. The insurance fund was established by annual
assessments of one-half of one percent on the paid-in capital of par
ticipating banks. 1/ Such payments were to be made until each bank
paid an amount eoual to three percent of its capital stock. No ad
ditional payments were to be made unless capital stock of the bank vas
increased or unless there was a loss to the insurance fund as a con
sequence of payments to creditors of insolvent banks. In the latter
case special assessments, not to exceed the regular rate, were to be
levied on participating banks until the insurance fund was restored
to its maximum size. 2/
Assuming no change in its capital stock, each participating
bank would make six or seven payments to the insurance fund. Seven
payments irere required if the bank took advantage of a provision of
the law which permitted it to make the first payment after organiza
tion on the basis of the number of months the bank had been in actual
operation. 3/ In ordinary circumstances this provision would be of
negligible significance but it turned out to be of some consequence
in Michigan’s case, as will be shown later.
The insurance fund was the "property of the corporations
[i.e. ,banksj by which the same shall be paid, in proportion to the
amount which each of such corporations shall have contributed there
to ..." 4/ The Auditor General and the Treasurer of the State were
directed to "keep proper accounts of the said fund separate and dis
tinct from the funds of the State ..." 5/
Since the insurance fund remained the property of the banks,
income from investments of the fund was to be returned to the banks
in proportion to the amount which each had contributed. However, a
first charge against the income vas supervisory salaries. 6/
Method of paying creditors of failed banks. Upon failure
of a participating bank the first payments to creditors were to be
made by the receiver out of the liquidation of the bank’s assets.
After the final dividend the receiver was to be directed by a court
of chancery to apply to the Auditor General for the amount needed,
if any, from the insurance fund to pay the remaining debts of the
failed banks. 7/ No provision was made for the issuance of warrants
or similar instruments to bank creditors in the event that the in
surance fund was smaller than the amount required. In such a case
it was provided that the deficiency would be paid to the receiver
out of the first monies received thereafter from assessments. 8/
As was true of the original New York act, no provision was
made in the Michigan plan for the issuance and sale of securities to
the general public if the insurance fund proved insufficient. There

1/
2/
3/
4/
5/
%j
7/
0/

An_ Act to create ..., section 2.
Ibid., section 3 .
Ibid., section 2.
Ibid., section 6 .
Ibid., section 5 .
Ibid., section 7*
Ibid., section 9*
Ibid., sections 10 and 11.

V-5
was no mention of any distinction to be made in the payment of
noteholders as compared with depositors, nor was there mention of use
of the find to restore the solvency of a failing bank.
Participation of banks. Insurance in Michigan applied to
"every moneyed corporation having banking powers, hereafter to be
created in this state, or when their charter shall be renewed or
extended ...” 1/ In addition any bank chartered prior to March 28,
1836 had the option of becoming subject to the law before the ex
piration of the bank's charter. 2j No provision was made for the
voluntary withdrawal of a bank participating in the insurance system.
It was evidently the intention of the formulators of the
Michigan plan to follow New York's lead and provide for the eventual
inclusion of all banks in the insurance system. However, whereas
New York abandoned this objective it was scrupulously adhered to in
Michigan.
Michigan's Free Banking Act of 1837 was a version of one
of a number of bills being considered in the New York legislature.
In 1337 there seemed a good possibility that the New York legislation
would include the new banks under New York's insurance system. How
ever, there was a sharp shift of opinion in New York in mid-lS37 as
a consequence of the difficulties in which several of the already
insured banks found themselves and the requirement that free banks
be included in insurance was dropped from the New York bill, which
became law in 1838 . Michigan's version, passed a year earlier, re
flected the 1837 climate of opinion, with the result that the "Act
to organize and regulate banking associations” that year specifically
provided that "every such association •.. shall be subject to the
provisions of this act and the act to create a fund for the benefit
of creditors of certain moneyed corporations, and to such alterations
of said acts as shall be made from time to time by the legislature."3/
This single provision was to provide more difficulties for insurance
in Michigan than any other event which occurred.
Statutory Provisions Relating to Supervision and Regulation
of Participating Banks
Modem procedures of bank supervision were an integral part
of Michigan’s insurance system.
Briefly, the system provided for
regular bank examination by salaried personnel specifically sppointed
for that task and empowered to make a thorough examination of all
tank records. A discussion of the background and development of
this type of bank supervision - which represented a radical departure
from bank supervision, to 1830 - is included in Chapter II.
Supervisory agency. Because of the relatively small number
of banks originally included in the insurance system, the I836 law
l/ ~Ibid. sect ion 1 .
2/ An Act to create ♦.., section 32.
3/ An Act to organize and regulate banking associations,
March 15 , 1337, section 32.

V-6
for b, supervisory agency consisting of only one person,
"to be styled the Bank Commissioner of the State of Michigan", 1/
Ho provision was made for additional staff. With the increase in
the number of participating banks as a consequence of passage of
the Free- Banking Act the number of Bank Commissioners was raised
to three. 2/

provided

Michigan Bank Commissioners were to be appointed to two-year
terms by the Governor, with the advice and consent of the legisla
ture'. 3/ Initially the salary of the Commissioner was $300 per year
but when the number of Commissioners was raised to three in 1837 the
salary of each was increased to $1,250 per year.
\

On March 25, 1840, Michigan ended bank supervision by an
independent agency by abolishing the office of Bank Commissioner, kj
This move was probably taken because the large number of bank failures
during
1838-40 created doubts as to the usefulness of such an
agency and, moreover, by March of 1840 there were few banks left to
examine. The bank examination power was given to the Attorney
General of the State but it was apparently to be used only at the
request of the Governor, 5/
Bank examination and reports. Examination of each of the
banks participating in the insurance system was to be made by the
Bank Commissioners at least once in every four months and more fre
quently whenever any three participating banks so requested, 6/ The
scope of examination was the same as that provided in the New York
law. That is to say, it was made the duty of the examiners to
thoroughly examine the affairs of said moneyed corpo
rations, to examine all the books, papers, notes,
bonds and other evidences of debt of said corpora
tions; to compare the funds and property of said
corporations with the statements to be made by them
as hereinafter provided; to ascertain the quantity
of specie the said corporations have on hand; and
finally, to make such other inquiries as may be
necessary to ascertain the actual condition of the
said corporations and their ability to fulfill all
the engagements made by them. 7/
1 / Ibidl, section 15.
2/ An Act to amend An Act entitled Ap Act to organize and
regulate banking associations, December 30> 1837* section 37•
3/ An Act to create ..., section 20.
zl An Act to abolish the office of bank commissioner, and
for other purposes, March 25, 1840, section 1.
5/ Ibid.", "It shall be the duty of the Attorney General of
this state, whenever by the Governor required, to institute an ex
amination into the condition and affairs of banks and banking associ
ations in this state, and to do and perform all the duties now or
hereafter required to be done and performed by said bank commission
ers ..."
6/ An Act to create ..., section 15 and 16. However, free
banks were to be examined once every three months, and more often
when requested by the Governor or any other free bank; An Act to
organize ..., section 13*
7j Ibid., section 15 .

V-7
In addition, the Commissioners were to question bank officials under
which oath the Commissioners were personally empowered to
administer. 1/
oath,

The Bank Commissioners were given ample power to close
and place in receivership any bank which they judged to be insolvent
or to have violated the law. 2/ In addition, they could take steps
to place a bank in receivership if it gave evidence of being in
serious financial difficulties. The tests in such cases were: (l)
if the capital of the bank was impaired to the extent that net sound
capital was equal to or less than one-half of paid-in capital stock,
or (2) if the bank had not redeemed its notes on demand in specie
for a period of 90 days. 3/
There was no specific grant of authority to the Bank Com
missioners which would permit them to act against continuance of
unsafe and unsound banking practices. However, certain restrictions
on bank operations were incorporated into the insurance law and
also in the law authorizing free banks. Violations of these re
strictions would, of course, have constituted violation of the law,
for which offense the Commissioners could proceed against the bank
in question as an insolvent institution.
Reports of condition in the cases of chartered banks were
generally required by their charters. Free banks were required to
submit reports of condition semiannually to the Bank Commissioners.4/
These reports were probably similar to those required of chartered
banks. Items to be reported were: (l) circulation, (2) individual,
partnership, and corporation deposits, (3 ) loans to directors, (4)
loans to stockholders, (5 } all other loans, (6) specie, (7 ) amount
due from other banks, (8) real estate owned by the bank, and (9 )
capital paid in. 5/ Statements of condition of free banks were also
to be published by the bark in a newspaper within the State. 6/
An a n n u a l report from the Bank Commissioners to the legis
lature was to be made in January of each year. 7/ These reports
were to include a discussion of the Commissioners1 activities
during the year and abstracts from condition reports made to the
Commissioners by the individual banks.
Bank operations. The act providing for an insurance system
in Michigan contained relatively few provisions dealing with bank
operations. This was because it was not originally anticipated that
any but chartered banks would become subject to the law, and for
these banks such provisions were included in the individual charters.
The most important limitations placed on bank operations
by the 1336 law related to the volume of circulating notes and loans
and discounts, and to maximum interest on loans and discounts.

1/
2j
3/
4/
5/
%j
7/

Ibid.^ section 1?• '
Ibid., section 18.
Ibid., section 25 .
An Act to organize ..., section 24.
Ibid..
Ibid..
An Act to create ..., section 19-

V-8
Circulating notes could not exceed three tines the capital stock
paid in and the same ratio to capital applied to loans and dis
counts. 1/ It might be observed that these limitations were not as
strict as those in New York's insurance actj which required that
circulating notes not exceed twice, nor loans and discounts twice
and a half, capital stock paid in.

Possibly to compensate for the cost of participation in
the insurance program, the 1836 Act established the maximum interest
rate for each bank at that permitted by its charter plus one-half
percent. 2j However, the additional one-half percent was not granted
to any bank whose charter permitted a rate of seven percent. The
act also required that all notes issued by banks be made payable
on demand. 3/
other words, "post-notes", i.e., notes usually
payable six or twelve months after issue, were prohibited.
The liability of bank directors in the event of bank
failure was spelled out in the 1856 act in the strongest possible
terms. It vas declared that any case of bank insolvency "shall
be deemed fraudulent unless its affairs shall appear, upon investi
gation, to have been fairly and legally administered, and generally
with ... care and diligence", hj In the event of insolvency the
directors were "to repel by proof the presumption of fraud.” 5/
The act did not provide for double liability of stockholders.
Michigan's Free Banking Act of 1837 contained numerous
provisions relating to bank operations. Since the free banks were
also included in the insurance system these provisions are summarized
below because it is probable that they were generally similar to
those appearing in the charters of the other banks.
The restrictions on circulation and on loans and discounts
were somewhat tighter for free banks than for chartered banks since
neither item was permitted to exceed twice and a half times the
capital stock paid in. 6/ Deposits were not specifically mentioned
in this connection, but were included in a provision which limited
the total debts of a bank to an amount not to exceed three times the
capital stock paid in. 7/
Directors of each bank were required by the 1837 Act to
conduct their own examination once in each three-month period. 8/
In the event of failure, the liability of directors was unlimited
and that of the stockholders was limited to the amount of their
stock, i.e., double liability attached to free bank stock. 9/
1/ Ibid., section 2^.
2J Ibid., section 30*
3f' Ibid., section 31*
zJ
section 27 .
5/ Ibid..
2/ An Act to organize ..., section 17*
7/ Ibid., section 25*
oJ Ibid., section 20.
9/ Ibid., section 25 .

V-9
Several other provisions of the 1837 Act also deserve
mention. No free bank was to hold any real estate except as was
necessary to conduct its business or as a consequence of foreclosure;
neither could such a bank conduct other than a banking business. 1 /
The maximum interest rate was set at seven percent. 2/ Finally,
the amount of loans (direct or indirect), to all directors together,
or to any single individual or company, could not exceed onesixth of the total volume of loans and discounts permitted the bank.3/
Number and Obligations of Michigan Banks, 1835-41
Michigan's published bank statistics for the period
covered by this study are exceptionally poor because they omit data
for a sizable number of banks. Accordingly, liberal use has been
made of estimated data in this section in order to provide a more
correct picture of Michigan banking experience. All data, both
reported and estimated, relate only to commercial banlcs operating
under State law.
Kumber of operating banks. As was described earlier, by
the end of 1836 the Michigan legislature had issued charters for
sixteen, banks. Six of these charters were granted on or after the
date of adoption of the insurance law and the banks concerned thus
became subject to provisions of that law. A seventh bank, the
Erie and Kalamazoo Railroad Bank, had received its charter prior to
adoption of the insurance lav but became subject to insurance by an
act amending its charter passed on March 28, 1836. Thus, seven of
the sixteen banks authorized by the end of 1836 were subject to
participation in insurance, while nine were excluded from the in
surance program until such times as their charters expired and
were either extended or renewed.
Wot all of Michigan's chartered banks actually went into
operation by the end of 1836. As shown in Table 27, only twelve
banks were operating at that time, and of these only four were
participating in insurance. By mid-1837 all but one of the chartered
banks had gone into operation. Michigan's Free Banking Act had been
passed several months earlier but no free banks had as yet been
organized. Consequently, on June 30> l£37, there were fifteen
operating banks in Michigan, six of which were participating in the
insurance program.
The following year, i.e., from June 1837 to June 1838, saw
a marked change in Michigan's banking structure. The number of
operating banks increased almost four-fold because of organization
of free banks. All of these new banks were participants in the

If Ibid., section 26.
2/ Ibid., section 30*
3/ Ibid., section 28.

V-10
Table 27.

‘

Number and Percentage Distribution of Operating Banks, by
Insurance Status, Michigan, 1835-1841

Humber of"banks'"!/
Percentage distribution_______
Total Participating Not
All
Banks participating Banks
in insurance parti- banks
in insurance_____ not
Total Char-■Free cipating
Total Charter Free partici
ed
pating
t•ered
2/ in insur
in in
ance 3/
surance

Year

1835
Dec. 31

•7

100.0

30
31

6
12

6
8

100.0
100.0 33.3

33-3

100.0
66.7

30
31

15
45

6
36

6
6

9
9

100.0 40.0
100.0 30.0

40.0
13.3

30
31

52
42

44
34

7
7

37
27

3 4/

1C0.0 84.6
100.0 81.0

13*5

3C
31

19
13

4
4

5
5

30
31

7
*

1
1

1836

June
Dec.
1337
June
Dec.
1338
June
Dec.
1839
June
Dec.
1840
June
Dec.
1841
June

—

66.7

60.0
20.0

16.7

71.1
64.3

19-0

100.0 73*7
100.0 61.5

21.1
30.8

52.6

26,3

30.7

38.5

6 5/
O

100.0 14.3
100.0 14.3

14-3
14.3

100.0

15.4

85.7
85.7
»

100.0

Sources: The following periodicals were heavily relied upon
in determine the dates of operation of Michigan banks: Bicknell*s
Counterfeit Detector and Bank Tfote List, various issues of'1835“^°;
Clark's New England Bank Note List and Counterfeit Bill Detector,
various issues of 133&-39; Day's' Nev York Bank ITote List, various
issues of 1836-40. Also useful were: United States Senate Documents;
23rd Congress, 1st Session, number 86; 24th, 1st, numbers2, 226, 312,
313> 331* 356, 379# and 423; 24th, 2nd, numbers 2 and 21; United
States House Documents; 24th Congress, 1st Session, number 42; 24th
2nd, number 65 ; 25th, 1st, numbers 2 and 30, 25th, 2nd, number 79 ,
25th, 3rd, number 2 ; 26th, 1st, number 172 .
1/ See Appendix to this chapter for the names of operating
OSllXiS *
2 j All numbers are miniinum estimates by the writer. See
Appendix A for a list of free banks, grouped by probability of operation.
3/ Chartered banks. Excludes one institution, the River
Raisin and Lake Erie Railroad Company, which exercised (illegally)
certain banking functions under its railroad charter.
4/ Includes the Michigan Insurance Company of Detroit, an
institution which apparently exercised full banking powers beginning
in 1838 and for the remainder of the period.
5/ Includes Bank of St. Clair, a chartered bank which vas
permitted to withdraw from the insurance system by a special act of
the State legislature, March 19, 1840.

„

jjo page V-11

V-12

insurance program, thus raising the proportion of participating
banks from 40 percent to 85 percent of all banks. 1/
The rapid increase in the number of operating banks
during 1837-33 was matched by an equally rapid decline during
1838-39* As can be seen from Table 27* the total number of operating
banks in Michigan fell from 52 in June of IS38 to 19 by June 30,
1839, and to 7 "by June 3^^ iS^-O. Of the banks still in operation
on the last date only one was participating in the insurance
system. Within the next year the last participating bank vas
closed. 2/
Obligations of all operating banks. During the period
under review several of the Michigan banks not participating in
the insurance system acted as ’’deposit banks" for the Federal
government* The large volume of such deposits, plus tiie incomplete
nature of published statistics, makes it difficult to compare
the obligations of banks participating in insurance with those not
included in the insurance program. Because more information is
available on circulating notes, and to a lesser extent on indivi
dual and business deposits, estimates of these items are easier
to prepare than estimates of total obligations. Consequently,
Table 28 contains estimates of the total circulating notes and
individual and business deposits of all operating banks in Michigan,
with banks distributed by insurance status. It is believed that
these data provide better information on the proportions of circu
lating medium attributable to the two groups of banks than would
be the case with the inclusion of United States Government and
interbank deposits.
On June 30> 1336, before any bank participating in insur
ance had gone into operation, Michigan banks had circulating notes
and individual and business deposits of approximately two and a
quarter million dollars. One year later the total of such obliga
tions had declined to just under $2 million and it is estimated
that about 20 percent represented obligations of newly organized
participating banks and was therefore covered by insurance.
The volume of bank-obligations grew rapidly after June 30,

1837 . By the end of 1837 circulating notes and individual and
business deposits of Michigan banks exceeded $3 million, about
two-fifths of which was covered by insurance. The relatively small
size of participating banks is indicated by the fact that they
comprised 80 percent of all operating banks on the same date.
The rapid formation of free banks explains the divergent
movements in obligations of participating and :nonparticipating
banks during the early months of 1838. Circulating notes and

if There" was a net decline of one in the number of char
tered banks not participating in insurance, as two closed and one
new bank, using an insurance company charter, opened for business.
2/ A list of Michigan free banks will be found in an
appendix to this study.

V-13
28 . Circulating Notes; Individual and Business Deposits of
Operating Banks, “by Insurance Status, Michigan, 1335-1841
(Amounts in thousands of dollars)
"
year

1835
Dec.
1836
June
Dec.
1837
June
Dec.

1838
June
Dec.
1839
June
Dec.
1340
June
Dec.
l84l
June

Q1dligations of "banks: 1/ Percentage ii¥trioution of obTotal Participating
Not
ligations of banks:____________
in insurance
partici- Total Participating in
Hot
Total Char- Free pating
insurance_________ partici
tered
in insurTotal Charter- Free pating
ance
ed
in in
surance

1,795

100.0

-""

_ —

—
—

2,224
1,873

100.0
1C0.0

—

— 2/1,594
750 1,890
°/
423 1,G0CM/ 392
443 5C0=/ 972

31 1,795

239

-239

3C 1,946
352
31 3,088 1,198

352
443

30 2,224
31 2,117

30 2,315 1,423
543
31 1,915

976

905

30
31

3c6

765

920

338
395

333
362

22
22

50=■';
33^

100.0
100.0

11.3

-“—

100.0
100.0

18.1
38.8

18.1
14.5 24.3

81.9
61.2

100.0
100.0

61.5
49.2

18.3
23.1

43.2
26.1

38.5
50.8

510

100.0
100.0

39.8
43.6

34.7
40.0

5-1
3.6

60.2
56.4

784
398

100.0
100.0

2.7

2.4

-—

97.3
97.6

765

lOG.O

—

100.0

583

88.7

Sources: See note on sources for Table 27, particularly
government documents.
1/ "Obligations" as used here includes circulating notes
and deposits of individuals, partnerships and corporations. It
excludes, "because of insufficiency of data, interbank deposits,
deposits of United States government, and miscellaneous liabilities.
2/ Minimum estimates by writer.
3/ From returns from four free banks, U. S. House of
Representatives Documents, 26th Congress, 1st Session, document
number 172, p. 1298.

v-iu
individual and business deposits of "banks not participating' in
insurance declined by more than one-half in the six months ended
June 30) 1836 - reflecting the effects of the panic of 1837 - hut
the obligations of participating banks increased more than 20 per
cent during the same period. As a result, by June 30, 1838, more
than 60 percent of the State.’s total of these obligations was pro
tected by insurance.
The effects of the depression and of the closing of many
participating banks are reflected in the bank-obligation data for
1339. Table 23 shows that by June 30; l339> circulating notes
and individual and business deposits of all Michigan banks were
less than $1 million, two-fifths of which vas attributable to
participating banks and therefore insured. The following two years
saw a further decline in circulating notes and individual and
business deposits in Michigan banks as banks continued to close
or contract their obligations.
Obligations of reporting banks. A more detailed picture
of the composition of bank liabilities is given in Table 29, which
shows liabilities as reported on three dates during the insurance
period. The dates are: December 1, 1836, at about the height of
the nationwide boom; February 1 , 1830, after the general con
traction of bank operations due to the panic of 183? had begun
but at the time when new free banks had just gone into operation;
near January 1, 1839, after many of the free banks had closed and
when the nationwide depression vas getting underway. It should
be kept in mind that not all operating banks made reports and that
some reports were seriously inaccurate.
The 1836 reports provide information on seven banks,
only two of which were included in the insurance system. It will
be observed that less than a quarter cf the deposits of the latter
group of banks consisted of deposits of individuals, partnerships
and corporations. The largest deposits were those of the United
States Government and most of these were in two banks.
The relative importance cf circulating notes also differed
among banks. Thus, on December 1, 1836, circulating notes of the
two banks participating in insurance were almost five times the
total deposits in such banks, whereas in nonparticipating banks
circulating notes were only two-fifths of total deposits. If
deposits of United States Government are excluded from the latter
tabulation circulating notes in nonparticipating banks were
about equal to the volume of deposits.
In February 1838, total obligations of reporting banks
participating in insurance were just under $1 million. Approxi
mately half of this amount was attributable to 21 reporting free
banks, with the remainder representing obligations of the six
participating chartered banks in operation on that date. For both
the free and chartered banks circulating notes were the most
important type of obligation, conn rising about three-fourths of
the total obligations of all such banks. Deposits consisted largely
of individual and business deposits, with a relatively small
amount of interbank deposits and no reported United States Govern
ment deposits.

v-15
Table 29.

All banks
Banks partlolpating in
insurance-- total ~

3*768
180

Erie and Kalamazoo Rail
road Bank
117
Calhoun County Bank
5/
Clint on, Bank of
6/
Constantine, Bank of
5/
Oakland County Bank
"5/
St, Clair, Bank of
5/
Ypsllantl, Bank of
b3

1,229 2,539 619

218

l4£

1,557

165 3>399 1
--

988

735

—

Banks not participating
"T n insurance - total
Farmers & Mechanics Bank
of Detroit
Miohigan Insurance
Company
Miohigan State Bank
Monroe, Bank
Pontiac, Bank of
River Raisin, Bank of the
Tecumseh, Bank of
Washtenaw, Bank of

3,588

10 /
82^
251*

2,506 588

15
15
9
10

1
3
10
1/

—

64
109

5
9

342

175

147

—

844 1,567

766

133

640

149
6/
3*?

191

151H /

489

118

2l6

11 /
570 175 ~ 7 ^

1 >537

266

165 2 ,^11

12 /
53— /fc*91

342

V — 5/

831

274

294

24*^40

5/
174
191
2?6
6/

T>/

l*t?
142

W
134

0/
15—

„

, . 114
5/
11 /
159 91
80 70
99 77

68
10
22

10
8

V
¥

2,047

§21 320

890

4(>0

430

238 192

40
55

17
12

4/
37

40
10
115

y--

67
30
—

962

— 4/
-- 5/
1/

517^

1,082

18
19
10

209

8/
Free Banks - total

253

640

7®

69
12

176

1,820

—

211

,579

Banks

December- iy36 1/
“
'
February/ lFjtTaT
January, 1S59 "V
~
ToT^^Clrcu^--Deposits
‘ Total Clrcu"beposlts
Total ClrcuDeposits
ob 11- lating foFaTTTp<T Inter-”U 3 Other obll- latlng Total IPC Inter- US Other obli- lating Total IPC inter-US Other
ga- notes
bank Govft
ga- notes
bank Gov't
ga- notes
bank Gov't
t
l
o
n
s
____________ t l o n s ____________________________________ tions__________ _ _ _ _____
lo

-------- _ ---------- -

Total Obligations of Operating Baraks, Michigan, Selected Bates, 1836-59
(Amounts In thousands of dollars)

—
—

104
5/
53
10

116
86

464^

138

l _3

437

150
26
51-ni/ 50

124

642

148

13/ 6/
10“ ^ 856

128

13/ 3^
13—
152

30
84
24

74
5/

326 192 134
1,617

802^160

!&%/

1
24

502

2 ,119

728 102
4

68
50

4
42

333

_— y
—
-- v
--

V
y

—

128

333

16 34

719

%
93
626^

y
16

719

y
y

Sources; Wot December, lb 36:
0,S. House of Representatives Documents, 25th Congress, 2nd Se ssion, doc umerit" number 79* P» 015; P »S. Senate
Documents. 24th Congress, 2nd Session, document number 21, pp. 26-37/ "“For February, 1838 and January, 1859:
* '"■
""
fr»5» House of Representatives Documents, 26th Congress, 1st Session, dooument number 172, pp* 1105-06; 1149*5^*
1/ Data are for December 1*
7/ Data provided in response to a request by the State legislature on February 1, 1838 . Data are assumed to relate to this date,
or dates slightly later in February*

v-i6
Table 29*

Total Obligations of Operating Banks, Michigan, Selected Dates, 1B36-59
(Amounts In thousands of dollars)

3/ Data are from examinations or reports made at various dates, most of which were near December 51 > 1838 , Earliest date wao
November 2l, 1858 : latest date was January 21, 1839 .
V None, or Included with other Items,
Not In operation on this date.
%/ Not available,
Less than $500.
From returns from 21 free banks.

Prom returns from 14 free banks.
__. Includes branch at St. Joseph, Michigan,
11/ Total deposits as shown In document 79 less U, S* Government and other deposits shown in document 21* See Sources.
*12/ Probably includes deposits of State government,
T 5/ Excess of assets over liabilities as shown on report giving only principal asset and liability Items,
TJ/ Includes branch at Bronson, Michigan,
Deposits
State
Treasurer,
of receipts
from sale of Internal improvement bonds.
NOTE: T§/
Spaces
left of
blank
Indicate
bank consisting
was not In principally
operation that
date.

V-17
On the same date reporting banks not participating in
insurance had total obligations equal to about two and a half

times the obligations of participating banks. Deposits of the
United States Government still bulked large for several of these
banks, thus bringing the total deposit figure for the non partici
pating banks substantially above the total of their circulating
notes. It is interesting to observe, however, that when United
States Government deposits are excluded, deposits of individuals,
partnerships, and corporations were almost as large as the volume
of circulating notes; while such deposits, plus interbank and
other deposits, considerably exceeded the volume of circulating
notes.
Reports for January 1839, reveal little new information
about the relative importance of bank liabilities. Once again,
banks not participating in insurance accounted for more than twothirds of all bank obligations, which by this date had declined
by about 10 percent since February 1333- Circulating notes still
comprised the most important liability of participating banks,
while for nonpa-rtic ipating banks such notes were exceeded in
importance by total deposits and about equaled in amount by de
posits other than those of the United States and of the State of
Michigan.
Among banks participating in insurance, interbank deposits
were surprisingly large when compared with the two earlier dates.
Most such deposits were attributable to free banks and probably
represented concealed borrowings by these banks. Large deposits
by the State of Michigan, representing receipts from a sale of
bonds to finance internal improvements, account for the very
marked increase in size of the Michigan State Bank, a nonpartici
pating bank. On the two earlier dates the Bank of Michigan, also
nonparticipating, far exceeded in size any other bank, partici
pating or nonparticipating. Indeed, the total obligations of the
Bank of Michigan at the end of 1836 were more than 50 percent of
the obligations of all reporting banks, while in February of 1838
they were more than a third of all such obligations. The decline
of this bank to second largest by January of 1839 reflects, in
addition to the large State deposits in the Michigan State Bank,
the continued withdrawal of United States Government deposits.
The relatively greater importance of circulating notes
for banks participating in insurance as compared with nonpartici
pating banks has been noted for each of the three reporting dates.
This is largely an indication of the smaller size of participating
banks and of the fact that they tended to be located in the
smaller towns and villages of the State. For example, none of
the chartered participating banks and only one of the free banks
(the Detroit City Bank) was located in Detroit, the largest city
in the State. In smaller population centers, and among relatively
new banks, circulating notes were always more important than
deposits.
So far as circulating notes alone are concerned, bankobligation insurance was probably fairly extensive during most
of the insurance period. It will be observed that in early 1838

V-lS
iess than 30 percent of all "bank obligations were insured 'out almost
c;0 percent of circulating notes were insured; approximately the
sane percentages apply to the January 1339 data. Also, on both of
these dates reports are missing for many free banks, most of whose
otiigations were in the form of circulating notes.
History of Operation of Insurance System
Michigan's insurance system has a brief and rather dramatic
history- Events moved so rapidly that a chronological rather than
topical presentation seems warranted. An account of economic conditions,
a discussion of the status of the insurance fund, and a record of bank
failures is given below for the respective time periods.
March 28, IS36 through December 1836. The first nine months
of bank-obligation insurance in Michigan were largely taken up with
organizing the insurance system. There were no failures of partici
pating banks during this period and, consequently, no call upon the
insurance fund for assistance. However, during this period there were
several developments which were to have an important bearing on the
future cf Michigan's insurance system.

1836
was a year of high-level economic activity. Prosperity
was nationwide and was fully shared by western States such as Michigan,
perhaps the most significant characteristic of western economic
activity was the rapid settlement of the area and the attendant boom
in land values. Tne policy which the Federal Government had been
following since about 183^ with respect to its surplus funds con
tributed to western prosperity. These funds, which had previously
been deposited with the Sank of the United States, were being placed
in selected State banks and those in western States, including
Michigan, seemed to have been particularly favored.
In mid-1836 three events signalled the end of the nationwide
boom. These were: the financial collapse in England as a consequence
of restrictive monetary action by the Bank of England, the issuance
of the "Specie Circular" by the Federal government on July 11, 1636,
and the decision (on June 23 , 1836) to distribute the Federal sur
plus among the various States. All three of these occurrences were
instrumental in causing the panic of 1837 and the severe depression
which began in 1839; and two were to weigh particularly hard on
western. States such as Michigan. The "Specie Circular" ordered
government land offices to accept only specie in payment for govern
ment lands after August 1?, 1836. Thus in one stroke the use of
banknotes for land purchase was eliminated; and it was largely the
notes of western banks which had been so used. The distribution of
the Federal surplus was scheduled to begin on January 1, 1337, with
the amount each State received to be in proportion to its repre
sentation in Congress. This meant that the western States would
suffer a net loss of such deposits.
The ’'Specie Circular" and the surplus distribution law
threatened to exert tremendous pressure on bank reserves, which con
sisted of specie or specie fund% so long as specie payments were re
quired by law. The effect would be similar to the kind of pressure
on bank operations which would be exerted today under a drastic policy
of drawing- reserves out of the banking system.

V-19
By the end of 1836 tie Michigan insurance system was thus
^ the position of having gone into operation during the final stages
a boom and just before economic disaster was to strike the country.
^5 described earlier, only four participating banks had been started
bv that time. Although each had probably made a partial payment
into the insurance fund there is no record of the financial condition
0f the fund on or near December 31 , 1336.
January 1837, through July 1837 . The seven-month period
of the financial crisis
1836. Also, the Michigan
legislature compounded the difficulties in store for the new in
surance system by taking steps designed to alleviate the monetary
stringency. However, as was the case during the preceding period,
events through July 1337, were to become important at a later date;
there were no current failures of participating or nonparticipating
banks and consequently no necessity for the insurance system to make
provision for the payment of creditors.
ending with July 1^37, saw the development
foreshadowed by Federal monetary policy of

The Federal Government made its initial call for funds on
deposit in selected State banks at the beginning of 1857- The effect
of these withdrawals on Michigan's banking system can be judged from
the statements of the two largest banks in the State. As shown in
Table 29, on December 1, 1336, the Bank of Michigan had total deposits
of $l,683,OCO, of which $1,191,000 represented deposits of the United
States Government. Six months later, on May 1, 1837, United States
Government deposits in the Bank of Michigan were $592,000! In the
case of the Farmers and Mechanics Bank, withdrawal of United States
Government deposits had started in the fall of 1836. From a total of
$1,266,000 of such deposits, withdrawals to May of 1837 brought the
total to less than $5^0 ,000I
The Michigan legislature apparently believed it could offset
the contraction of bank operations by passing the Free Banking Act
of March 15, 183?. This is suggested, for example, in the report of
the Bank Commissioner at the end of 1337, which stated: "In supplying
a circulating medium at hone the want of which was already greatly
felt, the banks which have gone into operation under the general
banking law have effected a sensible relief, and have thus acquired
a not unmerited popularity." l/
Scarcely had the Free Banking Act become effective when the
developing crisis came to a head. On May 10, 1837 , the New York
City banks announced the suspension of specie payments and within
the next several weeks almost every bank in the country followed suit.
The legislature authorized Michigan banks to suspend specie payments
by an act signed into law on June 22, 1837, although probably many
of the banks had suspended a month earlier. 2f Suspension was permitted
1/ "Annual Report of the Bank Commissioner of the State of
Michigan," December 6, 1837, Documents Accompanying the Journal of the
Senate of the State of Michigan, Annual Session 1838, document number2.
2j An Act suspending for a limited time certain provisions
of law, and for other purposes, June 22, l837»

V-20
until May 16, 1838, at which time the "banks were required to resume
specie payments. This applied to all operating "banks and, in addition,
to all banks put into operation prior to May 16, 1838 . 1/ Thus it
o-oened the way for banks to organize under the Free Banking Act with
out the necessity of redeeming their notes in specie during the first
months of operation.
There are no available data on receipts or expenditures of
the insurance fund for the seven months ending with July 183?.
presumably, each of the six banks participating in insurance had made
at least one payment into the fund by that date.
August 1837 j through December 1837» In August 1837, the
Farmers Bank of Homer commenced operations, becoming the first bank
to start business under the Free Banking Act. The formation of 29
additional free banks during the remaining months of the year was
the most significant development in this period of Michigan's in
surance history
It will be recalled from Table 28 that during the latter
part of 1837 there was a 50 percent increase in circulating notes
and individual and business deposits of Michigan banks. This was
due to two factors: the opening of the 30 free banks and, second,
the expansion of operations of all operating banks as a consequence
of the act permitting suspension of specie payments. The increase
in liabilities of operating banks during a period of suspension of
specie payments was not prudent banking but was to be expected since
the suspension act was tantamount to the removal of all reserve
requirements. With the rapid pace of western economic development
it would have required exceptionally skillful and conservative
bankers to have reacted otherwise. Hot/ever, specie, which was always
in short supply in a frontier community, was being further diminished
by the withdrawal of United States Government funds from Michigan
so that during
. late 1837 all Michigan banks were becoming in
creasingly vulnerable to any adverse economic development.
The potential danger was evident to some observers at the
time. While visiting Michigan an official of a Wisconsin bank wrote
these prophetic words in a private letter:
The suspension law extends as well to those who have
not commenced business as to those that have. If
the system is not going to produce an explosion in the
end, I am very much mistaken. The people appear to
like it. Good, easy, souls, they little dream of
what they are nourishing. 2/
It is presumed that most banks participating in insurance
by the end of 1837 made some payment into the insurance fund at the
time of their organization. For many such payment would have been
”’l/"This was"later-amended (December 28, 1837) to forbid
the suspension of specie payments by any bank going into operation
after January 1, 1838.
2/ Letter, December U, 1837; Morgan L. Martin Papers, MSS,
State Historical Society of Wisconsin Library, Madison, Wisconsin.

V-21
exceedingly small since more free banks were organized in December
than in any other month in 1837- Each of the banks organized during
the final month of the year, if it made any payment at all, was
only required to pay in proportion to the time it was in operation,
i.e., one-twelfth of its full annual assessment.
There is no detailed information on receipts and disburse
ments of the insurance fund during the whole or any part of 1837 However, a report for 1838 does give the status of the fund as of
the end of 1637 • At that date there was available for the protection
of bank creditors the sum of $1^5.14.
l833» For all practical purposes bank-obligation insurance
in Michigan collapsed during the early months of 1838 as the insurance
fund was faced with bank failures involving hundreds of thousands of
dollars more than was available for insurance purposes. Table 30
shows the number and obligations of banks which ceased operations
during 1838 and during the two following years.
During the first quarter of 1838 six free banks suspended
operations. These banks, comprising one-sixth of all banks partici
pating in insurance, had obligations at time of failure of $193,000.
Although the insurance fund was only obligated for the deficiency
remaining after liquidation, the fraudulent organization and
operation of several of these banks assured that the total which would
eventually be claimed from the fund would far exceed the $ 1^5 avail
able at the beginning of 1858. For example, the Bank Commissioners
estimated the loss in the case of one of these six banks as $25 ,000.
Events in the months to follow merely brought additional
difficulties to the insurance system. The attempt to resume specie
payments on May 16, 1838, as required by law, had precisely the effect
which some persons had anticipated. During the second and third
quarters of 1838 ten more free banks suspended with total obligations
in excess of $250,000.
As noted in Table 30 > there were probably additional failures
in the fourth quarter of 1838 but no precise information is available
in this connection. It is of some significance that all 16 failures
known to have occurred during 1838 were free banks; none of the
chartered banks participating in insurance failed. However, two
chartered banks aot participating in insurance did fail in 1838; one
near the beginning of the year and one in August.
There is no record of payments on behalf of creditors of
failed participating banks during 1838. This is to be expected since
it is doubtful that liquidation of any of the failed banks had been
completed by the end of the year.
1/ Documents Accompanying the Journal of the Senate of the
State of Michigan, Annual Session 1839; document number 2, December31*
1B 3HT On January 1, 1838 the State Treasurer reported receipts total
ing $592.96 from payments by four participating banks on behalf of a
5 of 1 percent regular tax on bank capital. Since they paid this tax
the same banks may also have paid the insurance assessment, total re
ceipts from which would also have been $592.96. Documents Accompanying
the Journal of the Senate of the State of Michigan, Annual Session
1S 3S, document number 5* Januaiy I, 1836*

V-22

Table 30.

Year and
quarter 1/

1838-40
1838-1
-2
-3
-4

Participating Bunks Ceasing Operations, Michigan Bank-Oblibation Insurance System, 1838 -IS40
(Amounts in thousands of dollars)

Banks in operation a t ______ Banks becoming insolvent__________________ Banks liquidating voluntarily
Obligations 3/
or closing for reasons unknown
beginning of quarter________ Humber_________
Total
As percent of
Total
As percent of
Number
Obligations 2/
number of opobligations of
Number
Obligations 4/
eratinn banks
operating banks
______
•t•
36
44
44
34

1839-I
-2

-3

1840-1

-2
-3
-4

6/
7/

***

1,198

6
1
0y

16.7
2.3
20.4
--

193
42
214
-

26.5
25 .O

33.5
9.0

18.2

316 11/
60 13/
24 13/
2k 13/

62.5

218 16/

1,310
1,423
1,133
9^3

665
388

11
8
1

«**

17/

1
1 l§/

9 W
5 12/

391

2
2

395

5 15/

22
22
22

-—

14.3

—
-*"—

-***

-™”

16.1

1°

^5150

1
--

3-2

15.0

—

6.2
6.1

5
1 iy
3. i y
1 w

82
12
22
12

3-3/
13/
i3/

55.2

14/

13/

—
--

Sources: See Table 27.
1/ Quarter-year periods are considered as beginning on the first days of January, April, July, and October.
2j First and third quarter dates are from Table 2. Second and fourth quarter data are interpolations.
3/ Circulation plus individual and business deposits at time of failure or last report prior to failure.
kj Circulation plus individual and business deposits at date of closing or last report prior to closing.
5/ Includes Bank of Lapeer for which no information is available on obligations. Bae sum of $25,000, esti
mated by the Bank Commissioners as the ultimate loss, was included in the total.
6/ Six failures during the first quarter of 1838 were offset by 13 free banks and one chartered bank
beginning operation during the quarter.

V -23

Table 30.

Participating Banks Ceasing Operations, Michigan Bank-Obligation Insurance System, lbjj3-l84o (cont'd)
(Amounts in thousands of dollars)

7 / One failure during the second quarter of 1S38 was offset by one free bank beginning operations.
0 / Includes an estimated $25,000 of obligations of two banks (Berrien County Bank; Peoples Bank of Grand
River) for which there is no information 011 obligations at time of failure, or at any previous time.
9j It is probable that some of the failures shown for the first quarter of 1839 occurred during this
quarter.
10/ Includes two chartered banks (Bank of Ypsilanti; Bank of Clinton) with estimated obligations of
$141,000.
11/ Includes an estimated $25,000 of obligations of two banks (Bank of Coldwater; Saginaw City Bank) for
which there is no information on obligations at time of failure, or at any previous time.
12/ Includes one chartered bank: Oakland County Bank.
13/ Estimated: each bank arbitrarily assumed to have had obligations amounting to $12,000.
14/ No information is available on the number of banks voluntarily liquidating during these quarters as
compared with those which failed. It is arbitarily assumed that of the 18 which closed during these four quarters
at least four did so voluntarily.
15/ Includes two chartered banks: Calhoun County Bank; Erie and Kalamazoo Railroad Bank.
IS/ Estimated; $12,000 total obligations arbitrarily assigned each of the three free banks; $182,000
of obligations of the two chartered banks is an estimate based on earlier reports.
17/ In addition to the six participating banks which closed, the Bank of St. Clair, a chartered bank,
was permitted to leave the insurance system by virtue of a special act of the legiulature on March 19, 1040.
18/ The Bank of Constantine, a chartered bank and the last remaining participant in insurance, failed at
about the end of 1840 or early in l84l, obligations shown are of the order of magnitude of those shown in its last
report, September 1839*

Ho. ?age

V-S5
For the year 1838 the first detailed record of receipts end
eXpea(iitures of the insurance system is available. 1/ This report
shews receipts in excess of $1,100 and expenditures of only $51 -CO.
receipts cane entirely from assessments; there is no record cf
income from invested funds. Sixteen free banks paid a total of $5^2.75
ia assessments, while three chartered banks paid assessments amounting
to $623.^9.
The receipts and disbursements shown above would have left
the insurance fund at the end of the year with a balance of approxi
mately $1,250. Howeverj it must be presumed that the salaries of the
Bank Commissioners, which by law uere a charge against the insurance
fund, were paid and that, in fact, the insurance fund did not have
a real balance at the end of I038.
1339. If there was any doubt about the insolvency of the
insurance fund at the end of 1838 it vas quickly dispelled in 1839More important, events occurring during 1339 were not so much un
favorable to the insurance system - which was already beyond help as reflective of the beginning of the disintegration of Michigan's
entire banking system. Although there had beer, a partial recovery
from the consequences of the panic of 1837 by the middle of 1839
another downturn began, which continued for almost four years.
As shown in Table 30, 26 of the 34 participating banks in
operation at the beginning of the year closed during 1839* At least
18 of these 26 banks closed because of insolvency and their obliga
tions at the time of closing were in excess of $400,000. Three of
the 18 failed participating banks were chartered banks, the remaining
15 being, of course, free banks- Whereas the bank suspension of
1838 can possibly be attributed to the early discovery of inadequately
capitalized banks organized during the hectic months of late 18377
the failures during 1339 involved the large majority of all partici
pating banks, including chartered banks with sizable amounts cf ob
ligations and operating records of several years.
Failures among nonparticipating banks also became serious
as two such banks closed during 1839* In addition, one of the larger
nonparticipating banks (Michigan State Bank) appears to have sus
pended operations at about this time. There is some evidence that
this bank resumed operations at a later date but as of December 31*
1839* only five nonparticipating banks were doing business. This
represented a 50 percent decline in the number of such banks.
Too late, the Michigan legislature now attempted to prevent
further deterioration of the banking situation by repealing the Free
Banking Act. In a measure with the interesting and significant title:
"An Act more effectively to protect the public against various frauds,"
the legislature prohibited the formation of any new banks under the
1837 law and ordered closed all such banks which had not completed

1/ Document number 2, December 31j 1838, op. cit..

V-26
six months of operation.

Strangely enough, the insurance fund was reported to have
increased in size during the year 1839* The State Treasurer's
report for that year exhibited receipts amounting to $762.6k and
expenses of $£87 .50. 2/ Only one of the free banks (Merchants Eank
of Jackson County) paid an assessment. The bulk of receipts con
sisted of assessments paid by three chartered participating banks:
the Calhoun County Bank, the Bank of St. Clair, and the Bank of
Constantine. Expenses were attributed to three warrants drawn in
favor of two of the Bank Commissioners, presumably representing
partial salary payments. There is no record of any payment to a
creditor of a failed bank from the insurance fund.
slightly

The balance of the insurance fund at the end of 1839 was
therefore $1,335* most of which, according to the indicated report,
was deposited in the Michigan State 3ank. Once again it must be
observed that the insurance fund could not have had a balance at
the end of 1839* By that date the Bank Commissioners had been in
office for two full years and, at salaries of $1,250 per annum,
should have received payments totaling $7*500. Although this amount
exceeded the assessments paid during 1838-39* no recognition of the
discrepancy is apparent in the reports for those years.
lS'4-C-lCUU. The early months of l8U0 saw a continuation
of the banking difficulties of the preceding year. Six of the eight
remaining participating banks closed during the early part of the
year. At least five of these banks were insolvent and had obligations
at time of failure in excess of $200,000. Included among them were
all of the remaining free banks and two of the chartered banks.
Of the two participating banks still in operation in the
spring of 1840, the Bank of St. Clair was permitted by the legislature
to withdraw from insurance. 3/ The Bank of Constantine struggled
along for a time and finally failed near the end of the year. Thus
within three years every bank participating in Michigan's bankobligation insurance system - except one which was permitted to with
draw from insurance - had either failed or gone into voluntary liqui
dation.
In 1840 the State Treasurer and the Auditor General, both
of which officials were charged with the administration of the in
surance fund, reported what had been evident all along, namely,
that the insurance fund had been insolvent for some time. Expenses of
the insurance fund had actually been paid out of the State's general
fund, with the result that at the end of 1839 the fund was in fact
17
An" ct more effectivelly to protect the public against
various frauds, Annual Session 1039* section IT ^Date not known^/
2/ Document? accompanying the Journal of the Senate of the
State of Michigan, Annual Session lB5o, document number 3* December 1,
1839*
3/ An Act for the relief of the Bank of St. Clair,
March19, 18U0 .

v-27
0verdrawn by more than $4,2CO. 1/ During 1840 receipts totaled
<£280 and expenditures were somewhat less so that by December of 1840
fund was overdrawn by about $4,100. 2/ It will be observed that
even the amount the fund was overdrawn does not accotint for all
salary payments to the Bank Commissioners. Consequently, it may he
assumed that no payments were ever made out of the fund to creditors
0f failed banks.
Official recognition of the end of bank-obligation insurance
in Michigan may be dated as November 30, 1842.
In a report of that
date the Auditor General remarked: "The amount for which this fund
vas overdrawn ... having been paid from the general fund, and the
receipts and payments under the law creating it having wholly
ceased, it has been deemed proper to cancel this fund by carrying
the amount to the general fund." 3/
It was also during 1842 that the remains of Michigan's
banking system began to dissolve. By l84l there were only five
operating banks, all of which were nonparticipating banks. The
largest of these, the Bank of Michigan, failed disasterously in 1842.
Several of the other banks closed at about the same time, although
there is again some evidence to indicate that these banks later re
organized and resumed business. Aside from the Bank of St. Clair,
which was in difficulty after 1342 and failed about 1845, only one
bank is known to have operated continuously during this period with
out becoming involved in serious financial difficulty. This was the
Michigan Insurance Company, a firm which operated as a bank despite
its title and despite a charter which evidently had not contemplated
such a development.
Appraisal of Supervision and Begulation of Participating BanksBank supervision in Michigan during the period of bankobligation insurance was conducted in the face of difficulties
which, it is safe to say, have never been matched in perplexity for
any supervisory authority at any time. For three men to examine
upwards of 40 banks three or four times a year in a State which was
largely a wilderness was an almost impossible undertaking. But
overriding all of these difficulties was the fact that supervisory
officials were sworn to enforce banking laws which a large majority
of the bankers were determined to ignore.
Bank organization under the Free Banking Act. The central
fact to be remembered about banking developments in Michigan during
1837-38 is that there was an extraordinary demand for circulating
medium due to, first, the rapid migration of population to the State
and, second, the enforced contraction of circulating medium, largely
1/ Michigan Joint Documents, annual Session l&Ul, document
number 2, December 20, 1&4Q; document number 3* December 30, 1840.
2j Taid..
3/ Michigan Joint Documents, Annual Session 1843, document
number 2, November 30, 1342.

V-28
"because of Federal monetary policy.

Probably most of the individuals
vbo attempted to meet this demand by organizing new banks under the
Free Banking Act did so for purely personal reasons, but their
actions, at the beginning at least, had the approval of the vast
majority of the people.

Such was the demand for circulating medium that banks were
organized and went into operation at a rate of about two per week
during the last four or five months of 1837* At the end of 1837
the legislature attempted to restrain this movement by requiring that
no new bank could issue circulation - and thus for all practical
purposes could not open for business - until each banknote had
been endorsed by a Bank Commissioner. 1/ However, even when obeyed
this provision came too late to be of use.
The Free Banking Act was a rather carefully drawn piece
of legislation. Indeed, the procedure for placing banks in operation
was "hedged around with so much care, and guarded with so many pro
visions, that few, it was supposed, would venture to bank under /the
lav^." 2/ Section 10 was the most formidable obstac e to the forma
tion of banks, since it began: "At least thirty per centum of the
capital stock of such association shall be paid, in specie before
such an association shall be permitted to commence operations ..." 3/
The methods by which this particular provision was circumvented are
illustrative of the general attitude in Michigan during 1837-38,
particularly when it is remembered that in most instances the indivi
duals concerned were not financial adventurers from out of State
(although Michigan did not lack for these) but "worthy men, with
the most upright intentions ... with no knowledge whatever of banking
business ..." kj Among the various methods used were: exhibiting
worthless metals as specie; shifting specie from one bank to another
one jump ahead cf the examiners; and the "purchase" of fictitious
specie certificates. The last mentioned instrument purported to
represent specie on deposit in the issuing bank and available on
demand to the organizing bank. As a matter of fact, there was
simply not enough specie available in Michigan to provide reserves
for operating banks, let alone for banks to be newly organized, so
that the vast majority of these certificates were entirely worthless.
The use of specie certificates provides another illustration
of the public sanction given to violation of the law. Many, if not
most, of these certificates were furnished by chartered, nonpartici
pating banks. Correspondence files of several of the prominent
Detroit bankers of the time contain requests for specie certificates,
with no effort to disguise
the purpose intended. For example,
a request to one such banker went as follows: "Will you and Mr. ____
1/ An Act to amend An Act to organize and regulate banking
associations,"and for other purposes, December 30, 1837, section 39»
2J "Report of the Bank Commissioners/' January 18, 1839,
House of Representatives Documents, 26th Congress, 1st Session, docu
ment number 172 .
3/ An Act to organize ... 5/ "Bank Commissioners’ Report," January 18, 1839, op. cit..

V-29
about $3;COO in specie which I pledge my honor shall be forthcofflin6 as y°u <^irec‘fc ••• I Ao not conceive that
rtis necessary
to have the specie actually here - but only a certificate of deposit
in your bank '/hicfc will not interfere with your report of specie and
will £>° ^or as 2iuch in our stock." l/ That such requ&ats were often,
acted upon favorably is indicated by a report of the Bank Commissioners
in which they noted that many banks were able to organize because
0f "the base dishonesty and gross cupdity of a few who had the
control of the specie of the country /i.e., Michigan^". 2/
lend

Participation of the older bankers in the movement to
organize free banks may be explainable siraply in terms of profits
vhich these bankers hoped to secure; in the short run through
making fictitious loans and in the long run through tying the new
banks to their own institutions. But more important, their partici
pation is still another indication of the general refusal to abide
hy the terms of the Free Banking Act.
The public attitude which permitted the banking developments
described here and earlier in this study was, at root, the most
formidable obstacle which was presented to bank supervisory officials.
Their frustration - and even dispair - over this situation will
never be expressed more dramatically than by words which appeared
in one of their official reports:
The singular spectacle was presented, of the
officers of the State seeking for banks in situations
the most inaccessible and remote from trade, and
finding at every step an increase of labor by the
discovery of new and unknown organizations ... Gold
and silver flew about the country with the celerity
of magic; its sound was heard in the depths of the
forest, yet, like the wind, one knew not whence it
came or whither it was going ... The vigilance of a
regiment of /examiners/ would have been scarcely
adequate, against the host of bank emissaries which
scoured the country to anticipate their coming
and the indefatigable spies which hung upon their
path; to which may be added perjuries, familiar
as dicers’ oaths, to baffle investigation.
3/'
Bank examination. It will be recalled from an earlier
section that all banks participating in Michigan's insurance program
were required to submit to examination by the Bank Commissioners.
Beginning in June 1337, examination was extended to those nonpartici
pating banks which accepted the conditions of the act permitting
the suspension of specie payments until May 16, 1838. It appears
that three of the nonparticipating banks did not accept the pro
visions of this act and therefore did not become subject to examina
tion, although it must be presumed that these banks nevertheless
1/ Letter, September 5> 1^37, C. C. Trowbridge Papers, MSS,
Burton Historical Collections, Detroit, Michigan.
2/"Bank Commissioners’ Report," January 18, 1839> op. cit..
3j "Bank Commissioners' Report," January 18, 1839, op. cit..

v-30
suspended specie payments. 1/ It will also be recalled that examina
tions vere tc be made once in each four-month period in the case of
chartered participating banks and once in each three-month period
in the case of free banks.
During most of the first two years of bank-obligation in
His two reports to
the legislature (January 5, 1837 and December 6 , 1837) reveal little
real information about the condition of Michigan banks and provide
no basis on which his examinations may be appraised. 2j Beginning
in 1838* after the number of 3ank Commissioners was raised to three,
reports to the legislature provided a considerable amount of informa
tion on examination activities.
surance there was only one Bank Conmissioner.

The reports deal largely with the Commissioners' activities
in ferreting out and exposing violations of law as a consequence
of the organizing of new banks. There '.vas little occasion for the
Commissioners to concern themselves with the quality of assets
acquired during regular bank operations and, aside from a few inci
dental references, there is no report which deals with anything but
cases of insolvency, violation of law, fraudulent organization, or
mismanagement.
In April of 1338 two of the three Bank Commissioners sub
mitted a special report to the legislature in answer to a request
by that body. 3/ Of the k2 banks subject to the examination of these
Commissioners, nine were chartered banks and 33 were free banks.
The Commissioners reported that five had not yet been examined and
four others were just going into operation. Of the 33 remaining
banks they reported that they had secured injunctions against the
continued operation of six and were dubious of the solvency of two
others. Some of the reasons for their action in the case of the
six banks not only serve to illustrate the previous discussion of
bank organization but also suggest that the examinations were quite
thorough.
When the examiner called and proceeded to count the specie
of the newly organized Jackson County Bank he:
... selected a box ... and found the same to contain
a superficies only of silver, while the remaining
portion consisted of lead, and ten-penny nails. /He/
then p-coceeded to open the remaining seven boxes;
they presented the same contents precisely, with a
single exception, in which the substratum was windowglass broken into small pieces, hj
1/ In the Bank Commissioners* Report of April 6 , I&38, °P•
cit., the Farmers and Mechanics Bank, the Bank of Pontiac, and the Bank
of Macomb County are so described.
2/ "Annual Report of the Bank Commissioner of the State of
Michigan" January 5* 1^37, Journal of the House of Representatives of
the State of Michigan, 1837, document number "E; "Annual Report of the
Bank Commissioner of the State cf Michigan", December 6 , 1337, Docu
ments accompanying the Journal of the Senate of the State of Michigan,
Annual Session 1838, document number 2.
3/ "Bank Commissioners1 Report," April 6 , 1838, op. cit..

The Wayne County Bank was found to be using specie certificates in
which "the cashier ... had so little confidence .... that he made no
entry of them upon the books of the bank." 1 / ‘JSae Bank of Lapeer
was found to have $ 16,000 in specie, ^15>000 of which was a specie
certificate issued by the Farmers and Mechanics Bank (a chartered,
nonparticipating bank) upon receipt of a check for the same amount
drawn upon a nonexistent account in the Bank of Lapeer by one of
its directors. 2/ The Farmers Bank of Genesee County also had
fictitious specie certificates, while the Farmers Bank of Sandstone
had never received any payments on its capital stock and, in addition,
had issued circulating notes without the necessary (in its case)
endorsement of a Bank Commissioner. The last of the six banks, the
Exchange Bank of Shiawassee, had "specie" consisting of: a fictitious
specie certificate issued by the Farmers Bank of Genessee County, a
forged specie certificate of a New Haven, Connecticut bank, a counter
feit banknote of a New York bank, and "seven coppers ... in the
safe." 3/
In each of these six cases the Commissioners made a care
ful attempt to estimate the potential loss which would fall on bank
creditors, with the combined total coming to about $100,000. Also,
the Commissioners suspected that additional circulating notes were
outstanding but were not shown on the books of the banks.
Examinations conducted during the nine months of 1833
following the Bank Commissioners' report noted above resulted in
the securing of at least 19 additional injunctions against operating
banks, one of which was a nonparticipating bank subject to examina
tion. bj Still other banks were allowed to go into voluntary
liquidation, although many could presumably have been enjoined by
the Commissioners. In all of these examinations the diligence of
the Bank Commissioners, judged both from their reports and the
results obtained, seems to have been exceptional.
There are no detailed reports of examination activities
during 1839* However, it may be presumed that during that year most
of the banks -which closed did so because of insolvency attributable
to asset deterioration. By that time the Bank Commissioners had
probably weeded out most of the banks which were organized fraudu
lently, or were flagrantly violating the law. The relatively few
free banks which continued operations through 1839 were probably
better organized and better managed banks.
Consequences of examination policies. The history of bankobligation insurance in Michigan provides an interesting, and per
haps unique, illustration of a completely ineffective insurance
system possessing bank supervision of the highest quality. This,
of course, is simply a reflection of the fact that forces far more
powerful than the quality of bank supervision were at work. Hevertheless, supervision was of some importance to the events of 1838-39,
k/ "Bank Commissioners1Report," April 6, 153^, U.S. House
of Representatives Documents, 26th Congress, 1st Session, document
number 172.
1/ Ibid..
2/ Toid..
3/ Ibid..
4/ U.S. House of Representatives Documents, 26th Congress,

V -32

though the part it played was scarcely that which had been anticipated.
The collapse of Michigan's banking system which began in

1838 was touched off by the examination procedures of the Bank Com
missioners. This is not to say that the collapse was caused by
supervisory officials, but rather that their activities served as
catalytic agents in the decline. By their very diligence and
thoroughness the examiners^exposed examples of fraud and insolvency
which shook the confidence/the public, both in Michigan and in
surrounding areas.
With so many new banks in operation, the public found it
difficult to distinguish between those of good credit and those
whose notes were at a heavy discount or worthless. The early reports
of the Bank Commissioners contributed to the uneasiness of the
public. Notices began to appear in the newspapers of neighboring
States early in 1838. For example, an Indiana newspaper commented:
"from necessity we are compelled to notify our distant subscribers
that we cannot any longer receive the bills of any Michigan banks
in payment for subscriptions. Doubtless some of them are good but
all of them are uncurrent in this part of the state." 1/ And a
newspaper in Cleveland declared: "a list of banks of Michigan,
bankable at Detroit, is greatly desired by persons in the Lake
country. All sorts of reports are afloat touching the value of
different kinds of Michigan paper at heme." 2/
The very fact that a bank was participating in insurance
added to the public suspicion. A person could quickly determine
if a bank was a free bank, and thus suspect, or an older chartered
bank by noting whether or not a proffered banknote bore an inscrip
tion to the effect that the holder was protected by reason of the
bank's membership in the insurance system. Those which did bear
such a description were, of course, the notes of free banks, or of
the few chartered participating banks. The public soon began to
use the term "wildcat bank" to apply to all free banks, even to
those known to be sound. The following letter to the Governor from
a large stockholder of one of the well-managed free banks describes
the difficulty of operating under these conditions. This gentle
man wrote that his bank:
has been in operation for two years and has never
in one instance failed to redeem its bills in
specie when presented ... but still they do not
have a first credit because it is a wildcat Bank and that is enough to condemn anything. We are
now entitled to a good charter...... and in
your message to the Next Legislature ... I hope
that you will recommend the chartering of the Bks.
in good credit that were organized under the general
_________ Bkg. law. 3/ ____________________ __________ _
1st Session, document number 172,'pp. 1122-1143. Several of these
injunctions may have been secured in the first weeks of 1839*
1/ Indiana Journal, February 3, 1838.
§/ Cleveland Herald Gazette, June 6, I838.
3/ Letter, December li, i839> William "Woodbridge Papers,
MSS, Burton Historical Collections, Detroit, Michigan.

V-33
Although "bank supervision was of no assistance in strengthen
ing the Michigan banking system, and probably actually hastened its
collapse, it nevertheless gave some protection to Michigan bank credi
tors. By their prompt action supervisory officials were often able
to close a bank after it had been in operation only a brief time,
thus preventing it from issuing large additional amounts of circulating
notes.
Numerous illustrations of this can be found in the records.
For exaople, the Farmers Bank of Sandstone went into operation on
January 29, 1838. Twenty-five days later, on February 23, 1838, the
Bank Commissioners reached the bank, conducted their examination, and
applied for an injunction to close the bank. During its 25 days of
operation the bank had succeeded in issuing a reported circulation
of $^6,933. In addition, it was believed that the bank had placed
much larger amounts in the hands of its agents, which were about to
go into circulation. The minimum estimated loss was $26,956, which
loss would obviously have been greater had the bank been allowed to
operate even an additional several weeks.
Appraisal of Michigan's Insurance System
Insurance of bank-obligations in Michigan failed to attain
either of the two objectives its proponents had in mind: the State
was not guarded against collapse of the circulating medium due to
bank failures nor was the "small" bank creditor protected against
loss arising from the same cause. The Michigan experience demonstrates
that however we11-conceived and managed, an insurance system
cannot be effective unless lawmakers and those who determine monetary
policy provide at least the piinimum requisites for successful opera
tion.
Protection of bank creditors. Whatever protection was
afforded creditors of banks participating in Michigan's insurance
system arose out of the ability of the Bank Commissioners to close
insolvent banks as rapidly as possible. Ho payments to creditors
of failed banks are known to have been made from the insurance fund.
Losses to creditors can be only roughly approximated. This
is due to the absence of liquidation records, which in turn is due
in great part to the fact that liquidation proceedings were stopped
when the Free Banking Act was declared unconstitutional in 184U. The
Bank Commissioners reported in January 1839* that "at a low estimate,
near a million dollars of the notes of insolvent banks are due and
unavailable in the hands of individuals." 1/ It may be assumed that
the bulk of this $1 million was never recovered since the banks
concerned were those most fraudulently and recklessly operated. To
this amount must be added: the notes of participating banks which
failed after the above estimate was made, plus the deposits in all
participating banks at dates of failure, less whatever recovery
was later made on these items. It would appear not unlikely that the
total loss to creditors of failed participating banks exceeded $1
million and approached $2 million during Michigan's insurance history.
Reasons for failure of the insurance system. Insurance of
bank-obligations in Michigan was a failure for two reasons: the_____
l/ "Bank Commissioners1 ReportJanuary 1&» 1839. QP- citTT

V-3*+
timins of its adoption and, second, the peculiar character of the
State's banking development just after the insurance system began

There were, it is true, certain deficiencies in the
insurance law. However important these deficiencies might have
become under normal circumstances, they were of little significance
in contributing to the collapse of bank-obligation insurance in
Michigan.
operation.

Bank-obligation insurance did not fail in Michigan due to
a lack of good bank supervision, nor can its difficulties be traced
to the insolvency cf a few large participating banks. On the
contrary, precisely the opposite situation was true in each case.
The explanation is simply that Michigan put its insurance system
into operation just prior to a severe depression. By itself this
would probably have been sufficient to cause the collapse of the
system but the Michigan legislature compounded the difficulties by
adopting banking legislation which increased to an extra-ordinary
degree the potential liability of the insurance fund without pro
viding any immediate increase in its resources. Since this potential
liability became almost immediately an actual liability the insurance
system broke down.
Deficiencies of insurance law. Michigan’s insurance law
suffered from the same defects as that cf the New York la:/ from
which it was copied. These deficiencies were: (l) insurance
authorities were not provided with a borrowing power to be used in
the event of an emergency, (2 ) the examining force was adequate in
quality but decidedly inadequate in number, (3 ) no payments could
be made to the creditors of failed participating banks until liquida
tion of the banks' assets had been completed, and (k) assessments
were levied on capital stock rather than on insured obligations.
Of the various shortcomings noted above the only one which,
if remedied, could possibly have influenced the course of events in
Michigan was the lack of a 'borrowing power. However, the needed
amount was so large that it is scarcely conceivable that adequate
funds could or would have been secured. Further, western States such
as Michigan had a poor credit standing during 1338-42 and found it
exceedingly difficult to borrow money. In fact, Michigan had trouble
placing a bond issue of $5 million, authorized in 1837 for internal
improvements purposes, and to this day has not redeemed half of that
issuei
So far as the other deficiencies are concerned, a larger
examining force would simply have meant that many hanks would have
been closed even sooner than they were; the need for a method of
payment prior to liquidation of a bank's assets was of no consequence
since there were no funds available for such payments, while assess
ments on insured obligations rather than capital would not have
yielded sufficient additional revenue.
Comparison with other insurance systems. Michigan’s bankobligation insurance system may be compared with those of New York
and Indiana, both of which were in operation during the panic of
1037 and the depression which followed. New York's insurance system
also broke down by 1342, but it was eventually able to pay all insured

V-35
claims arising out of the failure of participating banks. Indiana's
insurance system, which was of an entirely different type than that
of Michigan, was completely successful in protecting bank creditors
during the crisis years of 1837-^2 .
The different results attained by New York and Michigan
are clearly attributable to the matter of timing* By 1 8 3 7 Mew York's
system had been in full operation for six years and the fund was
sufficiently large to permit authorities to handle the first cases
caused by the panic of 1 8 3 7 . The fact that they were given authority
to act promptly, without having to await liquidation of bank assets,
was undoubtedly important, but it may be presumed that the Michigan
legislature would have done precisely the same thing under similar
circumstances. Also, during 1840-42 the Hew York fund was able for
a time to pay the claims of insured creditors. When additional
failures gave rise to claims far in excess of the amount available
in the fund, the legislature permitted the fund to borrow, not only
because it could observe the beneficial effects of paying these
claims but also because it was clear that assessments paid by sur
viving banks would be sufficient to eventually redeem the securities
issued. In Michigan, 011 the other hand, the entire banking system
was wrecked within a very short time, while the fund was hopelessly
insolvent with the failure of the first participating bank.
A more interesting comparison can be made with the Indiana
insurance system. This is so because the Indiana system was in
operation only a little more than two years before the panic of 1837
and had not much more time to prepare than had the Michigan insurance
system. Also, it will be recalled from Chapter IV that the Indiana
plan was one of mutual guarantee by participating banks with no fund
and nc borrowing power, except insofar as each individual bank could
or would borrow when it was called upon to make a contribution. Yet
only one Indiana bank became involved in serious financial difficulty
and in this case prompt action by insurance authorities resulted in
complete protection for insured creditors.
The explanation lies in the character of supervision given
Indiana participating banks. In ability, the Michigem supervisory
personnel were at least the equal of those in Indiana, but they did
not possess the broad authority which Indiana supervisory officials
were given. Because of their power to control the volume of bank
operations and, to some extent, the direction of bank lending, super
visory officials in Indiana were able to keep participating banks
free from involvement in the speculative land boom of the time. In
addition, they were able to force participating banks to follow a
contractive policy during the period of suspension of specie payments.
In fairness to the Michigan system, it must also be added
that even with respect to supervision timing was of some importance.
The speculative land boom in Michigan reached dizzying proportions
during 1 8 3 6 . Had adequate supervision been accorded Michigan banking
a year or two earlier, as was the case in Indiana, it is possible
that Michigan banlcs would have been in a better position when the
panic of 1837 occurred. Still, it is extremely unlikely that even
this would have been sufficient under the circumstances which prevailed

v -36

in Michigan as a consequence of the passage of the Free Banking Act.
If Michigan had adopted an insurance plan similar to that of Indiana
it would probably have failed even if the free "banks had not been
included in insurance; it would certainly have failed if they had
jeen included. 1/

Conclusion. As the only insurance system (of the six
adopted prior to the Civil War) which completely failed to protect
bank creditors, Michigan's system offers little in the way of
constructive lessens to be gained from its operating experience,
v/hat its history clearly demonstrates is that bank-obligation in
surance car.not operate in a vacuum; that there are basic causes
for bank failures rhich are still beyond the immediate influence
of bank-obligation insurance.

1/ In 1 B39 Michigan^Lid, in fact, attempt to establish a
banking system and insurance plan similar to that in Indiana. How
ever, sufficient capital could not be secured to enable the banks
to begin operations.

V-37
Appendix, Chapter V
Free Banks Organized under Act of
March 15, 1337

Banks

Month and year
commencement
of operations

Month and year
of suspension
of operations

Adrian, Bank of
Allegan, Bank of
Ann Arbor, Bank of
Auburn, Bank of
Battle Creek, Bank of
Berrien County Baiik
Branch County Barak
Brest, Bank of
Chippeway, Banlc of
Chippeway County Bank

February 1838
December 183?

y o
January 1839 2/

3/ „ a
January lb30
May 1838
November 183?
September 1337
3/
5/

si.
21 0
January 1839
September 1838
y
August 1838
3/
3/

Citizens Bank of Ann Arbor
Clinton Canal Bank
Clinton River Bank
Coldwater, Bank of
Commercial Banlc, Gratiot
Commercial Banlc, Harre
Commercial 3ank of Michigan
Commercial Banlc, Portsmouth
Commonwealth Bank, Tecumseh
Detroit City Bank

3/
December 1&37
?/
**
* ?
November 183
3/
3/ _
January 1&39
3/
2/ „
December 1637

Detroit and St. Joseph Railroad
Bank
Exchange Bank, Ann Arbor
Exchange Bank, Shiawassee
Fanners Banlc of Genesee County
Farmers Bank of Eomer
Farmers Banlc of Hudson
Fanners Bank of Oakland
Farcers Bank of Prairie Road
Farmers Bank of Romeo
Farmers Bank of Sandstone

January I038

Farmers Bank of Siaron
F & K Bank of Centreville
? & M Bank of Monroe
F & M Bank of Pontiac
? "s M Banlc of St. Joseph
Genesee County Bank
Gibralter, Bank of
Goodrich Banlc
Grand Paver Bank
Huron River Banlc

December 1837
3/
October 1337
December 1837
3/
December 1837
January 1838
January 1838
September 1837
January 1838

3/
February 1838
December 1837
August 1837
3/
December 1837

V
2/ „ o
January 1838

3/
January- 1839 2/
3/
January 1839 2/
3/
3/
y
3/

y
u
March 1838
March 1838
January 1839
3/
July 1838

%
3/
February 1838
September 1838
3/
y
July 1838
July 1838
January 1339 2/

v -38

Jackson County Bank
Kalamazoo River Bank
Kensington, Bank of
Lake St. Clair, Bank of
Lapeer, Bank of
Lapeer County Bank
Lenawee County Bank
I!anchester, Bank of
Marshall, Bank of
Merchants Bank of Jackson County
Merchants Bank of St. Joseph
Merchants and Mechanics Bank of
Monroe
Michigan Centre Bank
Millers Baric of Washtenaw
Niles, Bank of
Oakland, Bank of
Ovasso, Bank of
Peoples Bank of Grand River
Saginaw City Bank
Saginaw County, Bank of
St. Joseph County Bank
Saline, Bank of
Shiawasse, Bank of
Shiawasse County Bank
Singapore, Bank cf
Superior, Bank of
Utica, Bank of
Van Buren County Eank
Wayne County Bank
White Pigeon, Bank of

November 1837
3/
December 1837
7/
December 1837
3/
December 1337
November 1837
October 1837
January 1836
-

November 1337
„

December 1837
December 1837
September 1837
3/
February 1838
December 1837
3/
December 1837
December 1837
December 1837

April 1838
January 1839

I
3/

February 1838
3/
July I838
3/
March 18^8

February 1838
January 1838
September 1837
3/ .
December 1337
3/

y,
n o
January 1839
V
January 1839 2/
3/
August 1838
January 1839 2/
3/
September 1838
August IS38

b
y o
January 1839
January 1339 2/
u
March 1338
3/

1/ Unknown! last condition report dated August 1839*
2/ Injunction reported as having been secured by this date;
actual date of closing possibly earlier.
3/ No conclusive evidence exists to show that this bank was
ever actually in operation.
4/ Unknown; presumably before end of 1840.
5/ Unknown; last condition report dated September 1839*

CHAPTER VI
IITSU3ANCE OF BANK OBLIGATIONS II! OHIO, 1345-1866

Ohio was the fifth State to make use of the insurance
principle in providing for the protection of bank creditors before
the Civil -far. The Ohio plan was put into effect in 1845 and -was
to expire in 1866. However, it became inoperative with the con
version of most of the participating banlcs to national banks after
1863.
Review of Ohio Banking History to 1865
Unlike the two western States which had. previously adopted
insurance programs for the protection of bank creditors, Ohio at
the time of adoption of the program was relatively far advanced in
its economic development and had a banking history dating back almost
to the beginning of the century. Ohio was the first State carved
from the Old Northwest, in 13C3- 1/ By l84o, following the great
migration from the eastern States, it had become the third most
populous State in the union. It was the leading agricultural State,
producing, for example, about a fourth of the country's output of
wheat. Cincinnati was not only the great metropolis of the State but
also one of the leading cities in the nation, and Cleveland was
rapidly becoming a commercial center of importance.
Banking prior to 134-5 ■ The first bank in Ohio, the Miami
Exporting Company of Cincinnati, was formed in 1803, shortly after
statehood was attained. It had not been specifically chartered as
a bank but its proprietors interpreted several provisions of the
charter as granting such rights and almost from the beginning engaged
in none but a banking business. The first bank charter, as such,
was granted by the State legislature in I3c8, to the Bank of Marietta
Banking spread rapidly in Ohio, particularly after expira
tion of the charter of the first Bank of the United States in 1811,
and by IS19 it appears that 25 banks were in operation. However,
the depression of that year led to the failure of a number of banks
and the restraining influence of the second Bank of the United States
which had been chartered in l8l6, kept the number of banks from
expanding throughout the 1820's. Indeed, only 11 banks were doing
business in the State in I83O, although as settlers continued to
arrive and new towns started there was an increasing demand for
bank facilities.
Andrew Jackson1s veto in 1632 of the bill rechartering
the second Bank of the United States was correctly interpreted as
1/ The Old Northwest roughly included the area north of
the Ohio River between the Mississippi and the Alleghenies. Out of
it was eventually formed the States of Ohio, Indiana, Illinois,
Michigan, and Wisconsin.

71-2
as foreshadowing the demise of the federally chartered bank with its
nationwide system of 'branches, one of the most important of which was
at Cincinnati. As a consequence, 13 new banks were chartered by the
State between 1830 and 183^. In addition, a number of banks which
had failed earlier but whose charters had not expired, among them
the Miami Exporting Company, reorganized and resumed business. The
panic of 1337 checked but did not completely halt the increase in
the number of banks and by 1839 at least 35 chartered banks, with
aggregate capital exceeding $10 million, were doing business. 1/
At the same time there was substantial growth in the number
of unauthorized banks. Banks could only be chartered by special act
of the State legislature, and it was not always possible to satisfy
all groups or localities believing themselves deserving of charters.
Consequently, unauthorized banks (such as the Stark County Orphans
Institute and the Granville Alexandrian Society) were numerous.
Attempts to legislate them out of existence were futile and probably
a few were operated as well as the chartered banks.
I839
was the peak year for the number of authorized banks
in this period. In that year the largest part of Ohio's $10 million
banking capital was concentrated in Cincinnati, with four of that
city's banks accounting for more than one-third of the total. 2/
Nevertheless, banking facilities were well-distributed throughout
the State. Eoth Columbus and Cleveland had two relatively large banks
and almost every town of any size had at least one medium or smallsized bank.
The banking structure was weakened by the panic of 183?,
and the recovery of 1833-39 was short-lived, tailing off into severe
depression. Also, many bank charters expired in 1843-Vt-. With the
banks closing both because of failure and of expiration of charters,
Ohio was left at the beginning of 184-5 with only eight authorized
banks and few, if any, of the unauthorized banks.
Banking from l S ^ to 1365. Because of the small number
of banks operating in the State in I8U5 , and the difficulties which had
been met under the previous system of permitting only chartered banks,
the legislature in I8U 5 reorganized the entire banking system. Legis
lation in 131+5 and later makes it possible to characterize this
second period as "banking under general laws", as contrasted with
the earlier period of "banking under special charters". 3/
The banking legislation of I8U5 was "An Act to incorporate
the State Bank of Ohio and other banking companies" which became law
February 24, 13^5 ■ This law was an attempt to combine the leading
features of banking codes in other States, notably those of Hew York
and Indiana.__________________________________________________ _
1/ Bank capital as reported in the early years often was
authorized capital. Paid-in capital may have been substantially less.
2j Authorized capital. Capital data for unauthorized banks
are unavailable.
3j C. C. Huntington, A History of Banking and Currency in
Ohio before the Civil War (Columbus: Ohio Archaeological and
Historical Society, 19157, ?• ^H*

VI-3
Under the 1845 law* which remained the basic banking law
0f the State for twenty years, any five persons might form a bank
vrith capital not less than ^50,000 nor more than ;^500,000, at least
30 percent of which had to be paid in gold or silver coin. A Board
of Bank Commissioners vas provided to examine all applications. To
•orevent a concentration of banks the State was divided into twelve
districts and the number of banks in each was limited. Further, the
aggregate capital of all banks formed under the act was limited to
£6,150,000. Banks organized under provisions of this law were in
corporated until May 1, 1866, at which time they were to cease
operations.
Two kinds of banks could be organized under the 184? law:
Branch Banks of the State Bank of Ohio and Independent Banks. The
difference between them vas primarily the nature of the security pro
vided for the notes which the banks issued. Circulating notes of
the Branch Banks were protected through establishment of an insurance
program, the details and operation of which are discussed in later
sections, while notes of Independent Banks were secured by deposit
of Federal or State bonds with the State Treasurer to amounts at
least equal to the value of the notes. 3ranch Banks also differed
from Independent Banks in that their minimum capital was $100,000
instead of $50,000, and they were supervised by a Board of Control
appointed by themselves rather than by State officers.
The Branch 3anks of Ohio were copies cf those of Indiana.
That is, they were independent banks, with their own stockholders
and officers, but collectively they constituted the State Bank. It
seems likely that Ohio adopted this structure and terminology in a
deliberate attempt to secure immediate public acceptance for its new
banking system. During the depression years of the early l840's, when
many Ohio banks had failed, notes of the various Indiana Branch Banks
served as the "par" currency of Ohio.
The Ohio legislature was therefore not introducing a novel
system in 1345, although present day writers have occasionally been
led to assume from the bank titles that branch banking, in the modern
sense, was authorized in Ohio in 1845* Indeed, even residents of
distant States were sometimes confused, as the following letter from
the president of the Board of Control (the supervisory agency)
indicates:
Your communication of the 31 ult. addressed to
the "Cashier of the State 3ank of Ohio” is received.
The corporation knovn as the "State Bank of Ohio"
is peculiar in its organization ... The State Bank,
as such, has no capital, transacts no proper banking
business, receives no deposits, makes no discounts,
declares no dividends. All this is done by the
several Branches ...
1/
1/ January 2, 1863, Letterbooks of the Board of Control^
MSS, Ohio State Museum, Columbus (hereafter referred to as "Ohio
Letters").

VI-k
New banks were soon organized under the 18^5 lav, and by
1850 fifty-seven banks, with capital exceeding $7 million, were in
operation. 1/ Almost three-fourths of the banks in that year were
Branch Banks.
Eecause there was a limit to the number of banks which
could be formed under the I8U5 law, both in total and by district,
there was an increasing demand in some sections of the State notably in Cincinnati - for a general banking law. Consequently,
another class of bank was provided for in the Free Banking Law
of 1-fe.rch 21, I85I. Capital of the nev banks was set at a minimum
of $25,000 and a maximum of :^50C,000, and provisions regarding note
security were similar to those in force for the Independent Banks.
A number of banks were formed under the new law and, by the end
of 1851, seventy banks were in operation in Cliio. This represented
the peak number for the entire period as the depressions of 185^ and
1857 were marked by numerous bank failures.
From 1357 until establishment of the National Banking System
in 1863, no major bank legislation was enacted in the State and the
number of banks remained fairly stable. However, after 1865 many
Ohio banks converted to national banks, spurred on in part by the
impending expiration of legal authorization for the Branch Banks
and the Independent Banks. As a result there was little need to
extend the General Banking Law of 1845 so that by the end of 1865
banking in Ohio was conducted by national banks and by banks operating
under the Free Banking Law of I851 .
Character of the Guaranty Legislation.
When reorganization of Ohio's banking system and the
adoption of an insurance plan were under consideration in the early
1840' s the legislators were able to draw upon the experiences of the
States which had preceded them in the insurance field by at least a
decade. As described in Chapter IV, Indiana's mutual guaranty
system began operating in 183^ and by 1844 it must have been clear
to the Ohio legislators that this plan had successfully weathered
the great depression of the early forties. ITew York's ic^uraace system
described in Chapter II, had been in operation for about 15 years.
It is not surprising therefore that the insurance plan finally
adopted in Ohio was a blend of the Indiana and New York plans.
As was the case in Indiana, Ohio's plan embraced only the
Branch Banks of the State Eank system. 2/ On the other hand, only
circulating notes were protected rather than all bank obligations.
This was very possibly due to the fact that the New York plan, which
had at first covered both circulating notes and deposits, had run
into difficulty in 1842 vith the result that insurance in that State
T /1 includes capital of banks chartered prior to™lS55 which
continued to operate after that date.
2/ No provision was made for the inclusion in the insurance
program of any banks to be organized at a later date, with the ex
ception of new Branch Banks.

VI-5
^as thereafter limited to circulating notes.
Objectives. One of the few statements which could be
located regarding the purpose of the 1845 legislation is by the
-legislative committee which drafted the law:
The committee entertain no doubt that a large majority
of the people of the state desire the enactment ... cf
some law authorizing the establishment of banks which
will furnish them with a safe and convenient currency
... In framing this bill the committee have constantly
in view the great landmarks of entire security to the
bill holder, reasonable security to dealers with
the banks, and proper inducements to the capitalist
... y
This statement would appear to reflect concern over both the circu
lating mediu, as such, and the safety of the individual bank
creditor, particularly the noteholder. It is thus in accord with
the general conclusion as to the function of banI:-cbligation in
surance, found in Chapter I.
Insurance f’.and. The insurance fund, or "safety fund"
as it was called in the act creating the State Bank, was not built
up through annual assessments. Instead, each Branch Bank was re
quired to "pay over, or deposit to the credit of said board [of
Control/^ 2/ as said board shall order, money or /bonds7 of this
state, or of the United States, at their current value in the city
of riew York, but in no instance above their par value, [inj an amount
equal to ten per centum on the amount of the notes for circulation,
which shall be delivered to such branch." 3/ This sum was to be paid
before any notes were delivered to the Branch Banlc, i.e,, before it
opened for business, and additional payments were to be made only if
the amount of notes delivered was later increased due to an increase
in capital or because the entire authorized issue had not been de
livered at the commencement of business.
The insurance fund was to be invested by the Branch Banks,
under the direction of the Board of Control, in Federal or State
bonds or in mortgages. Interest thereafter received was to be paid
to the Branch Banks in proportion to the amounts they had contributed.--'
!/hile the fund was the "property of said board, /it was held~f in trust
for the benefit of the several branches of the State Bank of Ohio,
and as a fund for the redemption of the notes of circulation /of a
failing Branch Bank/". 5/ In practice, the Branch Banks carried the
1/ As quoted by C. C. Huntington, A History of Banking and
Currency in Ohio before the Civil War (Columbus: Ohio State Archaeo
logical and Historical Society, 1915), p. 421.
2/ A description of the composition and functions of the
Board of Control is given in the following section.
3/ An Act to Incorporate the State Bank of Ohio and other
Banking CompanT^s^ February 24^X3457 section 21.
4/ Ibid., section 22.
5/ Ibid., section 21.

VI-6
amount they had paid on the assets side of their statements of
condition.
Payment of insured obligations. The method of paying
additional evi
of I!ew York,
which served as the model for Ohio legislators. The insurance fund
v/as not essential to the Ohio plan and, in fact, did not stand for
the immediate and direct payment of creditors of a failing bank.
Instead, this function was served "by a mutual guaranty system- '.■flien
a Branch Bank became insolvent, i.e., vas unable to redeem its notes
in specie l/the Board of Control was required to place it in receiver
ship and to "Immediately provide money, and place the same in such
solvent branch or branches, as may be most convenient for the pur
pose of redeeming the notes of such failing branch ..." 2/ The
amount provided vas not taken from the fund but from new assessments
levied on the solvent Branch Banks in proportion to the amount of
circulation each had outstanding. These sums were then repaid to
the solvent Branch Banks through liquidation of securities comprising
the insurance fund. 3/
creditors of failed tanks under Ohio's plan provides
dence that it was the Indiana plan, rather than that

The role of the insurance fund was clearly described by the
President of the Board of Control in a letter to a Cincinnati news
paper in 1862:
It is a very common mistake ... to suppose that
the "Safety Fund” is ... especially provided to
secure the circulation, but such is not the fact.
The entire capital, with all the means of every
description belonging to each and all the Branches
... are the security provided for the circulation
of each Branch. It is the Branches themselves, and
not the public, that are to look to the "Safety Fund"
for their security ... The basis of security provided
... is that of mutual liability ... <+/
Upon liquidation of the assets of a failing bank by re
ceivers, payments were to be made first to the other Branch Panics
to cover any amount not already returned from the insurance fund and,
second, to the insurance fund to reimburse it for all moneys advanced
except for that portion originally contributed by the failing Branch
Bank. Following this, the receiver could meet the claims of de
positors and other creditors and, finally, distribute any remaining
funds among the stockholders. 5/ No provision was made for re
plenishing the fund in the event it was permanently diminished.
1/ Ibid., section 2k. I f for some reason the Board of Control failed to take action any creditor of a bank failing to redeem
its notes in specie could secure a court order requiring such action
to be taken. Contrariwise,, a Branch Bank falsely accused of being in
solvent could appeal to the courts, (sections 28 and 29 ).
2/ Ibid., section 25 .
3/ Ibid., section 26.
March 1&, 1862, Ohio Letters, op. cit..
5/ An Act to incorporate ..., section 27 .

vi-7
However, it was probably expected that the Branch Banks would at
all times have an amount equal to ten percent of their circulation
deposited in the fund, so that if it were diminished new assess
ments would, have been required.
In essence, therefore, Ohio's plan meant that participating
banks collectively guaranteed the circulation, of any one of their
number but gave to the supervisory authority, i.e ., the Board of
Control, the right to determine which of their assets - from among a
selected group deposited with the Board - would be liquidated if it
became necessary to make any payments. For to return the sums
advanced by the solvent Branch Banks, the Board simply sold bonds
which were held in trust for the Branch Banks and which were counted
by them as part of their investment portfolios.
Statutory Provisions Relating to
Supervision and Regulation of Branch Banks
In providing a supervisory authority for banlcs Tjarticipating
in the insurance program, the Ohio legislature again drew upon
Indiana's experience. Provisions dealing with bank regulation were
similar to those then in general vise in the country.
Supervisory agency. The Board of Control, the supervisory
authority similar to the Board of Directors of the State Bank of
Indiana, was located at Colrmbus. It consisted of one representative
from each Branch Bank, chosen by the various Branch Bank boards for
a term of one year. Each member on the Board of Control had one
vote, with an additional vote for each $50*000 of circulating notes
assigned to his Branch Bank. 1/
The burden of the Board's work fell on the president,
vice-president, secretary, and an executive committee of not less
than five members. 2/ The president was chosen by the Board from
outside its membership and did not become a member of the Board upon
election. The same was true of the vice-president, provision for
whom was not made by the legislature until 1-351 with passage of an
amendatory act. Salaries of the three executive officers, along
with other expenses, were provided by assessments levied on the
Branch Banks. 3/
Admission to Insured status. Application to start a Branch
Bank automatically constituted application for insurance, since all
Branch Banks we re part of the mutual guaranty and safety fund system.
Investigation of the first applications was the responsibility of
five Bank Commissioners, appointed and named in the act authorizing
1/ Ibid., section 17*
2/ Ibid., section 14.
3/ Ibid., section 15. Assessments for most expenses varied
with the capital stock of the Branch Banks, but those to meet expenses
incurred in the printing of circulating notes were in the ratio of
the circulating notes assigned to each.

VI-3
the Branch Banks. 1/ The act also outlined the procedure which was
to be followed in determining whether an application was to be
granted. 2 /
Primary emphasis was placed on verifying the amount of
specie claimed to have been paid in, seeing that bank facilities
were well-distributed among the various counties, and investigating
the character and responsibility of the new stockholders. When at
least seven Branch Banks had been accepted by the Commissioners, the
directors of each were notified and were then to select their re
presentatives to the first Board of Control. 3/
Under terms of the original act this exercise of the power
of admission was to revert to the Auditor, Treasurer, and Secretary
cf State after one year. 4/ However, in an act of January 6, 1846,
an amendment gave the Board of Control the powers exercised by the
Bank Commissioners. The Bank Commissioners were continued in office
with power to review decisions of the Board of Control resulting in
denial of admission to any bank. In the event that the Commissioners
disagreed with the Board the Governor was authorized to make the
final decision.
Powers of Board of Control. Regular examination of the
Branch Banks was made by at least one member of the Board of Control,
or an appointed agent, as often as the Board desired. Ample power
was given examiners to determine the condition of the Branch Banks.
Also, each Branch Bank was required to submit condition reports to
the Board as often and whenever requested, the form for which was
determined by the Board. 5/
In addition to its powers of examination, and its duties
in the event of failure of a Branch Bank, the Board was charged
with general supervision of the banking system. This involved such
duties as making rules for the settlement of balances among the
Branch Banks and the printing of circulating notes. 6/ Most important,
the Board had the power to order a Branch Bank to do, or cease doing,
anything which it deemed necessary for the protection of that bank or
other banks in the system. 7/ This included specific authority to
compel a Branch Bank to reduce its circulation or other liabilities
to whatever level was deemed necessary for the safety of the bank
or the system. 8/ Thus, the Board had a power similar to that enjoyed
by the Federal Reserve today, in that it could influence the circu
lating medium of the community, alteit directly rather than through
changes in reserves. 9/
1/ Ibid'.', section 5.
2/ Ibid., sections 10 and 11.
Ibid., section 13 ♦
zJ
> section 5*
5/ Ibid., section 14.
%j Ibid., section 14.
7/ Ibid.. In 1848 the legislature strengthened this provision
by giving the Board the right to an injunction against any Branch Bank
which failed to comply with its orders. After allowance of the in
junction the Board could then appoint a receiver and proceed as in the
case of an insolvent bank.
8/ Ibid., section 14.
9/ While this particular provision was, in practice, used
only to enforce orders of the Board in the cases of recalcitrant Branch

VI-9
Restrictions on operations of insured banks. Statutory
limitations on the operations of the Branch Eanks were, for the most
part, similar to regulations governing banks in other western States
at that time. Many of these limitations related to the note issue
function of the Eranch Banks, since deposit banking was just beginning
to assume importance in Ohio.
Circulating notes of the Eranch Banks had to be paid on
demand in gold or silver coin; failure to do so was deemed an act
of insolvency. 1j However, the legislature suspended this require
ment in January of 1S62 as a consequence of the nationwide suspension
of specie payments during the Civil vlar.
By 18^5 it had become clear that provisions limiting circu
lation and other bank obligations to a multiple of capital did not
by themselves provide a precise rule as to the proportion that specie
reserves should bear to such obligations. Consequently, the Ohio
act required that each Branch Bank maintain a specie reserve equal
to 30 percent of its circulating notes. 2/ At least $0 percent of
this reserve was to consist of gold and silver coin in the bank's
vaults, while the remainder could consist of demand deposits in
specie-paying banks located in Hew York, Boston, Philadelphia, or
Baltimore. Whenever this ratio was below the minimum for 12 days,
or as soon as it fell below £0 percent, a bank was prohibited from
putting new notes in circulation or increasing its liabilities by
making new loans and discounts except on bills of exchange. 3/
Hote circulation of each Branch Bank was also limited to a
multiple of paid-in capital, the multiple decreasing as capital
increased. Specifically, circulation could not exceed twice the
first $100,000 of capital; once and one-half the second $100,000;
once and one-fourth the third $100,000; once the fourth $100,000;
and for any amount over $400,000, not more than three-fourths the
amount of such capital. Ia addition, notes could be issued to an
amount equal to the bank's deposit with the safety fund, hj Thus a
Branch Bank with a maxi mum authorized capital of $^00,000 could have
a circulation of about $700,000, for which it had to maintain a
specie reserve of approximately $215 ,000.
Other provisions dealing with circulating notes included:
notes could be issued by any Branch Bank, were to be signed by the
President of the Board of Control, countersigned by the cashier of
the issuing bank, made payable to bearer and negotiable by delivery; 5/
they were not to be of smaller denomination than one dollar nor
larger than $100 and the proportion of each denomination was proBanks, the Board did find a way by which it could influence the circu
lating medium through changes in reserves. See below, pp. VI- 4l.
l/ Ibid., sections 19 and 2k.
2/ Ibid., section 55*
5/ Ibid..
5/ Ibid., section 19.
3/ Ibid., section 18.

VI-10
vided for; 1/ notes of out-of-State banks which were not redeemable
in specie, or which were of smaller denominations than five dollars,
could not be paid ever the counter of a Branch Bank, in the course

cf its daily business; 2/

notes of each Branch Bank had to be

accepted at par by all other Branch Banks. 3/

Deposits were specifically exempted from maximum amount
limitations, perhaps reflecting the then current opinion that they
yere not a function of bank lending operations. However, Branch Bank
indebtedness, which was dsfined as excluding deposits, was limited
to two-thirds of capital stock paid in. 4/
Excessive favoritism shown stockholders and directors had
long been a source of weakness in many western banks and a number of
provisions of the act creating the State Bank of Ohio were directed
toward this problem. Included among such provisions were: limitation
of the amount for which the stockholders, collectively, of any Branch
Bank could be indebted to it, either as principals or by endorsement,
to not more than one-third of the Branch Bank’s capital; 5/ a similar
limitation for directors except that the collective amount could not
exceed one-fourth the amount of capital stock owned by the directors.6/
Directors were personally and individually liable for damages in
curred by stockholders or creditors of the bank as a consequence of
violation of this or any other provision of the act. 7/ Also, loans
in which stock of the Branch Bank served as security were prohibited.8/
Interest charged by the Branch Banks was limited to six per
cent. Under the original act bona fide purchases, discounts, or
sales of bills of exchange payable at other than the place of purchase
could include normal exchange charges without violating the above
restrictions. 5/ An 1850 amendment eased the interest restriction
somewhat further by permitting in addition to the six percent the
"actual cost to ... the bank of converting the proceeds of such note
or bill of exchange into available funds at par, when the current
rate of exchange is not in favor of the place of payment ... 10/ On
the other hand, the same amendment authorized, and made it the duty
of, the county prosecuting attorney to sue for the cancellation of a
debt to a bank, if the debtor had not himself brought suit within
six months, whenever a bank charged more than the legal rate of
interest. Formerly, the bringing of such a suit was at the option
l/ Ibid., section 52.
2j Ibid., section 63 .
3/ Ibid., Section
4/ Ibid., section 56.
5 / Ibid., section 230 / Ibid.. These limitations were raised to one-half and onethird respectively, if indebtedness included bills of exchange drawn
in Ohio and payable outside of the State.
7/ Ibid., section 66.
oj Ibid., section 47.
9/ Ibid., section 6l.
10/ Laws, By-laws and Resolutions relative to the State Bank
of Ohio, i^Coluinbus: 1655)* However, total receipts to the bank could
not exceed 12 percent.

VI-11

the borrower. 1/

No person or firm could be indebted to a Branch Bank to an
a m o u n t exceeding one-half of its circulation.
If liabilities on
account of biJls of exchange were excluded, this limitation was
raised to one-tenth of the same base. 2/ Branch Sanies were prohi
bited from dealing in or owning real estati^£fP$as necessary to pro
vide banking facilities or in conducting normal bank operations. 3/
Humber and Obligations of Ohio Banks, l845-65
During the twenty years following passage of the General
Banking Law of 1845 Ohio had what nay be described as a multiple
banking system. That is, banks fell into four classes, distinguishable
fcy the type cf charter or other official sanction under which they
operated. 4/ These were: Old Banks, which possessed une:q?ired
charters in 1845
continued to operate under provisions of those
charters, 5/ Branch Banks and Independent 3anks formed in accordance
with the 1&5 law, and free banks formed and operated, in accordance
with provisions of the Free Banking Law of 1851 • As noted previously,
only the Eranch Banks participated in the insurance system.
The twenty years may be divided into three periods, deter
mined by the various classes of banks in operation. The first,
18^5-50* ends just prior to the entry of free banks into the general
system; the second, 1851-57 , includes the years when banks of all
four classes were in operation; while the third, 1858-65, includes
years in which there were again banks of only three classes in
operation.
Number of operating banks. The number of banks operating
under State law in Ohio increased rapidly after 1845 and reached a
peak of 70 by 1851. Following a decline during the next several
years, the number stablised at upwards of 50 banks until the end of
the period, when aost banks began to convert to national banks.
During all of this period banks participating in the insurance system
never constituted less than 50 percent of all operating banks, and
for most years, comprised two-thirds or more of all operating banks.
Table 31 shows the nuribsx of banks in operation in Ohio at the end
of each year, with the banks grouped by class and insurance status.
Eight Old Banks were in operation in Ohio when the act
authorizing the formation of Branch and Independent banks was passed
in February cf I&45. By the end of the year lo Branch Banks and seven
Independent Banks had been organized and placed in operation. With
1/ An Act to incorporate .♦., section 6l.
2/ Ibid., section 62.
3/ Ibid., section 51*
£/ Only banks operating under State law are included. Na
tional barks, many cf which had formerly been Branch, Independent, or
free banks, are not included in this survey. Private banks and
brokers are also excluded.
5/ The charters of 15 banks had expired in 1343-44 “but the
1845 law permitted five of these tc reorganize and continue. Of the
four which took advantage of this provision, two became Independent
Banks, one a Branch Bank, and one an Old Bank.

VI-12
Number and Percentage Distribution of Operating Banks, by Insurance status, Ohio, 1844-65

Table 31.

Percentage distribution

Number of banks 27~
End of
year

otal

insurance
Branoh

1844

1845
1846
1847
1848
1849

^4*
16
18
30

1850

48
5*»
57
57

41
41

1851
1852

70
67

41
39

5Z
5&
57
53

36
36
36
36

5*
54
55
53
53
51
43

36
36
36
36
36
36
34 4/
8 5/

1853
1854

1855
1856
1857

1858

1859
1860
1861
1862
1863

1864

186$

Old

8
8
8
8

Independent

7
9

5
5
5

10
11
11
11

5
5
4

12
11
11

10
10

-—

7
7
7
7

--—

4
3

1 5/

Free

------12 3/
12 “

12
11
11
10
10

11
11
12
10
11
11
6
3

Total

100,0
100.0
100.0
100*0
100.0
100*0
100,0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100*0
100.0
100.0

Insurance
Branch

..
51.6
5 1 .*

Old

100.0
25.8
22.9

Independent

22.6
25.7

62.5
70.4
71.9
71*9

16 .7
9.2
8.8
8.8

20.8

58.6

7.2
I -5

17.1
16.4
16,7

58.2
59 -1
63.1

62.1

63.2
67.9

66.7
66.7
65.5
67.9
67.9

70.6

79.1

66.7

6.0
1 .8

1.7

1 .8

m t*

—
m m

Free

20.4
19.3
19.3

15,8
17.2
IV. 5
13.2
32,9
12.9
12.7
13.2
11.3
7.8
7.0
8.3

m m

—M
1 7 .1
17.9

18.2

19.3

19.0
1 7 .5
18.9

20.4
20.4

21.8
18.9

20.8
21.6

13.9

25.0

1/ Omits unauthorized banks, private Tib'anks, and lroCers. Por lBSJ-65' omits national banks, aiT"follows: 58" in 1U63",- W~In~IET69,~
and 136 In 1865 .
2/ Data are partially estimated by the writer based on Reports of Auditor of State; C. C. Huntington, History of_Bankinj? and
Currenoy In Ohio Before the Civil War. (Columbusj 1915); and monthly condition reports of the Branch Banks. The OrganizationDivision of
the Office of the Comptroller of the Currency kindly provided Information on the conversion of Branch, free, and Independent Banks to
national banks. Conversions have been estimated as follows: in 1863, one Independent Bank and one free bank; in 1864 eight Branch Banks;
In 186s, twenty Branch Banks, two Independent Banks and one free bank.
3/ Free banks were not authorized until this year,
V Reports were made by these banks but it is known that at least six were in the process of converting during that period.
2/ The law under which these bank3 operated expired May 1. 1866 . Several may have converted to national banks at that time.

VI-13
the eight Old Banks remaining in operation, this meant that within
one year the number of Ohio banks was increased almost fourfold. 1 /
As shown in Table 31, the number of operating banlcs con
tinued to increase, reaching 57 by the end of 1850. The growth in
the number of Branch Banks was primarily responsible for this increase
in the total, as the number of Independent Banks increased more
slowly and the number of Old Banks declined. Consequently, more than
seven-tenths of all banks operating in the State were participating
in insurance at the end of 13^0, compared with just over half in I8U5 .
Passage of the Free Banking Law in March
the foimation of 12 free banks before the year was
quent rise in the number of Ohio banks to the peal:
period. This increase in the number of banks left
banks, i.e., Branch Banks, constituting just under
all operating banks at the close of 1851.

of 1851 led to
out and a conse
for the entire
participating
60 percent of

Neither the number of operating banks nor their distribution
by class stabilized at the 1851 levels. In the following six years
18 banks ceased operations, at least 13 by reason of insolvency,
while only one new bank was formed. 2/ All of the Old Banks closed
during this period and there were declines in the number of banks in
each of the remaining three classes. Percentagewise, the position
of the Branch Banks was improved and they constituted almost 70 per
cent of all operating banks by the end of 185?.
From 1857 until passage of the National Banking Act in
1863, the number and distribution of Ohio banks was relatively stable.
About two-thirda of all operating banlcs were participating in insur
ance, while the remaining third consisted of free and Independent
Banlcs. The last of the Old Banlcs had closed in 1857 *
tony new banks were formed in Ohio under national charters
in 1863, but few of the banks operating under State law converted
in that year. However, it soon becaae apparent that the Ohio legis
lature would not extend the 1645 law when it expired in May of 1866.
As a result, an estimated 28 Branch Bc,nks and three Independent Banks
relinquished their State charters in 1864-65 &nd organized as national
banks. Several free banks also converted so that by the end of 1865
there remained only 12 banks in Ohio operating under State law, and
nine of these were required by law to cease operations within the
following few months. 3/
1/ The Bank of Xenia, whose charter did not expireuntil
I85O, apparently elected to become a Branch Bank in 1845* However, the
number of Old Banks remained at eight in that year since the charter
of the Ohio Life Insurance and Trust Company, which had previously
expired, was extended by the legislature. See p. VI-11, note 1 .
2/ Actually, 19 banks closed during this period, but the
Dayton Bank, an Independent Bank, resumed operations in 1655 so that
it does not affect the count given above.
3/ Information on the conversion of Ohio State banks to na
tional banks for I863-I865 was provided by the Organization Division of
the Office of the Comptroller of the Currency. In a number of cases
the fact of actual conversion or succession could not be definitely
established, hence the necessity of estimating the total number.

VI-14
Bank obligations. Table 32 shows total bank obligations,
which consisted largely of circulating notes and deposits but also
included miscellaneous liabilities, for each year and by class of
ban!' from 1845 through 1864. Data for 1865 are of doubtful validity
because of the conversion to national bank status of so many of the
barms operating under State law.
As would be expected, total obligations reached a peak
during the Civil War, in 1862, The previous high had been achieved
ten years earlier, following which total obligations had fallen off
substantially, remaining at relatively low levels until i860. The
decline in the totals for 1863 and 1864 shown in the table is due to
the conversion of some banks to national banks. For these years the
figures in the table do not reflect changes in circulation and
deposits of all bank operations in the State.
Except during the early years of insurance, participating
banks (Branch Banks) typically accounted for two-thirds or more of
total bank obligations. This proportion is about of the saxae order
of magnitude as the proportion 01 all banks participating in insurance,
shown in Table 31* It suggests that, on the average, Branch Banks
were neither larger nor smaller than the average bank not partici
pating in the insurance system.
During the first of the periods noted earlier, 1845 to
This development re
flects the emergence of the State from the depression cf 1839-43,
as well as the establishment of new banks under the 1845 law.

1850, the obligations of Ohio banks doubled.

It will be noted that Old Banks supplied the major portion
of total bank obligations during the first two years of this period.
This was to be expected since they were already in operation when
Branch and Independent Banks were just being started. However, there
were only eight Old Banks, and the failure of three in 1848 is re
flected in the data for that and succeeding years. By the close
of 185O more than two-thirds of total banl: obligations were attributa
ble to the Branch Banks.
The second period, which includes the depression of 1854-55
and ends with the year of the panic of 1357, shows a substantial
decline in total bank obligations after 1852-53 . However, Branch
Banks continued to furnish about two-thirds of circulation plus
deposits during this period. The most severe decline naturally
occurred in the case of the Old Banks, all of which had closed or
failed by the end of 1357Total bank obligations during the last period not only re
flect the impact of Civil War financing, but also the emergence from
the depression which followed the panic of 1857 and, in the final
two years, the preparations many of the banks were maJcing to convert
to national banks. The proportion of total bank obligations attribut
able to Branch Banks declined in each year of this period as free
banks, net faced with the expiration of their charters, continued to
expand their operations. Whereas in 1658 almost three-fourths of

VI-15
Table 32.

Amount and Percentage Distribution of Bank Obligations Operating Banks by Insurance Status, Ohio, 1845-1864
(Amount in thousands of dollars)

Year 3/
All banks

1845
1046

9,104
9,393

1047

1 2 ,10 3

imb
1849
1850

15.929

15.749

5.280

9,370
10,309

16,809

11,655
12,114
12,204
12,403
10,585

17.375
17,314
11,615
12,999

1859

12,696

11,075
10,953
8,%9
9,399

1860
1861

14.929
16,059

1863

19,114
17,513

1851

1052
1853
1854
1855
1856

ill?
1862
1864

17,503
18,935
20,241
19.717

20,702

Percentage distribution

Amount of obligations £/
Not participating in Insurance
participating
Free
Independent
"OlcT
in Insurance
Branches

All banks

1.316

2.595
3,728

4,298
4/

1,683

5,140
4,409

2,150

3,126

3,621
2,116

1.393

2,314

2,801

3,047
3,643

283
1,645
2,452
2,276

2,895
2,771

2,706

2.555

2,420

2,141

2,122

2,318

1,739

1,921

1,537
1,597 10 /
1.505 “

1,579
2.003
2.003

10,501

1,690

11,210

2,039
2,527
2,024
1,839

2,738
2,810 11 /
4,323
4,788 12/
4,717

9,108

13.852
12,302
10,957

in insurance
Branches

Old

100.0
100*0
100*0
100.0
100,0

28.5
3 9 .7

?7.o

58 .8

42.5
27.7

65.5

19 .8

100*0
100.0
100.0
100*0
100*0

66.6

17.4

64.0
60.3
62,9

19.2

100.0
100*0
100*0
100.0

43*6

17.9

10.8

1^.5
14*5
13,9
13*5
1^.7

16 .0
1 5 .3
1 3 .7
13.7

Free

**•
"
1.5

8 .1
12 .6

6 3.0

8.3

15 .2

13,5

6 3.8

13.9
12.3

12.3
13.4

1 0 .0

100.0

63.2
73.2
72.3
71.7

100*0

70.3

100.0
100.0
100.0
100*0

% .8

Independent

69.8
66 .Q
64.4

62.6

1 3 .2

“

12.3
11.9

•**.
■»•*
----

11.3
12.7

1 2 .2

10.5
10.5

U.l
13.6
15.4
16.4
18.4
17.5
20.9
25.1
26.9

Reports ol^lJondltlon publlsHed montHIy and “on file at the library of
Sources: Auditor of State Reports; Huntington, op~~cf¥
the Ohio State Archaeological and Historical Society.
1/ Excludes obligations of private, savings, and national banksq
?/ Includes individual, business, and interbank deposits; circulating notes; miscellaneous liabilities. Partially estimated
for nonparticipating banks*
3/ For most years data are for November or nearest year-end dates. Data for 18^7 are for May; for 18 U9 are for August* Year-end
data are available only for Branch Banks* Though available, these data were not used in order to make possible comparison with obligations
of nonparticipating banks*
h/ Excludes data for seven Branoh Banks in operation by end of year but apparently not in operation at time of report.
5/ Excludes data for one Independent Bank in operation by end of year but apparently not in operation at time of report*
0/ Includes data for Bank of Massillon which failed before end of year.
7/ Data for 13 banks, presumably including the Miami Valley Bank of Dayton which failed before end of year.
0/ Apparently Includes data for one bank which had ceased business*
9/ Report from City Bank of Columbus not available,
11/ Includes nine banks, report from Marine Bank of Toledo not available*
10/ Includes six banks/ data far Dayton Bank nq£ available. 12/ Data for. Iron City. Bank of Iren*e»-not available.

VI-16
total bank obligations were attributable to the Branch Banks, by
1864 Branch Bank3 had less than two-thirds of total bank obligations.
Obligations of participating banks. As the only banks in
cluded in the insurance system, the distribution of Branch Bank obliga
tions is of more importance than a similar distribution for nonpartici
pating banks. Table 33 provides such information.
During almost the entire period of insurance the Ohio Branch
Banks were primarily "banks of issue". That is, the volume of circula
ting notes was typically two to three times the amount of deposits.
Only in the final few years did deposits exceed circulation and this
may have reflected the approaching termination of the banks* charters.
Deposits of individuals, partnerships, and corporations com
posed the largest part of total deposits. Interbank deposits were
relatively small. Miscellaneous liabilities were relatively large
in some years because of borrowings among the various Branch Banks.
Relative size of participating banks. The average Ohio
Branch Bank m s of medium size for the area and time, typically
having between $200,000 and $3C0,COO of deposits plus circulation.
Although a few Branch Banks were of fairly large size, none was ever
as large as the Ohio Life Insurance and Trust Company, with deposits
and circulation in excesss of $2 million, or the Bank of the Ohio
Valley, a free bank with obligations of more than $1 million. Table 3^
shows the obligaions of Branch Banks on three dates with the banks
grouped by size as measured by the amount of deposits plus circulation.
The data in Table 34 reveal that there was only a very
slight tendency towards a concentration of risk under the Ohio in
surance system. In general, Branch Banks in each size group tended
to have insured obligations, i.e., circulating notes, in about the
same proportion as their number was to the total. In 1846 the single
baric with more than $400,000 of deposits and circulation comprised
six percent of all Branch Banks but had only four percent of total
circulation. In 1855 banks with obligations in excess of $400,000
were 14 percent of all Branch Banks and had 17 percent of total
circulation; the comparable percentages for l96l were 17 and 23 .
For purposes of comparison in this connection, the largest 14 per
cent of banks participating in Federal deposit insurance today hold
more than 70 percent of all insured deposits.
The tendency towards concentration of risk would have been
more narked had deposits been included in insurance coverage. Banks
with more than $400,000 of deposits plus circulation had 12 percent
of total deposits and circulation in 1346, but 27 percent in l86l.
This is a reflection of the fact that deposit banking tended to be
relatively more popular in larger sized banks in the more populous
cities.
Insured obligations. By restricting insurance protection
to the circulating notes of Branch Banks the architects of the 1845
law provided such protection for about half of total bank obligations
during most of the insurance period. Table 35 shows that, except
for the few years at the beginning and end of the insurance period,

VI-17
Table 3 3 . Obligations of Banks Participating in Insurance by Type
of Obligations, Ohio Branch Banks, 1845-1861+
(Amounts in thousands of dollars)

Year 1/

Total
Circulating
notes
Total
obligations

Deposits
Individual,
partnerships,
and corpora
tions

10,309

1,576
2,655
3,679
6,667
7,601

1,421
2,395
2,5^3

1650
1851
1652
1853
185U

11,655
12,114
12,204
12,403
10,585

8,295
3,1+60
8,117
8,293
6,994

3 ,442
3 ,33 ^
^,810
3 ,3^3

3,^79
3,401
2,970

1855
1856

11,075
10,953
8,495
9,399

7,520

3,271
3,^26
2,050

181+5
1345
181+7
1843
181+9

1857

1858

2,595
3,728
5,280
9,370

1359

9,108

i860

10,501
11,210
13,352
12,302

1861
1862

1363
1864

10,957

7,^17
6,1+01

6,862
6,528

7,4o4

3,136
8,103
5,739
4,663

950

1 ,C26

3,0+9

Interbanks

870
381+
1,295
2,099

80
-11+2

2,226

323

2,751

298

3,058

Miscella
neous lia
bilities

126
296

180
1C3
159

211
212

384
355

253

379

242

3,055
3,151
1,864

216

284

275

110

2,^ 4
2,5C3

2,280

174
244

1+3
83
72

3,057
3,031
5,734
6,539
6,223

2,31+3
2,361+
5,1+91
6,324
5,989

209

1+0

167
243
215
239

^3
15
21+

2,26k

Source: Monthly condition reports;
State Archaeological and Historical Society.

1+09

186

300

library of the Ohio

1/ Data are for same dates as in Table 32 . See note 3
of that table.

69
47

VI-18
Table 34.

Size of bank

Humber
of
banks

Number or amount
- Total

Banks with deposits
plus circulation (in
thousands of dollars)
of:
Less than 100
100 to 200
200 to 300
300 to 400
400 to 500
500 to 600
600 to 700
700 and over

Percent distribution
- Total

Number, Deposits and circulation of Branch Banks, by Size of Bank, Ohio, 1846, 1855, 1861
(Amounts In thousands of dollars)

3,681

83
784

1,026

2.655

2,381

1 ,1
508

433

317

1 ,8 7 3

m *»

m m

1 0 0 . 0#

rnm

100 . 0#

2.2
21.3
64.7

__
1 1 .8

_ „

100 .

Deposits and circulation
Total
Deposits circulation"

10.791

3
22
6
1

560

Number
of
banks

November 1&61

Deposits and circulation
Total
Deposits circulation'

3,271

7.520

II .167

3,031

1
22

184
5,592
2,417

5?
1,024
884
487

8,136

1,088
686

5,^9
1.957
40/
1,615

660

462
4,331
1,271
192
955

833

524

309

100 .0#

5.2
50.2

6.1

- -

.5
19.1
^9.5

2 .9
22.2
7 0 .5

30.9

8 .3
6 1.1
1 6 .7
2 .8

—

8.3

2 .8

m +*
mm

n 6
—

______ November_

215

7
4

1 ,70 2

149

4,568
1,553

1,2 15

548

211

724

390

334

10 0 .0 #

100 .0 #

100 .0#

10 0 .0#

2.8
61.1
19.4
11.1
2.8
*»
2 .8

1 .6
50 .1

337

m **

Banks with deposits
plus circulation (in
thousands of dollars)
of:
Less than 100
5.9
100 to 200
29.4
58.8
200 to 300
300 to 400
400 to 500
5.9
500 to 600
600 to 700
700 and over
Source:

November itw>
' Number
of
Deposits and circulation
“Total
Deposits Circulation banks

1 8 .1

3.0
33.2
21,0

57 .6
16.9

15.0

6,6
20.2

12.7

7~7

16.0

3.8

2.6

Monthly condition reports,

16.0

1.8
56.2
18.9

4.9

7.0

14.9
4.1

6^5

12.9

15 .2

mm
mm

21.7

l.l
33.8
29.2

Ohio State Archaeological and Historical"Society.

VI-19
Table 35*

—— "
Year 1/

1845
1646
1347
1848

1849

Insured Obligations and Insurance Coverage, Ohio, 1845-1864
(Amounts in thousands of dollars)

Circulation:
Branch Banks

1,576
2,655
3,679

6,867
7,601

1850
1851
1852
1853
1854

8,395

1855
l8p6
1857
l8p8
1859

7,520

i860

7,404
8,136
8,103
5,739
4,668

1861

1862

1863
1364

8 >06
8,117

8,293
6,99^
7>17
6,401
6,862
6,528

Branch Eank circulation as percentage of:
All bank
Total obligations of
circulation
Branch Banks
All banks
17.3
28.3
30.4
43.1
48.3

60.7
71.2
69.7
73-3
73-7

48.0
44.4
40.1
42.1
41.6

72.0

43.3
42.3
55.1

67.9

52.8

51.4

49.6
50.7
39-1

30.0

26.7

69.4

66.5
66.9
66.1
67.7
75-3
75.0
71.7
70.5
72.6
58.5
46.7
42.6

16.9
23.3
25*3
34.7

38.6
^9.0
§6.3
35*7
35-6
36.3
41.1
40.1
41.9

43.0

42.2

42.9
42.7
40.4
43.1
45.6

1/ Data are for the same dates as in Table 32. See note 3
cf that table-

VI-20
Branch Bank circulation ranged from ^0 to 55 percent of total obliga
tions of all Ohio “banks. Thus insurance protection was about of the
same order of magnitude as has been the case under Federal deposit
insurance with its maximum coverage limitations for each depositor.
Insurance protection for circulation alone was much higher,
approximating 75 to 85 percent in most years. Since it was sho:.*n in
Table 32 that total obligations of Branch Banks typically comprised
60 to TO percent of all bank obligations, the high degree of pro
tection for circulating notes alone reflects the fact that Branch
Banks generally had a larger proportion of their liabilities in
circulating notes than was the case for nonparticipating banks.
History of Operation of Insurance System
During its twenty years of operation, Ohio's insurance
system provided protection for the creditors of participating banks
to an extent previously unmatched in Ohio banking history. This was
done despite a number of severe shocks occasioned by bank failures
and nationwide financial panics. When the law under which the parti
cipating banks were operating was nearing expiration, and the banks
began to convert to national banks, Ohio's insurance system was at
the peak of its strength.
Between 1850 and 1857 ten Branch Banks became involved in
financial difficulties sufficiently serious to necessitate the levying
of insurance assessments on the sound participating banks. During
the earlier period, 1845-^9, and after 185? no such action was required.
Table 36 shows, for each Branch Bank concerned, the cause
of the difficulty and the disposition of the case. It will be noted
that four banks were placed in receivership. The remaining six
received financial assistance ^/hich enabled them to continue in
operation during the remainder of the insurance period.
Payment of insured obligations. Circulation at time of
failure of the four Branch Banks placed in receivership cannot be
determined but at the dates of their last reports prior to failure
it totaled .£690,000. These reports were made within a few weeks
prior to failure and it is assvaed that this total is close to
circulation at time of failure. All of the circulating notes pre
sented for redemption were immediately paid so that no loss was
suffered by a noteholder.
Losses to depositors of the four failed Branch Banks are
not known, deposits were not covered by insurance but, it will be
recalled, neither did they constitute a major portion of Branch Bank
obligations to the public.
Assessments levied on the solvent Branch Banks to secure
funds for the redemption of notes of the failed banks are shown in
Table 37* It will be noted that only about
approximately
50 percent of the estimated circulation redeemed, was required. The
difference was made up by depositing with the redemption banlcs, i.e.,
the banks selected by the Board of Control to redeem the notes of the
failed banks, the

VI-21
Table 36.

Name

Branch 3anks
insurea obligations
(thousands) 1/

Ohio Branch BankB in Serious Financial Difficulties, 184-5-6^
___ ______
principal cause
of difficulty

Sumit County

197

Poor management

Toledo

235

Poor management

Licking County

179

Akron

188

Mechanics and Traders

Commercial, Toledo

__ _____________ Date of~51spo3ltl'oi~6'f ease
Placed In receiver
Reorganized wiT/h fi
nancial aid 2/
ship 2/
—

Received aid and cor
tinued without reorg
zation

December, 1850

—

Defalcation

June 2, 1852

Defalcation

November 24, 1854

—

Asset deterioration

November 26 , 1854

—

252

Asset deterioration

November 27 > l8j4

Merchants

208

Asset deterioration

—

Norwalk

212

Asset deterioration

—

Guernsey

190

Asset deterioration

—

September, 1857

Ross County

262

Asset deterioration

—

October, 1857

—

August, 1857
August, 1857

1/ At date nearest failure or action taken by Board of Control.
2/ Dates are accurate to month; days, when shown, are approximate,
,,
3/ Includes, as of date just prior to failure, notes in circulation of $156,000 plus $23,000 carried under liabilities as
sundries". The latter sum probably represented circulating notes held as security by other Brancli Banks for amounts adva-ieed in the
unsuccessful attempt to sustain the Licking County Branch Bank.

VI- 22
Table 37*

Insurance Assessments*
—

Datu

Branch Bank Involved

1850
December
November
June

1051

June

$141,870
Toledo
Summit County
Toledo
Toledo

1852
December
June
March
1853
July
May 2/

April
1855
April
January

113.180

1057
October
September
August

Assessment on behalf" o"£
operating Branch Banks
2/
Rate 3/
Amount collected

1 percent 10/
1 percent TS/

$ 141,870
'■47,470
47,200 5/
47,200 5/

1 percent 10/

48,518
SU75T5 5/

1 percent 10 /

_—
--1 /4 or 1%

22,636

M^
—
22,636 5/

Assessment f*or redemption of
notes of failed Ttesrich Banks
Rate 37
'Amount collectedT

—

■>p*
m
mp*
1/2 Of 1*
1/2 of 1%

—

m o, 258
Mechanics and Traders
Akron
Akron
Licking County
Licking County

_1/2 of 1%

58,124
Akron
Commercial, Toledo
Akron

—

22,270

20,033

59,-36

8l. 122
39.100 5/
42,022

umm*

—

1/4 of 1;%
1/4 of 1%

M
-—«

1/4 of 1%
1/4 of
1/4 of 1%

19,162 *"
19,162

1/4 of 12
1/4 of 1*

39,600
197535 5/
19,800 5/

—

56*000
Ross County
Guernsey
Norwalk
Norwalk
Merchants
Norwalk

45,272

1/4 of 1!$
1/4 of 10

56.000

w
5/
v

T.m
10.000
5.000
6.000
15.000
15.000

1 9 ,5§8 5/
13,568 5/
58.124

39,600
Commercial, Toledo
commercial* Toledo

$ 90,544
W.211
45,984

43,984
Licking County
Licking County

1856
June
February

48,518

Licking County
Licking County
Licking County

1854
December
November

ipotal
assessment
by year

Branch Banks, 1850-57

i<?.WQ 5/

VI-23
Table 37*

Date

1850-57 - total

Branch Bank Involved

Insurance Assessments, Ohio Branch Banks, 1850-57
Total
assessment
by year
$ 641,534

1/ (Continued)

Assessment on behalf of
operating Branch Banks
2/
Rate 3/
Amount collected
$

350.146

Assessment for redemption of
notes of failed Branch Banks
Rate 3/
Amount collected
$

291.388

1/ All data were secured from an examination of Board of Control correspondence and are necessarily dependent upon estimation*
and upon interpretation of remarks contained in certain letters.
2/ Assessments made prior to date of failure on behalf of failed Branch Banks are classified as assessments on behalf of
operating Branch Banks,
3/ Percent of authorized circulation of each Branch Bank, unless otherwise indicated.
%/ These assessments were in the form of loans made by individual Branoh Banks at the order of the Board of Control officers.
Of the $65,000 total, the Toledo Branch Bank contributed $16,000: Ccrcmerolal Bianoh Bank of Cleveland $15*000, and Lorain, Farmers1 of
Ashtabula, Harrison County, fit. Pleasant, and Dayton Branch Banks $5,000 each,
5/ Computed by author*
b/ Indirect assessment in the form of loan from the Board of Control clearing fund.
7/ Apparently each Branch Bank was assessed about $2,000,
0/ Evidence that this assessment was actually made is questionable.
9/ Assessment possibly made a month or two earlier.
10/ Percent of authorized capital.

VI-2U
first funds secured from liquidation of the assets of the failed
banks. This could be done because a portion of the notes circulated
at distant points and came in slowly, while liquidation vas begun
as soon as the banks failed.
The procedure adopted by the Board in collecting assess
ments was to return to each Branch an equal quantity of the notes
of the failed banks. 1/ presumably the notes then remained as
evidence of the sound bank's contribution and were cancelled as
dividends were received from the liquidator.
The first Branch Bank to fail was the Licking County, at
Newark, on June 2, 1052. 2j An effort had been made to prevent
failure but a large loss suffered by the bank as a consequence of
the cashier's defalcation rcade it impossible to continue. The cashier
had a private banking business and had purchased on behalf of the
Branch Bank much of the doubtful and worthless paper he had acquired
as a private banker. In addition, when his private bank failed it
was discovered that many creditors held unrecorded claims against
the Branch Banlc.
When it became obvious that the bank would fail it was
decided to let it continue in business while the first assessment
was collected so that redemption could begin immediately upon
failure. This led to protests by several of the solvent Branch
Banks which pointed out, correctly, that they could not be assessed
for the redemption of notes until an act of insolvency had been
committed by the failed bank, nevertheless, most of the first
assessment was on hand when the bank suspended. On July 3* 1^52,
the President of the Board of Control noted that $30,000 had been
deposited with the Exchange Branch Banlc and that $11,000 of the
circulating notes had already been redeemed. 3/ In all, about
.$175,000 was collected in seven assessments levied on behalf of the
noteholders of the Licking County Branch Bank. This was just under
the outstanding circulation at the last report prior to failure.
Surprisingly, the three failures which occurred in November
of 1854 seem to have caused less difficulty than did that of the
Licking County Branch Eank. The three banks had apparently been
badly managed and, in fact, the President of the Board of Control
seemed to feel that the system was strengthened by their closing. {+/
Somewhat less than $120,000
failures. No assessment was required
and Trader’s Branch Bank, but $20,000
Control from its own clearing fund in
tions for note redemption. Less than

1/
2/
3/
4/

was required for these three
in the case of the Merchants
was advanced by the Board of
order to meet the first applica
$100,000 was required for the

June 7> 1352, Ohio Letters, opT
June 2, 1852, Ohio Letters, op.
July 3 > 1852, Ohio Letters, op.
December 1, 1854, Ohio Letters,

cit..
cit..
cit..
op. cit..

VI-25
Akron and Commercial Branch Banks together, thus indicating that
sizable amounts were obtained from liquidation of their assets
soon after failure.
Aid to operating banks. More than half of the amount ex
pended by the Board of Control by reason of the financial difficulties
of participating banlcs went to aid operating banks, rather than
for the redemption of circulating notes of failed banks. In all,
eight Branch Banlcs received such aid and only two, the Licking
County and the Akron, later failed. Table 37 lists the amounts
spent in the eight cases.
In making this assistance available, the Board cf Control
was motivated by two factors: first, losses of the other partici
pating banks would very likely be smaller if weak banks could be
strengthened and continued in operation; second, damage to reputa
tion of the entire system would be avoided.
Smaller losses were to be e:cpected, according to the Presi
dent of the Board of Control, because "we think that the debtors
will be more likely to pay so long as there shall be any prospect of
^the bank/ resuming business." 1/ This was particularly true at
that time since the businessman of that day was not likely to chance
the denial of future accommodation by what was very likely to be the
only available bank, further, most western banks of that period made
a practice of padding the interest on loans. 2/ This practice was
understood, and to a certain extent accepted, by the community since
it was recognized that maximum interest permitted on bank loans
was much below the actual rate. However, when a bank failed and the
receiver began to press debtors for payment the added charges were
frequently cited as being usurious. If the courts agreed the debtor
was relieved of his obligation.
Squally important to the Board of Control was the reputa
tion of the banking system it supervised. In a period when banks
were still regarded with suspicion, and when the slightest rumor
could start a run, it was essential that the confidence of the note
holder be sustained. In the midst of the panic of 1857 John Andrews,
the president of the Board, put it quite simply:
Our great source of strength is public confidence and
whatever tends to sustain or increase that, adds to our
strength. Let us retain that, and we will pass the
crisis triumphantly ... 3/
In another instance the president was called upon to justi
fy assistance given the Akron Branch Bank in 185^. Aid received by
the bank had not prevented its failure, but Andrews commented:
" l/"March" 27j IB52, Ohio Letters, op. cit.~
™
2/ A typical arrangement required that a loan be repaid
in the notes of eastern banks, which carried a premium, so that the
bank received both premium and interest.
3/ October 9, 1857, Ohio Letters, op. cit.; underscoring
in original.

VI-26
You are aware of the circumstances under which these
advances were made, the object being to sustain the
Branch during a state of general alarm, when [j-X&J
failure ... would have, in all probability, carried
several others with it. 1 /
In addition to public confidence, the Board also had to sus
tain the confidence of the State legislature in the banks, many' of
whose members were strongly opposed to banking. Nothing contributed
to their animosity so much as a ban!: failure, with its attendant
disruptive effects upon the community. It is, therefore, not sur
prising that attempts had been made to sustain the Licking County
Branch BanI::
it was ... believed that the loss of the whole advance
ment, a calamity which was not contemplated, would be
a less disaster to our confederation than a failure
of a Branch ... Such an incident was only wanted jhy
the legislature? to carry out oppression to the utmost
extremity ... 2j
Despite the fact that there were often good reasons for
sustaining Branch Banks which seemed about to fail, the Board of
Control did not have the express power to do so. Consequently, it not
only had to count on the voluntary support of the participating banks
but also had to devise a workable procedure for such cases.
The Summit County Branch Bank and the Toledo Branch Bank
were the earliest and most difficult cases. Shortly after they opened
in 18^5 both banks were found to have seriously impaired capital and
were immediately placed under close surveillance by the Board. How
ever, it was not until 1850 that action was taken in the case of the
first bank, while the Toledo Branch Bank was not finally reorganized
until lo55*
In the case of the Summit County Eranch Bank, the Beard per
mitted new stockholders to organize a Branch Bank with the same name
as the old bank. Following this, "the Board transferred all the
assets and liabilities and paid /the new stockholders^ for assuming
them." Zj This resembles the"procedure followed by the Federal Deposit
Insurance Corporation in assumption cases, in which a sound insured
bank assumes the liabilities and assets of a failing bank with the
assets including cash received from the Corporation.
The case of the Toledo Branch Bank was more complicated. In
I85O, "it was ... deemed best to take this Branch from the stockholders
and endeavor to manage the affairs and ultimately to make up all.
the losses.” V
However, it was found that the banlc was without

1/ January 12, I855, Ohio Letters, op. cit.,
2j April 3, 1852, Ohio Letters, op. cit..
3/ July 6, l855> Ohio Letters, op. cit.j underscoring in
original.

hj' November 14, 1850, Ohio Letters, op. cit..

VI-27
capital and could not even meet its immediate liabilities. Conse
quently, the assessments shown in Table 37 were made, with the
Branches receiving the stock of the bank as security.
In l6p5 the Board interested some new investors in the bank
and the following letter went out to the Branch Banks:
There was transferred to each Branch, several years ago,
a certain number of shares of stock of the Bank of
Toledo — and doubtless to your Bank also. Your Bank,
as nost of them had done, had probably charged up its
contributions to the Bank of Toledo to Profit and
Loss, and took no account of the stock, as it was
really of no value. But I think you will find the
stock filed away among your records. However this may
be, I wish you to execute and forward the power of
Atty. to Mr. Martin without delay. It only informs
him to transfer any Stock outstanding in the name
of your Bank, on its books; and if the books of the
Bank of Toledo show none, the power will be only use
less. This sale differs from that of the Summit
Co. Bk. ... in this case we retain the assets and
liabilities, and the purchasers pay us for the stock.
The parties are very responsible. A Branch is needed
at Toledo, and the sale is considered a good one. We
wish to have it closed as soon as possible. 1/
In other words, the new stockholders acquired a going bank
whose assets included advances previously r.ade by the other Branch
Banks. By "pay us" for the stock, the president simply meant that
the payments would go into the Toledo Branch Bank to serve as its
new capital.
Because in both of these cases the Board had levied assess
ments, only thinly disguised as loans, to aid distressed operating
banks, a number of the sound banks protested. Such protests were
usually met with the arguments described earlier. In the case of the
Toledo Branch Bank the president wrote to one complaining cashier:
... I may add that the Toledo might have been treated
as if it had ccmmited an act of insolvency and then
the section of the law, 26, to which you refer would
apply in the contribution. But such, for the best
of reasons, was deened a very impolitic course and
would have no doubt led to a much greater loss than
the Branches will now be subjected to. I need not
remind you that this would also have brought an
irreparable discredit upon the system ... 2/
Apparently his reasoning was convincing since it appears that all such
assessments were collected.

1/ July 6, 1&55, Ohio Letters/ op. cit.; underscoring in
original.

2/ November 1^, I85O, Ohio Letters, op. cit..

VI-28
As previously noted the Board of Control attempted to
■bolster the Licking County Branch Bank in 1852 and the Akron Branch
Bank in 1854• Its action in the former case was probably influenced
toy the fact that a particularly severe hank tax law v/as then under
consideration in the Ohio legislature. As the president put it, "the
time is inauspicious for the failure of one of our Branches." 1j
However, neither objective was attained: the tax law vras passed and
a short time later the Licking County Branch Bank failed. In the
case of the Akron Branch Bank, more than $80,000 was advanced, appar
ently on the condition that the president resign and a man selected
hy the Board be elected. 2/ This was not done and, on November 25 ,
1854, the man favored by the Board for president was appointed
receiver, 3/
panic of 1857» The experience gained in earlier cases
was useful when the panic of 1857 broke. During the panic, and the
depression that followed, waves of bank failures swept the country
and, with very few exceptions, banks suspended redemption of their
obligations in specie. However, not a single Branch Bank failed,
nor did any suspend specie payments, although the Ohio Branch Banks
were among the hardest hit of the nation's banks.
The basic causes of the panic of 1857 will hot be explored
here but it is probably correct to say that the panic vas touched
off by the unexpected failure of the Ohio Life Insurance and Trust
Company on August 24 of that year. This company, operating under a
special Ohio charter which permitted a commercial banking business,
had become one of the nation's leading banks. At the time it failed
its New York agency was holding the correspondent balances of the
larger Ohio Branch Banks.
In the first days after its failure the President of the
Board of Control was more concerned, understandably, over these
deposits than over the developing panic. In a letter to the cashier
of the Commercial Branch Bank, who had been in New York when the
Trust Company failed, he wrote:
Accept my thanks for your advices from H. York by
teleg. and by letter. I presume you are again at
your post. The blow from the failure of the Trust
Co. is terrible -- but still it is so distributed
that I only fear serious trouble from a few points
... it falling generally 0:1 the strongest of our
Branches ... kj
He also enclosed a copy of a resolution, adopted by the Executive
Committee of the Board of Control on the previous day, which suggests
that the supervisory officials were preparing for a depression:
1/
2j
3/
5/
in original.

March 27, 1852* Ohio Letters, op. cit..
November lS, 185^, Ohio Letters, op. cit..
November 25, 1854, Ohio Letters, op. cit..
August 27, lS57> Ohio Letters, op. cit.; underscoring

VI-29
Resolved: That under the existing state of affairs
brought about by the unexpected suspension of the
Ohio Life Insurance % Trust Co. the Com. have
confidence in the ability of each Branch to protect
itself but in the event any of the 3ranches should
need assistance the President of the Board of Control
is hereby authorized to draw upon such of the Branches
as he may deem expedient for such sums as may be
necessary to render the adequate assistance ... 1/
Only two days after the above letter was written the
first request for aid appeared; and was promptly met. On August 29,
the secretary addressed a letter to the Commercial Branch Bank:
Dr. Andrews is absent at Cincinnati on business con
nected with this office— I am officially advised
that the Merchants Branch 3anit of Cleveland needs aid
to sustain it and I have assumed the responsibility
to telegraph to you this morning to render aid to the
amount of 15,GOC dollars under the resolution of the
Executive Committee of 26 instant. I trust it will be
convenient for you to respond favorably to this call.
The President will address you further on this subject
on his return from Cincinnati which will probably be
on Monday next. 2/
Other requestsfollowed and within two months assistance
totaling 35^,,000 had been given four Branch Banks. In each case
the aid was in the form of a loan. This was jade clear in a letter
to the cashier cf the Norwalk Branch Banlc, one of the aid recipients:
"It is expected that any Eranch which may receive aid, by way of
advances from another Branch, shall furnish satisfactory security
either in the form of time paper, or in the circulating notes of the
Branch ... and interest pail thereon ... 3/
In only a few cases was any protest made of the action taken
by the Executive Committee. Apparently, the fact that the "assessmentloans" were levied only on the Branch Banks best able to afford it
irked some, but the seriousness of the situation eventually led them
to comply with the order. A letter to the cashier of the Toledo
Branch Baric from Andrews deals '/ith such a situation:

I-lr. Gardiner of Norwalk Branch has returned
to this office our requisition on you for $10,0C0,
made in conformity with the resolution of the Ex.
Coat, on the 25 ult. the object of which is to
provide relief for any 3ranch which may need it in
a most extraordinary and unexpected crisis brought
upon us by no imprudence or improper action of one
Branch but by the gross misconduct and fraud of
others.
1/ Ibid..
2J August 29, I85T > Ohio Letters, op. cit..
3/ September U, l857> Ohio Letters, op. cit..

VI-30
The case presents the strongest one that can
he veil imagined for grounds of relief, if needed.
But aside from this, we are cne family, and our
Branches c.re about as much interested in sustaining
each other, as each is in sustaining itself. Infact, to sustain a sick Branch is to sustain your
self.
It so happens that this calamity has fallen upon
nest of our strongest Branches ...
Under these circum
stances out one of two courses remain, either to call
upon those who have escaped this misfortune, and who are
well able to afford relief, or to dc nothing, and let
the State Bank of Ohio fail ... Is your Board of Di
rectors known to contemplate such a result? The Elyria
Branch promptly responded to our requisition in aid of
Ilon/alk for o5,0CG, her capital being but half of what
yours is ... but I cannot draw on you until I hear from
you. 1/
The Eranch Banks were also benefited in other ways during
the panic as a consequence of their relationship with each other.
First, the Board of Control had been able to secure bonds and
mortgages from the Trust Company to secure the deposits held there.
Some of these mortgages were immediately converted into cash and
were thus of some help. 2/ Second, the Branch Banks were able to
exchange circulating notes with each other to be used in the course
of daily business. By paying out the notes of other Eranch Banks
rather than its own, each bank was assured that noteholders would
have difficulty in returning notes for redemption. This was a com
mon, if not entirely ethical, practice followed by banlcs during
emergencies. And since the Beard of Control was in contact with all
Branch Banlcs, it was a relatively simple matter# The procedure
apparently was that the clerk of the Board of Control, upon re
ceiving notes from one Branch Bank, would return a mixed package
of notes of other, distant, Branch Banks. 3/
By the end of 1^57 it was becoming clear that the panic had
bee.i successfully jiet by the Branch Banks. 4/ As noted earlier,
this was the last instance in which financial assistance was re
quired by banks participating in the insurance system.
Losses to participating banks. It was pointed cut earlier
that assessments on participating banks to redeem the notes of an
insolvent Branch Bank were to be returned to the banks from the
1/ "September 5, 1557, Ohio Letters, op. cit.; underscoring
in the original.
2f Many of the letters written during September and October
of 1857 indicate that the Board's efforts to collect on mortgages
secured from the Trust Company met strong resistance.
V October 5 and 10, lo57> Ohio Letters, op. cit..
%j ”... I hope the good ship *State Bank of Ohio' is once
more in smoother waters. But for the terrible calamity of the
Trust Co. she would have passed through the crisis without the
necessity of telling in a sail." November 27, 1357 > Ohio Letters, op.
cit..

VI-31
insurance fund. 1/ However, the fund consisted simply of a portion
of the assets of each Branca Bank. Since both the assets assigned
to the insurance fund end the assessments were based on the amount
of circulating notes, it is clear that liquidation of the fund, or
any part, to repay the banks the amounts they had been assessed
would have only amounted to a shift in the composition of assets of
each bank and not to a true reimbursement.
As a matter of fact, the insurance fund vas never used for
this purpose. This was made clear in a letter to the Cincinnati
Gazette in 1862, long after the last occasion for an assessment had
arisen:
... a "Safety puni" is provided solely for the purpose
of reimbursing the Banks for advances to each other.
I would here renark, however, that the Board of
Control of the State Bad: of Ohio has never permitted
any such reimbursement to be made from this fund;
requiring such advances to be charged to the profit &
loss of each Branch, thus preserving the "Safety Fund"
unimpaired ... 2/
It is impossible to determine what proportion of the
$291,000 disbursed on behalf of creditors of the four Branch Banks
placed in receivership was eventually repaid to the contributing
banks. In the monthly report made in September 13^3, the item
''Advances to insolvent branches” appeared for the first time among
assets. The amount shown was $170,000, and since there was a some
what comparable decline from the preceding uonth in the holdings
of Branch Bank circulating notes it may be presumed that the new
item was sisr:ly an attempt to take out of "Notes of Branches on
hand" those notes of failed banks which were being held as claims
against the receivers of those failed banks.
The amount shown as "Advances to insolvent Branches”
fluctuated within a narrow range during the next several years
reaching :)l82,C00 in January of i860. Thereafter it declined and in
January of 1365 was $52,000. The increases in some months were
probably attributable to the fact that notes of a failed bank generally
cane in 3lowly for redemption, particularly so when it was known
that they would be redeemed at par. How much of the decline in this
item is attributable to payments to the Branch Banks by the respective
receivers and how much to charge-offs by the banks themselves cannot
be determined.
Financial aid given operating 3ranch Banks prior to their
failure did not entitle the contributing banks to a preferred position
among bank creditors. This was made clear in a letter from the
president to a Branch Bank cashier, dealing \rith advances made on be
half of the Akron Branch Bank prior to its failure:

1/ See p. VI-5 .
2/ March 18, 1852, Ohio Letters, op. cit..

VT-32
... Nothing has been done since the meeting of the
Board of Control to secure the Branches for their
advances to the Miron Br. prior to its failure.
From present indications I fear there will he no
assets left ... from which any security can he had.
At the time those advances ’/ere nearly ... IOC, 000,
R.R. Stock held by the Bank was deposited in this
office to secure the Branches for their advances.
By the subsequent insolvency of the Bank this
stock, is I suppose, vested in the Board of Control
as part of the assets of the Bank and the proceeds
may be applicable to all future redemptions of the
notes of the Bank ...
I have instructed the Branches from which the
advances were made ... to keep the account of their
advances entirely distinct from the account of
contract made after the failure of the Branch. All
the Branches have contributed in like proportion to
these advances ... 1/
Thus, in the two cases where such aid was given, i.e.,
the Licking County and Akron Branch Banks, the other participating
banks undoubtedly suffered losses. Also, there was apparently
little or no return to the participating banks for their con.tributions
made to assist in the reorganization of the Submit County and Toledo
Branch Banks. If it is assumed that advances made during the panic
of 1857 were all repaid, it may be roughly estimated that losses to
the participating banks for the entire period approximated $300,000.
Appraisal of the Supervision and Regulation of
Participating Banlas' 2*7
Supervision of the Ohio Branch Banks was entrusted to the
president of the Board of Control and an Executive Committee, con
sisting usually of four or more Board members and the president. The
full Board met only twice a year, in May and November, and although
it could, and did, receive appeals from actions of the Executive
Committee it rarely sustained such appeals. Consequently, the bulk
of the supervisory correspondence, on which the following appraisal
is based, consists of letters written by the President of the Board
of Control, i.e., by Gustavus Swan until 1855 and by John Andrews
thereafter.
Enforcement of supervisory regulations. Four methods were
available to, or developed by, supervisory officials to assure coagpliance by the Branch Banks with their orders. The first, and most
l/ January 12, 1855> Ohio Letters, op. cit..
2j Almost all of the direct evidence available for appraising
the supervision and regulation of the Ohio Branch Banks is contained
in the correspondence records of the Board of Control covering the
years 13US-64. While this is a far better source of information than
is usually available for banking systems operating a century ago, it
should be noted that the records consist of outgoing correspondence.
Thus, information contained in incoming mail, such as letters from
participating banks and reports of bank examiners, can only be inferred
The lack of correspondence records for the first three years the sys-

vi-33
frequently used, was persuasion. Since the president and the
members of the Executive Committee were in a position to view the
system as a whole and were in receipt of daily information on
banking conditions, they were frequently able to explain and justify
orders which might be unpopular. This method was apparently used
with great effect by both presidents but particularly by the first.
Its greater use in the earlier years probably reflects in part the
different personalities of the two men and in part the fact that
the first president had to deal with bankers to whom the system and
the principle of mutual liability was still new.
A more effective technique for stubborn cases was developed
by the Executive Committee after John Andrews succeeded to the
presidency of the Board. This was to limit, or forbid, the payment
of dividends by the Branch Banks until a particular order was obeyed
or situation corrected. Although there was no express provision for
this power in the 1&+5 law or later amendments, it is found in the
1855 edition of the By-laws. 1/ Apparently it was based on the
broad powers given the Board, and by it to the Executive Committee,
to protect the interests of the system as a whole. 2/
By limiting or forbidding dividends the Executive Committee
could clearly exert great pressure upon the officers of an erring
Branch Bank. However, a stronger weapon was needed in a few cases
and this was found in the right of the Beard to require a Branch
Bank to reduce its circulation or other liabilities whenever it
felt that the activities of the bank threatened the system with a
loss. Unlike the limitation of dividend payments, which merely
postponed distribution of earnings already made, reducing circulation
meant a reduction in earning assets and thus earnings per se. This
power was used sparingly and usually only by the full Board of
Control rather than the Executive Committee.
Finally, the Board could secure an injunction and close a
Branch Bank which failed to obey an order. This authority was never
used but its presence gave great weight to the decisions of the Board
and of the Executive Committee.
Exaittnations and reports. The act creating the State Bank
system required that participating banks be examined at intervals
determined by the Board of Control. Examiners were to be either
members or special agents of the Board and were given broad powers. 3/
Examination of each Branch Bank was apparently made two or
three times a year during the first years the system was in operation.
However, by 18U8 it was felt that "unless it was supposed best by the
Ex. Ccm. the Branches need not be examined oftener than once a year..."if
The policy of annual examinations, unless conditions
warranted a special examination, was embodied in a section of the_____
tem operated, is considered a less serious deficiency because of the
short tiiDe involved and the fact that no major change occurred among
personnel of the supervisory agency until 185^.
1/ Laws, By-lawa and Resolutions relative to the State Bank
of Ohio (Columbus, 1B55 }/ Article 6. The Branch Banks could appeal
to the Board but in the meantime had to obey the order in question.
2/ See p. VI-3.
3/ See pp. VI-8-11.
5/ June 12, 1848, Ohio Letters, op. cit..

VI-3*+
1855 By-laws, along with a provision prohibiting notice of the time
of examination. 1/ Apparently both practices had been followed, for
a number of years prior to 1355 and were also followed thereafter.
Occasional inquiries designed to ascertain the date of forthcoming
examinations were sometimes put off by the secretary of the Board
in the following manner: ’’I know not when the Examiner will 'be on
you* but suppose he will come at a time when you do not expect him,
perhaps 'like a thief in the night'. Therefore 'be ye r e a d y . 2/
There is no indication in the correspondence records or
elsewhere that a permanent staff of examiners was ever recruited. In
the early years examinations seem to have been assigned to indivi
dual members of the Board of Control who, upon completing the task,
charged the bank a fee for the service. 3j The fee was not fixed by
the Board, at least in the early years, since Swan had occasion to
write to one cashier who considered the charge "exorbitant": "How
if Mr. W. has charged too much under this situation it is not our
fault and if we can be made sensible of it we shall take care that
such a thing shall not happen again." 4/
This system was also unpopular with the appointees and on
several occasions the Board was unable to persuade the person selected
to accept the assignment. 5/ Consequently, after the middle I85C S
most examinations were conducted by the vice-president of the Board
of Control.
Numerous letters to examiners were found among the corres
pondence records of the Board. The instructions included with two
such letters, the first written by Swan and the second by Andrews,
are reproduced here to show what the supervisory officials expected
of their examiners. Swan's letter included the following list:
1. Ascertain by count or weight ... the amount of specie
on hand.
2. Compare bills and notes with books ...
3. Ascertain and report overdue paper and on the oaths of
the president and cashier the real cash value thereof.
4. Interrogate the officers under oath as to what amount the
directors and stocldbol&ers directly or indirectly are indebted
to the Branch and whether the terms and conditions of the loans
are more favorable than to customers in general.
5 . Ascertain what agent the Branch employs in or out of
the State and what is the principle or main object of employing
him or them.
1/ Article 8 , section 10, Laws — op. cit..
2/ August 30, 1855, Ohio Letters, op. cit..
3/ It goes without saying that a Branch was never examined
by its own representative on the Board of Control.
h] December 7> 18^9, Ohio Letters, op. cit..
5/ For example: "We hardly deem the reason assigned by you
for declining the duties ... sufficient. With a view to the thorough
examination of the Branches we selected those whose experience of
business ... best qualified them ... We have no doubt but ^that it isJ
more or less janj inconvenience ...", Letters, September +
], 1&52.

VI-35
6.
Whether any of the stock of the Branch, other than what
appears upon the books is held in trust or is incumbered in any
way ...
7* Whether debts due the Bank deemed not sure and collect
able in whole or in part, and which have been past due for six
months or more, have been carried to Profit & Loss.
8. Ascertain by interrogatories to the cashiers and other
officers what per cent upon the capital, or the amount in gross
in addition to what has heretofore been carried to Profit &
Loss, in their judgment will be loss on the present debts due
the Branch.
9 . Whether the Branch is in the habit of discounting or
purchasing bills of exchange payable at another place than the
place of such discount or purchase and if so what is the pre
mium or exchange usually taken ...
10. Has the Branch in any case renewed bills or notes with
the sole view of diminishing the overdue list.
11. Has the Branch knowingly suffered any individual or
individuals to overdraw his or their deposit account and if so
whom and to what amount.
12. Does the Branch make loans to brokers or others whose
business ia in whole or in part to return notes of the Branches
for redemption.
You will please give in your report your opinion as to the
manner of keeping the books ... and whether they are attended
to as to daily detect errors, and whether there is promptness
or negligence in answering letters of business. You will also
ascertain and report the amount of specie drawn from the Branch
since the last meeting of the Board, the sources from which the
Branches mainly supply themselves with specie and the expense
of procuring it.
The agent is not limited in his investigations to the
particular points enumerated but is to use his own discretion
... to the fullest extent. 1/
Andrews' letter was somewhat less formal:
At a meeting of the Ex. Comt. this day you were appointed
an Agent to examine, prior to the next meeting of the Board of
Control, the Union Bank, Massillon; The Knox County Bank; and
the Hocking Valley Bank. You are requested to examine carefully
the character, security and probable prompt payment of the
bills Receivable of each of these Banks, a list of which you
will return with your report, with marginal remarks. You will
also carefully examine their books and accounts and reports,
not only as to their accuracy, but as to the time when their
accounts, general and individual, can be settled. It is
desirable also to know whether either of these Banks has any
arrangements, either through the Bank, or their officers, in
official or private capacities, to procure and maintain in
circulation the notes of other Banks in or out of the State;
and if so the nature of such arrangements, the security given,
and whether any of the assets of the Bank are hypothicated or

1/ September 10, 1851, Ohio Letters, op. cit..

VI-36
pledged to secure the same.
You will not confine your examinations to the points
indicated, "but make them full and thorough so as to present
a true and actual condition of the Bank. 1/
Apparently the examination reports were laid before the
Eoard at its semi-annual meetings. Typical of the action taken at
one meeting was the following;
Dayton 3ranch Bank: Resolved: That the Dayton Branch
be required to make quarterly trial balances of its individual
ledger, to correspond with the general ledger, and that a
record of the same be kept on file for the inspection of the
examiner.
Resolved: That the Dayton Eranch be required to so change
its mode of "bocfckeeping that any variation of the cash shall
not prevent balancing of its general ledger.
Jefferson Branch Bank: Resolved: That the Directors
of the Jefferson Branch, in making a dividend on the First
of Nov., 1858 of four percent, in violation of a resolution
of the Board of Control after their attention had been called
to the sane by the President of this Board, are censurable
for such violation, and that said Eranch be restrained from
making any dividend until permitted to do so by the Executive
Committee.
Farmers Branch Bank, Mansfield: Resolved: That the
Farmers Branch at Mansfield be required to ascertain and
correct the discrepancy which existed at the time of the
Sxaminer's report between its individual and general ledgers.
Miami County Branch Bank: Resolved: That the Miami Co.
Branch be required to cause the loans to ___ , ___ , ____ ,
and ____ to be reduced at the rate of 10 percent on the present
amount, as the same matures, each sixty days, until the debt
is reduced to at least $3^,000 in the c^gregate, of active paper.
Mt. Pleasant Branch Eank: Resolved: That the Directors
of the Mt. Pleasant Branch in making a dividend on the 1st of
Nev. 1858 of eight percent in violation of a resolution of
this Board, and an order of the Executive Committee allowing
only a 3 percent dividend, are clearly censurable by this Board;
and that said Branch be restrained from caking any dividend
until permitted to do so by the Executive Committee.
Athens Branch Bank: Resolved: That the Atfc.ens Branch
be required to enter the $10,00C time drafts given to the
Conway Bank of Massachussets, upon their books.
Resolved: That the Athegig Branch be required to reduce
the loans to their directors/as to bring them within the limits
prescribed by the Charter.
Resolved: That the Athens Branch be required to adjust
the discrepancy between it and the Ross Co. Branch.
Marietta Branch Bank: Resolved: That this Branch be
required to reduce its loans to directors b o as to bring the
amount within the limits required by the Charter.
Ross County Branch Bank: Resolved: That the Ross County
Branch be required to adjust the discrepancy in the amounts
betwen it and the Athens Branch. 2/

1/ March 23, lS55, Ohio Letters, op. cit..
2J November 18, 1858, Ohio Letters, op. cit..

VI-37
It seems fair, on the basis of these and similar letters,
to conclude that high examination standards were laid down and that
examinations were diligently conducted. It also appears that the
supervisory authorities did not hesitate to take action on the
basis of information secured from examination reports.
The 1845 law gave to the Board of Control the right to
determine how often, and in what form, participatings banks would sub
mit reports of condition. The By-laws published in 1855 show that
monthly condition reports were required and, in addition, names and
addresses of all persons indebted to the Branch Banks were sent to
the Board four times in each year. 1/ It is probable that both of
these practices were followed from the time the system began until
it closed.
The fern of the condition reports was not described in
the By-laws. Probably it was the sane as the "accurate statement
of the condition1'' which the lS<5 la'^ required of each Branch Eank
at the time dividends were paid. 2/ This statement was quite
detailed including, for example, a distinction between specie in the
bank's possession end "specie" deposits in other banks. Also, amounts
owed by directors and stockholders had to be segregated in these
reports. Many of the Board of Control letters indicate that such
information was included in the reports of condition submitted monthly
by the Branch 3an.':s.
Q-oeration of individual banks. In their dealings with
individual Branch Banks supervisory officials were responsible for
seeing that statutory provisions were not violated and that each
bank conducted its business in a sound manner. This naturally re
quired a wide range of activities but study of the correspondence
records indicates that officials were diligent in meeting their
responsibility. This may be illustrated by examining their record
for several of the more important areas of supervision.
One of the most important of the statutory provisions was
the requirement that each Branch Bank maintain a specie reserve for
circulation. 3/ In 1845 such a requirement was still novel and the
tendency of bankers to ignore it was strong. The situation vas
further complicated in Ohio by the activities of private bankers and
brokers who demanded exorbitant premiums for specie or its equiva
lent, particularly on the days just prior to the submission of
condition reports, bj
nevertheless, the supervisor;' officials
were prompt to require compliance in each instance, even where the
infraction was minor, as indicated in the following letter:

1/Article 5, sections 1 and 4, Laws ..., op. cit."
2/ An Act to incorporate ..., section 59*
3/' See page VI-9.
%j August 12, 1 8 5 Ohio Letters, op. cit..

VI-33
We observe by your last monthly report that your specie
is ... less than thirty percent. The deficiency is a
trifling sum and doubtless its occurence was accidental
.
I write merely to comply with the spirit of the
/law?. 1/
Letters from supervisory officials regarding violations of
the specie reserve requirement were equalled in number only by those
dealing *rith excessive accommodations granted stockholders and
directors. The tradition that these persons wex-e particularly de
serving of bank loans stil persisted and probably no other statutory
limitation relating to banks, in other States as well as Ohio, was
more consistently violated. However, the practice was dangerous
because of the concentration of risk to which, the bank became sub
ject; and because anti-bank legislators were quick to point to it
in justifying laws detrimental to barking.
An illustration of the concern evidenced by supervisory
officials is seen in the following letter:
... I do not presume that /the liability of your directors
and stockholders^ swelled as it is, exceeds the limits of the
latter clause cf the 12th Sec. but I m y be permitted to
say that this large accommodation, if publicly enough
known and it is very apt to set out, will leave an un
favorable impression as to the .management of the Branch.
It will give confirmation to what is often charged upon
banks, that those interested monopolize the means to the
exclusion of those without. I would therefore respect
fully suggest to your directors whether it would not be
a measure of policy to curtail seme of their stockholder
borrowers, the better to enable the Eranch to extend
accocmodations to the business portions of the community
... Stockholders should be lenders, not borrowers ... 2/
Swan and Andrews were equally concerned with excessive
loans to stockholders and directors but whereas Swan preferred, or
perhaps T.ras required, to use persuasion, Andrews did not hesitate to
impose more stringent penalties. Indeed, one Branch Bank was compelled
to retire $50,000 of its circulation. 3/ By early 1357 Andrews
claimed that such action had solved the problem: Mwe have ... so far
succeeded in enforcing an observance ... that it rarely is necessary
to allude to the matter." hj However, the practice was never completely
eliminated and even as late as 1363 Andrews was reminding a bank:

1/
2/
3/
l/

October 17, 13*r3, Ohio Letters, op. cit..
April
13^9t Ohio Letters, op. cit..
L4ay 13> 1857> Ohio Letters, op. cit..
February 17, 1857,Ohio Letters, op. cit..

VI-39
"Of course we all know this debt is safe ... "but that is not the
question. It is a violation of the charter ..." 1/
The quality of “bank assets, as revealed, by examination re
ports, frequently drew criticism from supervisory officials. This
seems to have been particularly true after Andrews became president
of the Board of Control. However, individual banks were usually per
mitted a large degree of independence in the acquisition of assets
and supervisory officials were content merely to point out certain
errors. A typical letter from Andrews to the Union Branch Bank indicateslittle inclination to take action unless absolutely necessary:
The present condition of the bills receivable of the
Union Baric really alarms me. If anything should occur
to send your circulation homeward I do not see how the
3ank could sustain itself ... when will bankers learn
that the wiping off of an old debt by creating a new
one is not a payment? ... I did hope the "Union" had
seen its worst days but I fear that time is before, and
not behind it. 2 /
The problem of failure to maintain adequate capitalization
was not as pressing at that time as it is today. The ratio of
capital stock paid in to total assets was typically 25 to 30 percent
and supervisory officials were most frequently concerned with seeing
that capital was actually paid-in and that stockholders were not
permitted to borrow money with their stock serving as security.
Nevertheless, the Board of Control did substantially strengthen the
capital position of the Branch Banks by requiring that each bank
establish a contingent fund equal to its contribution to the safety
fund, i.e., equal to ten percent of its circulation. 3/ If a bank
failed to maintain the contingent fund at the stated level its
circulation was to be reduced accordingly.
Operation of the banking system. In seeking to achieve a
strong banking system, supervisory officials were often required to
look beyond the condition of individual Branch Banks. The insurance
framework within which the banks operated was novel for Ohio and,
in addition, there was the ever-present hostility of a portion of the
State legislature and of the public.
The attitude of the State legislature was of crucial im
portance to the welfare of the banking system and supervisory
officials devoted considerable time to placating the legislature.
Indeed, among the motives for a particular action it is sometimes
difficult to distinguish between those arising from the application
of sound banking principles and those related to fear of the legisla
ture. An excellent illustration of this is found in the previously
cited letter dealing with loans to stoc!iiolaers and directors, hj

1/
2/
3/
My'

October 26, ld63, Ohio Tetters, op. cit..
August lU, l36l, Ohio Letters, op. cit..
Article 6 , section 17, Laws
, op. cit..
See p. VI-36 .

VI-40
It is clear that the supervisory officials would go to
great lengths to appease the legislature. Reference has already
been made to the unsuccessful attempt to forestall the passage of a
particularly severe tax lav by delaying the failure of the Licking
County Branch. Bank. 1j In another instance, after the failure of the
Comciercial Branch Bank of Toledo the State was given a preferred
positicnjamong creditors "to prevent a great noise on the part of the
hards, /i.e, the "hard money'1 or "anti-bank1' legislators^" 2/ In
general, it is difficult to assess the policy adopted towards the
legislature because it was designed to forestall, rather than preci
pitate, legislation. That it was not successful in the case of the
1552 tax law does not, of course, mean that it was unsuccessful
at other times.
In at least once instance the State was cf direct assistance
to the Eranch Sanies. During the panic of I85T the State treasurer
publicly announced that he would receive in payment of public dues
only those banknotes issued by the Branch Banks and certain other
Chic banks. 3/ This announcement, which was of great value in main
taining public confidence in the banks, was the State's part of a
bargain, under which the supervisory authorities had promised to have
the banks furnish the State with eastern exchange, needed, to pay
interest on the State debt, at par, i.e., without exchange charges.
This was one of those actions which at first met the strong dis
approval of individual bankers but which was finally accepted when
supervisory officials explained its importance. 4/
During the earlier years supervisory authorities also had
to deal with a danger internal to the systen: antagonism among
the Branch Banks. As Swan put it in one instance: "Our Branches
are exceedingly jealous of each other and ... no slight danger
exists of actual hostility ... It is possible /the Executive Committee^
can derive some measures to avert hostility, so disgraceful among
brothers." 5/
Apparently, it was difficult for bankers who had operated
in prior years under extremely competitive conditions to become
accustomed to a system whose great strength was in the principle of
mutual responsibility. Under such circumstances the slightest in
dication cf favoritism on the part of supervisory officials could
have been disastrous. What was needed was patient, tactful handling
cf the banks and, on this score, supervisory officials acquitted
themselves well. The extreme delicacy of the situation, and the
approach used by Swan, is best illustrated by the f o l l o w i n g letter
to a Branch Bank cashier:

I regret to learn from a reliable source that your
Branch has recently returned for coin to the Xenia
Branch a large amount, say 15,0C0 of their issues.
I do not of course claim any right to interfere in
such matters, but I deem it of very great importance
1j
£/
3/
%J
5/

See p. VI-2d.
December 1, 1354, Ohio Letters, op. cit..
October 21, 1857, Ohio Letters, op. cit..
See p. VI-32.
September 2, 1350, Ohio Letters, op. cit..

VI-41
that the harmony of the Branches not be interrupted
in any way and I must say that unless impelled by an
absolute necessity I think a run by one Branch on
another is particularly calculated to create unpleasant
feelings .., Information has reached this office by
way of minor only that the Xenia Branch is in the habit
cf discounting domestic bills payable in your city in
coin. If these rumors are well founded it is but an
indirect way of drawing specie from your bank and
necessarily in part from other Eranches. If such a
practice exists to any great extent or perhaps even
in a single instance I should deem it unfair ... I
again repeat that I claim no right whatever officially
to interfere with the business of the Branches in such
natters and what I have said I fear may be deened ...
what does not concern me and if this should be the
case I most assuredly will not complain. 1/
Another example of the broadening of supervisory horizons
is seen in the concern shown by officials over the effect of bank
operations on the circulating medium and on the economic life of
the State. The law, of course, did not provide for supervision
in this area but from scattered bits of evidence it appears that
supervisory officials in Ohio developed a method of controlling the
volume of bank obligations similar to that available today to the
Board of Governors of the Federal Reserve System.
In providing for a specie reserve equal to thirty per
cent of circulating notes the Ohio legislature merely required that
at least half of the reserve consist of "old and silver coin in the
various Branch 3ank vaults and permitted the remainder to be in the
forn of deposits in banks of certain eastern cities. However, super
visory officials took the position that they could vary the proportion
of the specie reserve required to be in coin-in-vault so that, at
the maximum, the entire reserve could be so constituted. Thu3, orders
varying the proportions which might have appeared at first to be
simply routine became, in fact, of utmost importance. This was
because the Branch Banks frequently could not afford to draw down
their eastern balances too far and, as a result, could only meet an
increased specie-in-vault requirement by contracting their circulation.
The record of the use of this power by supervisory officials
is net complete. At some time prior to IS55 they required that 20
percent of the circulation consist of coin-in-vault since such a
regulation is included in an edition of the By-laws published in that
year. 2j A letter written by the president of the Board of Control
in the sumner of l3f2 nay provide a clue as to the date of this
provision and the reason for its adoption:

1/ June 30? 1&4~9, Ohio L e t t e r s op. cit."
2J Article 3, section 13. Laws ..., op. cit..

VI-42
Belov is a copy of a Resolution of the Ex. Com.
passed this day. I shall "be happy to have your
opinion as soon as convenient ...
"Resolved: That the President ,.. ascertain
whether it is deemed best in view of the cheapness
and abundance of money to enforce the orders of the
Eoard at last session directing a withdrawal of
circulation and an increase of specie basis." l/
Apparently, the ratio of coin-in-vault to circulation was
permitted to fall to 15 percent again during the panic of 1857 since,
as the panic subsided, the president of the Board of Control wrote
that one of the resolutions adopted at his recommendation required
the banks to "bring up the coin to 2C percent on circulation in
60 days and thereafter
percent per month until the amount is to
30 percent and hereafter we will have no 'equivalent' but count
only ’coin in vault' as the basis of circulation ..." 2/
Later changes in the ratio cannot be determined, although
between 1857 and i860 the portion of the specie reserve consisting
of coin-in-vault was again allowed to fall to half, or fiteen per
cent of circulation. In general, it appears that the supervisory
officials exercised their power over the circulating medium, or
that portion consisting of Branch Bank circulation, whenever they
felt that the strength of the State Bank system would be increased
by a contraction of circulating medium, or restraint upon expansion.
Because information is insufficient regarding the various
dates at which changes in the vault specie reserve were ordered, or
became effective, it is difficult to demonstrate the effect of such
orders upon bank operations. The November 13^7 resolution noted
above is the only order which can be assigned a precise date and
in this case it appears to have been quite effective. In October
I657 , the ratio of specie to circulation was less than 17 percent.
Following the ITovember order the ratio increased rapidly, exceeding
28 percent in Karen 1858* This rise was due to an increase in specie
and to a sharp contraction in circulation. Individual deposits also
declined sharply following the November order.
Appraisal of the Insurance Plan
Ohio's bank-obligation insurance plan had two closely re
lated but distinguishable objectives: to protect the creditors of
failed banks from loss and, second, to prevent a collapse in the
State's circulating medium as a result of bank failures. Only a
limited attainment of these objectives was possible since insurance
was restricted to circulating notes of participating banks. Within
these limits, the objectives were attained. No noteholder of a
failed participating bank suffered a loss and, in addition, a number

1/ August 23 , 1852, Ohio Letters, op. cit.J
2/ November 21, IS57 , Chio Letters, op. cit..

vi-43
of banks in financial difficulties were enabled to continue operations
as a consequence of "both direct and indirect aid from the insurance
system. This section deals with the measure of success enjoyed by
the insurance plan as well as with its shortcomings.
Comparison with nonpart icipatinr; banks. During the twenty
years of "bank-obligation insurance in Ohio thirteen nonparticipating
banks failed, with total obligations in excess of $5 million. About
two-fifths of this amount was attributable to the Ohio Life Insurance
and Trust Company. It will be recalled that only ten Branch Banks
became involved in serious financial difficulties and of these four
were closed. The total obligations of the ten Branch Banks were less
than 02 million. Since the Branch Banks composed veil over half of
all operating banks and were responsible for 60 to 70 percent of
total obligations, their record, whether in terms of number of banks
in difficulty or obligations involved, was considerably better than
that of the nonparticipating banks.
Losses to creditors of failed nonparticipating banks are not
known, but it appears certain that they were considerably larger,
both in absolute amount and in relation to total obligations of the
failed banks, than was the case for creditors of the Branch Banks.
In the case of the Branch Banks there was no loss to any bank creditor,
whether depositor or noteholder, in the sis banks restored to sol
vency through insurance disbursements. There was no loss to note
holders of the four Branch Banks placed in receivership but there
was very probably some loss to depositors of those banks. Total de
posits in these four Branch Banks were .just over $500,000 at about
time of failure. However, only A5,CG0 of this amount was in the
Licking County Branch Bank, probably the most disastrous failure
of the four. If it is assumed that depositor losses in the other
three failed Branch Banks were 50 percent - probably too high a pro
portion - then losses to all creditors of Branch Banks in financial
difficulty may be estimated at $250,COO.
The 13 nonparticipating banks which failed included six
Old Banks, five Independent Banks and two free banks. No special
protection was provided holders of circulating notes of the six Old
Banks, and such protection in the other seven cases was in the form
of bond security posted by the banks. From the record of similar
bond protection plans in other States it may be assumed that not all
payments to noteholders of Independent and free banks were at par.
Scattered pieces of information indicate that losses to
creditors of the Old Banks were substantial. For example, Huntington
quotes a contemporary estimate to the effect that losses in the case
of the Bank of Wooster, which had total obligations at tine of failure
in excess of ;j>!;G0,CC0, were not less than 3250,000.1/
In the case
of two other Old Banks which failed with circulation outstanding of

1/ Huntington, op. cit., p. 433*

VI-J+U
$^55,CCO quotations from banknote reporters suggest a minimum loss
of 25 percent, or more than $100,000. Thus, in the cases of only
three Old Banks it appears that losses to creditors were larger than
those for all Branch Banks in difficulty. Taking all thirteen
failed nonparticipating banks together and applying the sane ratio
of 50 percent to depositor losses as was applied in the case of the
Branch Banks, total losses to creditors of failed nonparticipating
banks would approach $2 million.
Method of •paying insured obligations. The fact that note
holders could secure gold or silver coin immediately after failure
of a participating bank undoubtedly contributed to the maintenance
of public confidence, and thus to the strength of the entire system.
However, it will be recalled that suns required for immediate note
redemption were secured by special assessments, levied as needed,
on the sound participating banks. Since the need for assessments
was greatest during depression periods, the sound banks were subject
to drains on their resources at the very times when they could least
afford it. In addition, the banks could not know how often, and
for how much, they would be assessed since that depended to a large
extent on the rapidity with which notes were returned to the re
deeming bank.
Thus, public confidence in the insurance system was sus
tained in periods of crisis at a nost to both the community and the
banks. The community suffered because the sound banks were undoubted
ly forced to contract even further than would be customary in order
to be able to :neet assessments that mi^ht arise. The banks suffered
because liquidation of failed banks could not proceed at an orderly
pace. That is, the receiver was under strong pressure to turn assets
into cash as fast as possible in order that there be no need for
further assessments.
An alternative would have bean to provide for the establish
ment of an independent insurance fund, under the control of the super
visory authorities, from which payments to noteholders could be made.
The legislature may have had some such plan in mind when it estab
lished the safety fund but, as vas shown earlier, that was not a
fund at all, a fact which vas so apparent that it was never used by
the supervisor;?- authorities for the purposes for which it had been
intended, l/
Bad an independent insurance fund been established it is
clear that substantially larger assessment rates than are paid today
by insured banks would have been necessary. Table 38 shows that a
fund created from assessments at rates ecual to those levied under
Federal deposit insurance would have been wiped out in 1350, the
first year in which payments were required. But had such a fund been
supplemented by adequate borrowing power assessments throughout
its twenty years of operation of i- of 1 percent of total circulation
would have met the losses which occurred in the banks which failed.

1/ See p. VI-6

VI-4?
Table 3 8 . Adequacy of Safety Fund and. Extent of Insurance Coverage
Chio Branch Banks, 1345-64
(Amounts in thousands of dollars)

Year

1845
1646
184?
1848

1849
1650
1851
I852

Claims appli- Branch Bank safety fund Hypothetical insurance
cable against ~Anount 2/ Percent of
fund 3/____________ _
Safety Fund l/
insured ob Amount Percent of
insured ob
ligations
ligations

—

---142

1655
1856
1857

113
44
140
53
40
56

1858

1859
186c

1853
1854

1861
1862
1863

1864

- -

$ 136
342
537
730

855
90"7
894
°o6
875
360

836
613

815
815

815
615

8.6
12.9
14.5

10.6
11.2
10.8
10.6
11.2
10.6
12.3
11.1
11.0
12 •7
11.9
12.5
11.0

815
3lp

10.0
10.1

815

14.2

774

16.6

$ 27
29
32
37
43
50
57
64

1.7

1 .1

0.9
0.5

0.6
0.6
0.7

0.8
0.8

76
32
38
93

l.l
l.l
1.2
1.5

1.4

104
110
U7
124
129
133

1.0
1-5

1.4
1.5
2.2
2.8

1/ From Table 37, '"'Total assessments by year.’’ Excludes
insured obligations of failed banks which were redeemed with funds
secured from liquidation of said banks.
2/ From monthly condition reports, library of the Ohio
State Arachaeological and Historical Society.
5/ Computed by assuming an original fund of $26,000,
approximately equal in relative size to original capital of FDIC, plus
additions for each year equal to one-twelfth of one percent of total
circulation. !’
Jo deductions were made for claims against fund.

VI-46
Had the safety fund, also shown in Table 38* actually been an
independent insurance fund it would have been adequate, but it would
have required annual assessments of about one percent on insured
obligations.
Supervision of participating banks. Equal in importance
to immediate parent of creditors in accounting for the success of the
insurance system was the supervision of participating banks. As
previously indicated, supervisory officials were diligent and thorough
in seeing that the banks complied with the law and that the system
was protected from attack or loss. Most important, this was accom
plished through self-regulation, i.e., supervisory officials were
named, paid, and subject to dismissal, by the participating banks.
Undoubtedly, there were numerous factors which account for
the quality of supervision, not the least of which was the ability
of the two presidents. However, it is submitted that the major
factor was the principle of mutual liability. Hie Board of Control,
consisting of representatives from each Branch Bank, could not
afford to relax its vigilance or limit the authority cf the presi
dent, lest it be faced with a failed bank and the necessity of levying
assessments on the banks it represented.
Before 1845 there was relatively little bank supervision
in Ohio and its development between 1845 and 1865 marked a great
step forward in Ohio banking history, nevertheless, it i3 proper to
suggest that the pressure on supervisory officials may have been too
great. Although the correspondence records indicate that officials
paid some attention to the credit requirements of the State, in siost
cases their concern was understandably directed towards guarding
participating banks against losses which would arise from insurance
assessments. Consequently, there may have been a tendency to be too
conservative, to contract earlier and more sharply than was warranted
in adversity and to expand too slowly during other periods.
While the available data are not sufficient to demonstrate
this proposition, it is significant that in changing the specie
reserve requirements officials were concerned in each instance with
contraction of the amount of circulating notes. 1/ There is no evi
dence that reserve requirements were ever lowered for other than
negative reasons: that is, that contraction was no longer necessary.
On the other hand, there were several instances where expansion of
the circulating medium to the benefit of the public was prohibited
while there was the slightest possibility of danger to banks. 2j
Adequacy of insurance coverage. When the Ohio legislature,
following Kew York's lead, restricted insurance to circulating notes,
it limited, but did not do violence to, the objectives of the insurance
plan. However, it appears that the exclusion of deposits from cover
age was developing into an important defect of the insurance system
by the l36C's.
1/ See pp. VI-41-42.
2/ February 8, 13^8, Ohio Letters, op. cit..

vi-vr
The growing importance of deposit banking is reflected in
the e:;tent of instance coverage, as shown in Table 35* It is true
that a substantial portion of total Chio circulation remained in
sured during most of the period. For example, in 1863 more than
two-fifths of Ohio's circulation was insured, i.e., it had been
issued by Branch 3anks. Hovever, whereas this insured circulation
had constituted about half of total obligations of all Chio banks
for much cf the period, by 1863 it was less than one-third of these
obligations. In other words, as the insurance system was near its
end it was protecting a minor segment of Ohio bank creditors and was
becoming inadequate as a safeguard for circulating medium provided
by Ohio banks.
Although this situation was due in large part to the growth
of deposit banking, it also points up another defect of the insurance
system, i.e., it applied to only a portion of the State’s banks. To
fully attain the objectives sought in the insurance legislation it
would have been necessary that all tanks participate in the plan.
As Andrews put it in a letter contrasting the State Bank system
with the Independent Bank system in Chio:
... Each system continues tc have its advocates, and
both seem to work satisfactorily when well managed.
The disturbing feature between them is in the nature
of the security furnished for their circulation. That
of the Independent Banks, being Ohio and U. 3. Stocks,
affords ultimate security without doubt: that of the
State Banlc being mutually liable for each others
circulation secures immediate redemption. Such a
system as that of the State Bank of Ohio can only
be made successful when it is made general ... 1/
The exclusion of deposits from insurance coverage was also
given importance by changes in the distribution of deposits as well
as changes in amount. Whereas in earlier years deposits tended to
be held by relatively few people and were little used as means of
payment, by 1 8 6 5 the use of checks was much more widespread. Conse
quently, to simply maintain the confidence of the noteholder was
not sufficient ir. periods of panic. It is significant that in 185^+
it was a run by depositors, not noteholders, which necessitated
giving aid to the Akron 3ranch Banlc. 2/ An increasing awareness
of 'che importance of protecting depositors was shoira. by Andrews in
1 8 6 3 , when he commented:
"Of the various forms of liabilities
banks have, there is no one which can be brought to bear upon them
with such sudden concentration cf power as their deposits; and
no one less susceptible of concentration and immediate demand than
their notes in circulation, ..." 3/
Summary, The limitations of Ohio's insurance plan should
net be permitted to obscure the fact that, on balance, it was a
remarkable success. It was one of the pioneer insurance plans,
launched at a time when banking was developing and changing rapidly.
Undoubtedly many of the defects would have been eliminated had it

if December 17, 185 5 > Ohio Letters, op. cit.i
2/ November 15, 1854, Ohio Letters, op. cit..
5/ January 2k, 1863, Ohio Letters, op. cit..

VI-U8
been permitted to continue after 18 6 5 .
Hie success of the insurance plan is reflected in the fact
that the State Bank of Ohio has come to be recognized as one of the
great banking systems of the pre-Civil War period. Time has not
altered the appraisal of the system of the insurance plan made by its
long-time secretary in lo55 :
The State Bank of Chio demonstrated the wisdom of
its founders. It lived through some troublous times
but kept its integrity. It did what it was designed
to do, furnish a safe circulating medium for the
people of the State .... 1/

1/ oohn J. Janney, *'State Bank of Ohio1', Magazine of
Western History, II (1885), p. 17^-

CHAPTER VII
INSURANCE CF BARK OBLIGATIONS IN IOWA, I858-I865

Iowa was the sixth State, and the last prior to the Civil
War, to make use of the insurance principle in providing for the
protection of hank creditors. The plan was put into operation in
1858 and became inoperative in 1865 when most of the participating
banks converted to national banks.
Review of Iowa Banking History to 1865
Prior to 1858, only one authorized bank was formed in Iowa.
The legislature of the Wisconsin Territory, which included the present
State of Iowa, approved the establishment of the Miners Bank of Dubuque
on November 30* 1836. The authorized capital was $200,000 and about
a year after its charter date the bank opened for business.
Almost from the beginning there was hostility towards the
Miners Bank on the part of the legislature^ becoming more intense
after the Iowa Territory was formed in 1338. Suspension of specie
payments by the bank in 1841 added still further to its difficulties
and. in 18^5 an act repealing its charter was passed. After an un
successful court battle the bank passed out of existence in 1849In retrospect, it appears that the Miners Bank of Dubuque
was no worse, and no better, than the typical western bank of the
time. Except in its early years, its business was not extensive and
note circulation probably never exceeded $175j000. In the years just
prior to closing it did little business and it is doubtful that the
community was affected by its demise.
Attacks on the Miners Bank reflected a general hostility in
Iowa towards all banking. When the first State constitution was
adopted in 184b the West was recovering from a severe depression and
many Iowa residents had come from areas in which bank failures had
been numerous. Article IX of the constitution illustrates their
attitude toward banks:

1. No coiporate body shall hereafter be created, renewed
or extended, with the privilege of making, issuing or
putting in circulation, any bill, check, certificate,
promissory note, or other paper, or the paper of any
bank, to circulate as money. The General Assembly of
this State shall prohibit, by law, any person or persons,
association, company or corporation, from exercising
the privileges of banking, or creating paper to circu
late as money.
2. Corporations shall not be created in this State by
special laws, except for political or municipal pur
poses, but the General Assembly shall provide, by
general laws, for the organization of all other cor
porations, except corporations with banking privileges,
the creation of which is prohibited ...

VII -2
Prohibition of banking did not prevent persons from meeting
the demands for bank facilities which naturally were present in a
rapidly developing State, private banks were numerous. Although they
were not permitted to issue notes, they found it profitable to fi
nance immigrant land purchases and to buy and sell eastern exchange.
Information on these private banlcs is slight, but apparently by the
middle 1850's every town of consequence had at least one firm which
offered some bank facilities.
Nor did the new State laclc for banks of issue. Beginning
in 1855 a number of banks secured charters from the territorial
legislature of Nebraska. These were controlled by Iowa residents and
although their home offices were nominally in Nebraska they were,
in fact, Iowa banks. Some of the better known were the Western Ex
change, Fire and Marine Insurance Company, the Bank of Florence,
the Bank of Nebraska, and the Bank of Fontanelle. 1/ However, the
life of these extra-legal banks was short, as not one was able to
survive the panic of I057*
Faced with the collapse of the Iowa-Nebraska banks and
burdened with a circulating medium made up of much of the worst bank
paper in the West, Iowa reconsidered her earlier position on banking.
A new constitution was adopted which permitted the legislature to
enact banking legislation. However, a trace of anti-bank feeling
remained in the requirement that before taking effect all such laws
had to be approved in a general election.
In 1858 two banking bills were enacted into law and over
whelmingly approved by the voters. A Free Banking Act permitted
individuals to establish banks provided that they complied with
rather strict provisions regarding capitalization and note issue.
How strict were these provisions is shown by the fact that when the
law was repealed in 1870 not a single free bank had been organized.
The other piece of banking legislation was more successful.
"An Act to Incorporate the State Bank of Iowa" was passed on March 20,
1858, and, after receiving the approval of the voters, was declared
in force on July 29 of the same year. In the absence of free banks,
the banking history of Iowa from this date until 1865 centers on the
State Bank system.
In structure the State Bank of Iowa was directly descended
from the State Banks cf Indiana and Ohio. The head office was
located at Iowa City, then the State capital, but its function was
solely that of exercising general supervision over the Branch Banks,
which could not exceed 30 in number. The maximum capital was $6
million, all of which was to be divided among the Branch Banks, which
were limited to not less than .$50,000 nor more than $ 300,000 capital.
Fifty percent of the authorized capital of each Branch Bank was to
be paid in specie prior to the opening of the bank, with the remainder
l/ It is probable that the name Western Exchange, Fire and
Marine Insurance Company was designed to resemble that of the best
known bank in the area, the Wisconsin Marine and Fire Insurance
Company of Milwaukee. To the extent that noteholders confused the
two, the Nebraska bank benefited from the excellent reputation of the
older bank.

VTI-3
due in installments of specie spaced at four-month intervals. Each
Branch Bank had its own officers and divided its profits among its
own stockholders. Thus the State Bank of Iowa, like those of
Indiana and Ohio, was a federation of independent banks.
The life of the State Bank was short but successful. In
addition to providing the State with muchneeded banking facilities,
it assisted the State government in financing its contribution to the
war effort. Although it would undoubtedly have continued after the
Civil War, passage of the National Banking Act, followed by the pro
hibitive tax on State banknotes, led most of the Branch Banks to con
vert to national banks in 1365.
Character of the Insurance Plan
Iowa's insurance plan for the protection of bank creditors
was very similar to that adopted in 1545 by Ohio. The successful
operation of Ohio’s plan and the fact that several Iovans prominent
in State affairs had previously resided in Ohio account for this
similarity. For example, Ralph Phillips Lowe, Governor of Iowa when
the State Bank was established, was a former resident of Ohio. Also,
the key individual on the standing committee on banking in the Iowa
senate when the act was passed was Samuel Jordan Kirkwood, (later
Iowa's war governor) a former Ohio resident who had taken an active
interest in the State Bank of Ohio.
Bank participation and obligations insured. As in Ohio,
the plan embraced only Branch Bank3 comprising the State Bank, made
use of the mutual guaranty principle as well as an insurance fund and,
finally, covered only the circulating notes cf the participating banks.
Deposits and other liabilities of the participating banks were not
covered, nor was any provision made for the inclusion in the system
of such other banks as might be established in the State.
Assessments and insurance fund. The insurance fund, or
"Safety Fund" as it was called in the act creating the State Bank,
was not built up through annual assessments. Instead^ each Branch
Bank paid to the State Bank "money or United States /bonds7 or interest
paying State /bonds/" at their current value in the city of Kew York
but in no instance above their par value, an amount equal to twelve
and one-half per cent on the amount of the notes for circulation,
which shall be delivered to such branch.” 1/ This sum had to be paid
before any notes were delivered to the Branch Bank, i.e., before it
opened for biisiness, and additional payments had to be made only if
the amount of notes delivered was later increased due to an increase
in capital or because the entire authorized issue had not been de
livered at the commencement of business.

j/~ An Act to incorporate the State Bank of Io'/a, March 20,

1858, section 7 *

VII-4
All money deposited to the account of the insurance fund
was to he invested in Federal or State bonds by the State Bank and
interest thereafter received was to be paid to the Branch Banks in
proportion to the amounts they had contributed. 1/ VJhile the State
Bank had custody of the insurance fund, ownership remained with the
Branch Banks, each of which carried the amount it had paid on the
assets side of its statement of condition. 2/
Fayaent of insured creditors. The insurance fund did not
stand for the immediate and direct payment of creditors of a failing
bank. When a Branch Bank became insolvent, i.e., was unable to redeem
its notes in specie, 3/ the State Bank was required to place it in
receivership k/ and to "immediately provide money ... and place the
same in such solvent branch or branches, as may be most convenient
for the puipose of redeeming the notes of such failing branch ..." 5j
The amount provided was not taken from the insurance fund but from
oevassessments levied on the solvent Branch Banks in proportion to
the amount of circulation each had outstanding. These sums were
then repaid the solvent Branch Banks through liquidation of securi
ties comprising the insurance fund. 6/
Upon liquidation of the assets of a failing bank by re
ceivers, payment had to be made first to the other Branch Banks to
cover any amount not already returned from the insurance fund and,
second, to the insurance fund to reimburse it for all moneys advanced
except for that portion originally contributed by the failing Branch
Bank. Following this, the receiver could meet the claims of de
positors and other creditors and, finally, distribute among the
stockholders any remaining funds. 7/ No specific provision was made
for replenishing the insurance fund in the event that it was diminished
but it vas undoubtedly expected that the Branch Banks would at all
times have an amount equal to ttrelve and one-half percent of their
circulation deposited in the insurance fund. Thus if the fund was
drawn down new assessments would have been required.
In essence, the Iowa plan meant that participating banks
collectively guaranteed the circulation of any one of their number
but gave to the supervisory authorities, i.e., the officials of the
State Bank, the right to determine which of their assets would be
liquidated if it became necessary to make any payments. That is, to
return the suns advanced by the solvent Branch Banks, the State Bank
simply sold bonds which were already the property of the Branch Banks.
1/ Ibid., section B.
_
2/ The amount contributed by a Branch Bank was "held by
the ^State/ Bank as the property of said branch for the benefit of the
several branches
Ibid., section ?•
3/ Ibid., section 10. If for some reason the State Banks
failed to take action any creditor of a bank failing to redeem its
notes in specie could secure a court order requiring such action to
be taken. Contrariwise, a Branch Bank falsely accused of being in
solvent could appeal to the courts (sections 1^ and 15 ).
4j Ibid., sections 10 and 11 .
%i
, section 11 .
zl Jbid^, section 12 .
7/ Ibid., section 13.

VII-5
Statutory Provisions Relating to
Supervision and Regulation of Insured Banks
In providing for bank supervision and operating regulations
Iowa drew heavily upon Indiana and Ohio legislation, although the
Iowa regulations were generally based on more conservative standards
than in either of the other States.
Supervisory agency. Responsibility for operation of the
insurance system and supervision of the Branch Banks was given the
directors of the State Bank. This was, in fact, their only function
since it will be recalled that all banking was done by the Branch Banks,
which collectively constituted the State Bank.
The Board of Directors of the State Bank, or State Board
as it was frequently called, was composed of one representative from
each Branch Bank 1/ and three members elected by the State legisla
ture. 2/ Branch Bank members served one-year terms while terms of
State members were two years. The Board was required to maintain its
head office at Iowa City.
Bach director on the State Board had two votes but those
representing the Branch Eanks were allowed an additional vote for
each $50,COO of capital paid into the particular Branch Bank in excess
of $100,COO, 3/ Since the State aid not hold any stock in the Branch
Banks, and consequently had no power to influence the selection of
those members of the State Board representing the Branch Banks, it
will be seen that control of the banking system was firmly in the
hands of its owners. If/
Apparently the burden of the State Board's work fell on the
president, secretary, and executive committee of three or more mem
bers, one of whom was the vice-president. 5/ With the exception of
the secretary, these officials were chosen by the State Board from
among its own number and received compensation for their services.
Except for the salaries of the State representatives, which were paid
by the legislature, 6/ all expenses were met by the Branch Banks in
the ratio of the circulating notes assigned to each. 7/
Ifew bank investigations. Application to start a Branch Bank
automatically constituted application for insurance, since all Branch
Banks were participants in the insurance system. Investigation of
the first applications was the responsibility of ten Bank Commissioners,
appointed and named in the act creating the State Bank. 8/ The act
also outlined the procedure which was to be followed in determining
whether an application was to be granted. 9/ When at least five_____
1/ Ibid^, section 2.
2j Ibid., section 51*
3/ Ibid., section 5»
4 / Section 3 provided for the right of the Governor and
General Assembly to inspect the records of the State Bank at any time.
5/ Ibid., section 3 .
0/ Ibid., section ?1,
7/ Ibid., section
3/ Ibid., section 52.
9/ Ibid., section 52.

VII-6
Branch Banka had. been accepted by the Commissioners, and the Governor
Was so notified., 1/ representatives to the State Board were chosen
who, together with the three State representatives, were thereafter
charged with the admission of additional Branch Banks. The Bank Com
missioners were then excused from further service.
T.Thethe r by the Bank Commissioners or by the State Board, the
act required thorough investigation of applications to form Branch
Banks. Primary eirphasis was placed upon verifying the amount of specie
claimed to have been paid in and upon investigating the character and
responsibility of the new stockholders. 2/
Bank examination and condition reports. Examination of the
Branch Banks was made by at least one member of the State Board, or
an appointed agent, as often as the State Board desired. 3/ Ample
power was given examiners to determine the condition of the Branch
Banks.
There is no indication in Iowa records of the frequency of
examination during the first several years. In i860 the State Board
made it the duty of the president to examine each 3ranch Bank once
in each six-month period and it is likely that the practice of semi
annual examinations vas thereafter followed, bj
Each Branch Bank was required to submit monthly condition
reports to the State Eoard, the form for which was carefully outlined
in the law. 5/ Such reports were required to be published by each
Branch Bank in a local newspaper and copies sent to each of the other
participating banks. 6/ Also a consolidated statement vas to be pub
lished monthly by the State Board. 7/
Sixteen items were required to be included in the condition
reports and the State Board had the right to add to these items.
Among the more important of those listed in the original law were:
(Liabilities) l) capital stock, 2) circulation,3) interbank deposits
broken down to show deposits of other Branch Banks, other Iowa banks,
and banks outside of the State 4) individual, business, and govern
ment deposits combined, i.e., without distinction as to the types
listed here; (Assets) y) amount of gold and silver coin or bullion,
6 ) amounts due from banks, broken, down as in (3 ) above and, in the
case of sight balances, containing in each case the name of the city
cr town in which deposited,?) loans, discounts, and securities without
distinction except for loans to directors and to stockholders. 8 /
Bank operations. Statutory limitations on the operations
of the Branch Banks were similar to regulations governing banks in
other western States at that time. Since deposit banking was only
1/ Ibid., section 53*
2/ Ibid., section 52.
3 / Ibid., section 3*
Kj Resolution adopted May 17, i860; Record of the Board of
Directors, MS, State Historical Society of Iowa.
5/ An Act to incorporate ..., op. c it., section 35*
♦
7/ Ibid., section 3*
%j Ihid., section 35 *

I/ Ibid‘

V I I -7

just 'beginning to assume importance, many of these limitations related
to the note issue function of the Branch Banks.
Circulating notes of the Branch Banks had to be paid on
demand in gold or silver coin; failure to do so vas deemed an act
of insolvency. 1/ However, the Branch Banks did not, in fact, pay
specie after 1862 since, along with other State Banks, and as a
consequence of the Legal Tender Act, specie payments were suspended
and bank notes were redeemable in United States notes.
By the time Iowa considered authorizing banks it was be
coming clear that provisions limiting circulation and other bank ob
ligations to a multiple of capital did not by themselves provide a
precise rule as to the proportion that specie reserves should bear to
such obligations. Consequently, the Iowa Act of 1858 required that
each Branch Bank maintain a specie reserve equal to 25 percent of its
circulating notes. 2/ In addition, each Branch Bank had to retain in
its vaults "at least twenty-five percent of its current deposits ...
over and above the amount required tc be kept for the protection and
redemption of its circulation.:: 3/ It is not clear whether this
wording meant that the deposit reserve must consist cf specie or
whether it could be partially or wholly in other kinds of cash, e.g.,
notes of other banks.
Note circulation of each Branch Bank was further limited to
a multiple of paid-in capital, the multiple decreasing as capital
increased. Specifically, circulation could not exceed twice the
first $100,000 of capital, once and three-fourths the second ^100,000
and once and one-half the third ^100,000. hj A Branch Bank with its
full complement of authorized capital could have a circulation of not
more than $ 525>C00, for which it had to maintain a reserve of approxi
mately $130,000. It should be emphasized that this reserve was in
addition to its deposit in the insurance fund, maintained for ultimate
note redemption in the event of failure.
Other provisions dealing with circulating notes included:
notes were prepared, registered, and countersigned by the State Bank
before distribution to the Branch Eanks; 5/ Branch Banks could not
include in their own circulation any but their own notes 6j and also
could not exchange their notes with those of an out-of-State bank
for circulation reasons; 7/ notes of out-of-State banks which were
known to be not redeemable in specie could not be paid over the
counter of a Branch Banlc in the course of its daily business; 8/ notes
of each Branch Bank had to be accepted at par by all other Branch
Banks. 9/

1/
2j
3/
4/
5/
2J
7/
0/
9/

Ibid.,
Ibid.,
Ibid.,
Ibid.,
Ibid.,
,
Ibid.,
Ibid.,
Ibid.,

section 10.
section 31*
section 32.
section 9«
sections 3 aiid 6.
section 29.
section ^7*
section 38 .
section 30.

VII-6
Deposits '/ere specifically exempted from maximum amount 1/
limitations, probably reflecting the then current opinion that they
were not a function of "bank lending operations. While this was in
fact the case in earlier years, and may still have been substantially
true in Iowa in 1&5'3, it will be seen from statements of condition
presented in the next section that deposit banking soon became impor
tant in Iowa.
A number of provisions of the act creating the State Bank
of Iowa were directed toward the problem of stockholders' and direct
ors' loans. Included aiiong such provisions were: l) limitation of
the amount for which the stockholders, collectively, of any Branch
Bank could be indebted to it, either as principals or by endorsement,
to not more than three-fifths of the Branch Bank’s capital; 2/ a
similar limitation for directors except that the collective atrount
could not exceed one-twentieth the amount of capital stock possessed
by the directors; 3/ double liability for stockholders; hj prohi
bition of dividend payments to stockholders whose notes were over
due; 5/ prohibition of mailing any loan in which stock of the Branch
Bank served as security. 6/
Interest charged by the Branch 2anks was limited to ten
percent until January 1663, at which time eight percent became the
legal maximum. The Branch Banks were permitted to make bona fide
purchases of bills of exchange and could add normal exchange charges
when discounting such bills without violating the above restrictions.
If a debtor could prove usury the act required that the debt be
cancelled. Jj
Loans of the Branch Banks were limited in duration to four
months §/and uo person or firm could be indebted to a Branch Bank to
an amount exceeding one-fourth of its circulation. If liabilities on
account of bills of exchange were excluded, this limitation was raised
to one-twentieth of the same base. 9/ Branch Banks were prohibited
from dealing in or owning real estate except as it was necessary to
locate the bank building or in conducting normal bank operations. 10/
Enforcement powers of supervisory officials. A participa
ting bank could be closed by the State Board because of discovery of
insolvency or of illegal operation. More important, it could be closed
if it refused to comply with an order by supervisory officials. Since
the State Board was charged with safeguarding the interests of the
entire system, such orders could well relate to unsafe and unsound

1/
2j
3/
Xj
5/
b/
7/
8/
9/
10/

Ibid., section
Ibid., section
Ibid..
Ibid., section
Ibid., section
ibid., section
Ibid., section
Ibid., section
Ibid., section
Ibid., section

33«
2c.
^2.
22.
23 .
37*
26.
38 *
28.

VII-9
banking practices, regardless of the legality of such practices or
of the solvency of tiie bank. 1 /
In addition to giving supervisory officials the right to use
the suspension ”,cwer in circumstances other than illegal or insolvent
operation, Iowa law provided the State Beard with less severe penalties
applicable to banks operatingin an unsafe and unsound manner. These
included authority to prohibit or regulate dividend payments and the
power to compel a bank to contract the amount of its assets and lia
bilities. In the case of dividends the law stated that the directors
of each participating bank would semiannually declare such dividend
"as they shall judge expedient and as shall be approved by the State
Bank /i.e., supervisory officials/." 2/ Control over the volume of
bank assets and liabilities was contained in the section giving the
State Board the right "to require any branch to reduce its circula
tion, or other liabilities, within such limits as /the State Board/
shall, after full inquiry into its condition, deem necessary to
secure from loss, either the dealers with such branch, or the other
branches. 11 3/
Number and Obligations of Insured Banks
Number of banks. The number of banks included in Iowa’s
insurance system was fixed during the entire period of its operation
by the number of Branch Banks of the State Bank of Iowa. These banks
constituted the only incorporated commercial banks in the State and
no provision was made for the inclusion of private banks or banks
which might be formed under the Free Banking Law of 1858. It is not
known whether any savings banks operated in Iowa during the insurance
period.
Within six months after passage of the act creating the
State Bank, applications for 19 Branch Banks were submitted. In
October IS50, eight applications were approved and se\*en of the Branch
Banks concerned apparently opened for business by the end of that
year. Establishment of four additional Branch Banks was permitted in
1859, two in lS6c and one in 1664, so that the peak number of banks
participating in the insurance progran was 15, of which 14 were in
operation during most of the period I05S-65. Table 39 shows the
number of banks operating in each year; the names of the various
banks are shown in Table 40.
With the failure of the so-called Iova“Nebraska banks in
the panic of 1357 and the absence of any efi'ort to start banks under
the Free Banking Law, the Branch Banks of the State Bank of Iowa had
as competitors only those private banks which continued after 1858.
These were not banks of issue and apparently in earlier years their
business was simply an adjunct of real estate transactions. By 1S 58,
however, private banks were probably accepting deposits and discounting
notes and bills of exchange. 4 / __________________
1/ Ibid,, section l£.
2j Ibid., section 35 .
3 / Ibid., section 3*
%j Howard E. Preston, History of Banking in Iowa (Iowa City:
State Historical Society of Iowa, 1922), p. 56 .

VII-10
Table 39*

Number and Obligations of Iowa Branch Banks, 1858-1864
(Amounts in thousands of dollars)

___________
End of
year

Number
of
banks

Total

Obligations________________________
____ Deposits_________ MiscellaCircula- Total Business Interneons
tion
and inbank
liabilidividu2/
ties 3/
al 1/

Number or
amount

1858
1859
i860
1861 5/
1862

1863
1864 6/

7
12
13
14
14
14
15

$
$
$
$
$
$
$

170
1,347
1,943
2,084
2,706
3,830
4,572

5
663
880

652

163
637
993
1,327
1,336
2,140

1,249
1,526
1,440

2,886

2.9
49.6
45.3
31.3
46.1
39.8
31.5

95.9
47.3
51.1
63.7
49.4
55-9
63.1

163

618

966
1,279
1,287

2,097

2,851

V
19
27
48
49
43
35

2
42

70
105
121
164
246

Percentage
distribu
tion

1858
1859
i860
1861
1862
1863
1864 6/

ioo.o;S
IOO.O73
100.of,
100.0$
100.0$
100.Of3
100.Op

1.2

95-9
45.9
49.7
61.4
47.6
54.8

1.4
1.4
2.3
1.8

3-1
3.6

1.1

4.3

62.4

5.4

5.0
4.5

Sources: Consolidated statements published in Iowa City Republi
can, library of the State Historical Society of lows.; issues of
January 19, 1359; January 18, i860; December 19, i860; February 20,
l86l: December 17, 1862; January 20, 1864; January 18, 1365.
1/
2/
3/
tj
5/
bj
part cf 18o 5,

Shown as
Shown as
Shown as
$474.
February
Although
the last

"depositors" in statements.
"due other banks" in statements.
"other items" in statements.
1861.
the insurance system operated during the first
year end data available are for 1864.

VII-

Table 40.

Circulation and Total Obligations of Iova Branch Banks, December 5, 1859;

December 5, 1864

(Amounts in thousands of dollars)

December 5» 1^5'v
Circulation
Obligations
Amount
Percent
Percent
Amount

Bank

All Branch Banks - total
Branch Bank at:
Burlington
Council Bluffs
Davenport
Des Moines
Dubuque
Fort Madison
Iowa City
Keokuk
Lyons City
Macquaketa

2kl
95
64

82
53
73

169
38

100.0/,

21.3
__
8.4
5.7
7.2

15 •6

4.7
6.4
14.9
3*4

34
37
13.2
3

2.8

0.5
5*0

6.0
6.5
19.9
1.4

-_63
39
71*
90

McGregor
Mt. Pleasant
Muscatine
Oskaloosa
Washington

565

100.0#

$1,131

Sources:

__
5-6

7.9
6.5
8.0

__
37

47
58

December 5 / 1864
Obligations
Circulation
Percent
Percent
Amount
Amount
$4,269

781
161

18.3

^.1,^33

271

3.8
3.0.6

86
2

5.8
16.0

141
284

112

2.6

135

453
246

683

302
210
m

6.5

31
306

8.3
10.3

242
157
313

O
OJ *<

100.0*6

7 .1
4.9
2.0
•7
7.2
5.7
3*Y
7.3

33
13^
3l
31
20
88
64

83
44

Iowa City Republican, issues of December 21, 1859; December 21, 1364.

lOO.O1
/,
I8.9

6.0
.1

9.8

19.8
4.8
2.3
9.4
5.7
2.2
1.4
6.2
4.5
5.8
3.1

VII-12
It is impossible to accurately determine the number of
private banks in operation in Iowa contemporaneously with the Branch
Banks. Indicative of the discrepancy in what little information is
available is the fact that whereas Thompson1s Bank Note and Commercial
Reporter lists only one private bank for Iowa on December 31, 1^59,
Homan’s Bankers Directory shows 7 6 in operation about January 1, i860.1/
It is probable that part of the explanation lies in the fact that
Thocrpson's reported only private banks engaged exclusively in banking
while Hcinan's may have included concerns doing a real estate or in
surance business and which also, as a sideline, loaned some money
or bought and sold out-of-state bank notes.
Bank obligations. Total obligations, i.e., circulating
notes, deposits, and miscellaneous liabilities, of IoT.."a Branch Banks
increased substantially during each year of the insurance period. It
will be noted from Table 39 that from the end of 1659 (the first full
year of operation) to the end of 1864 there was almost a fourfold
rise in total obligations. This large and nnbroken rise reflected
the need for commercial banking facilities in the State, the absence
of a serious economic downturn, and the effects of wartime financial
operations by the State and the Federal government.
As noted earlier, circulating notes were the only obliga
tions covered by insurance under the Iowa system. These insured
obligations constituted about half of all Branch Bank obligations
near the beginning of the insurance period but by the end of 1864
were less than a third of such obligations. It appears that had the
insurance system survived the proportion of obligations insured
would have continued to decline since the increase in deposits during
the insurance period was generally at a much more rapid rate than
that of circulating notes.
The relative importance of deposits among the obligations
of Iowa banks is socewhat surprising. Although in the rest of the
country the volume of deposits had exceeded the amount of circulating
notes some time previously, one would nevertheless have expected
that in Iowa, a predominately agricultural area and, in addition,
one which had not long been settled, circulating notes would have
comprised by far the largest share of total banking obligations. That
this was not the case is evident from Table 39, which shows that
during the insurance period (excluding the data for the end of 1858,
when the Branch Banks had just opened for business) deposits ranged
from slightly lass than half to almost two-thirds of all obligations.
Relative size of participating banks. During the insurance
period some size differentials developed among the Branch Banks. As
a consequence, there was a risk to the insurance system arising out
of the concentration of insured obligations in several banks. Table 40
shows the distribution of total obligations and of circulation among
Iowa Branch Banks at the conclusion of the first and the last full
year of operation.
I/1 The same directory reported the number of private banks
in succeeding years as follows: l36l - 75 ; 1862 "
1663 - 54;
1864 - 53 ;. 1865 - 42.

vil-13
At the close of 1859 the Branch Bank at Burlington held
over one-fifth of the total obligations of all Branch Banks, while
the Branch Bank at Keokuk held about 15 percent of such obligations.
Thus these two banks, comprising one-sixth of the total number of
banks, had well over one-third of the obligations, with the remainder
fairly well distributed among the other ten Branch Banks. Five years
later, at the close of lQ6b, the two largest banks (that at Dubuque
replacing the Keokuk bank) still held more than a third of all obli
gations and, in addition, a third Branch Bank, at Davenport, had
grown relatively large. Together, these three banks accounted for
only a little less than half of the obligations of the 15 Iowa Branch
Banks.
Insured obligations, i.e., circulating notes, were concen
trated in much the same fashion. In 1859 the two largest banks as
measured by total obligations, held over a third of the insured obli
gations of the entire system, while in 1864 the two largest banks
held almost 40 percent of all insured obligations. In both years
the proportion of insured obligations attributable to each of the
two largest banks was larger than the twelve and one-half percent
of insured obligations which, by law, was the minimum size of the
insurance fund.
Eistory of Operation of Insurance System
During the seven years of operation of Iowa1s insurance
system no participating ban.: failed so that the procedure for the
payment of insured obligations of a failing bank was never put into
practice. Nevertheless, insurance operations we re partly responsible
for the excellent record of bank creditor protection.
Insurance operations for the protection of bank creditors.
Two Iowa Branch Banks became involved in financial difficulties
sufficiently serious to warrant special action by supervisory officials.
In one case some loss was suffered by stockholders and an insurance
disbursement was required; in the other case neither a stockholder
loss nor insurance disbursement resulted, but special arrangements
were made to guarantee the solvency of the bank concerned.
In 1859 the State Board became aware of rumors regarding
unsafe banking practices on the part of officials of the Muscatine
Branch Bank. At the Board meeting of August 10, 1859, a report of a
special examination of the bank found "some departures of a minor
character ... the most prominent of which is the allowing of accounts
to be overdrawn." 1/ This report recommended no further action and
was placed on file by order of the Board.

1/ Record of the Board of Directors, MS, State Historical
Society of Iowa, August 1C, 1859*

VII-It
The situation of the Muscatine Branch Bank continued to
deteriorate and on January 5, i860, the executive committee of the
State Board conducted a special examination of the bank. At this
e xamination it was found that the obligations of the bank exceeded
the voluce of good assets by more than .£20,000. The shortage was
due to a defalcation on the part of the cashier, whose firm (in which
the president of the bank was apparently a partner) had overdrafts
of considerable volume in the bank. It was believed that the
cashier's bond would be sufficient to make up most of the losses
resulting from hi3 self-dealing and fraudulent operations.
The executive committee reported that it was at first
their "unanimous decision ... that the Branch should go into liquida
tion and wind up its affairs," but because the "directors and stock
holders ... were anxious to go on" another arrangement was made.
Specifically: the president and cashier resigned and temporary
control of the operations of the bank passed to the executive com
mittee of the State Board; the principal bondsman of the cashier
(who was also an official of the bank) deposited £45,000 with the
executive committee as security for his pledge to "clear the institu
tion within one year of all the indebtedness ^of the cashier and
president/ and other bad paper and make its stock ... as originally
... paid up and unencumbered"; the executive committee pledged
"the cooperation and assistance of the Branches to sustain the
^Muscatine Branch BankJ by depositing money therein until its
consumaticn ^i.e ., until the capital of the bank was restored/". 1/
It appears that on this occasion the sound participating
banks agreed to make, and did in fact make, deferred deposits in the
Muscatine Branch Bank. Management of the bank was later returned
to the stockholders and it became one of the more profitable banks
in the insurance system.
In 1863 a special examination of the Fort Madison Branch
Bank recommended that a receiver be appointed but that liquidation
not be started until a more detailed examination revealed whether
or not the bank was solvent. There is no indication from the records
of the State Board as to the cause of the bank's difficulty but it
vas apparently a case of asset deterioration. This is suggested by
the fact that management was left in the hands of the officers but
tne cashier agreed to post $120,OCO, which was kept as security by
the president of the State Board. It was agreed that the security
would be gradually released as the condition of the bank improved
and this, in fact, was what happened.
Insurance fund and assessments. Iowa's insurance fund in
creased during each year of the insurance period as a consequence
of the expansion of the business of the Iowa banks described earlier.
Table 4l shows the amount in the insurance fund at the end of each
year of insurance operation. In addition, the table contains ratios
of the insurance fund to total and to insured obligations and makes
possible a comparison of Iowa’s assessments with those paid by banks
in other States having insurance systems and under Federal deposit
insurance today.

1/ Ibid.', February io, 'i860.

VII-15

Table 41.

End
of
Year

1858

Insurance Fund, and Assessments, Iowa, 1858 -I8 CU
(Amounts in thousands of dollars)

_________ Insurance fund__________ _
As percentage of:________
Total
Total
Authorized Actual
obligainsured 1/ insured
tions
obligations obligatione 2j

105
1359
i860
135
1361 4/■' 147
1862
226
243
1863
1864
3C9

17.1
7.8
6.9
7*1
8.4

6.5
6.8

7.6
11.3

11.5
12.0
14.2
12.7
14.9

58O.O
15.7
15-3

22.5
16.1

15-9

21.5

Assessments: equivalent average annual
rate on: 3/
-----------------Total
Insured
obligaobliga
tions
tions
2.4
1.1
1.0
1.0
1.2
.9

1.0

80.0
2.2
2.2
3.2
2.6
2.3
3.1

Sources: See Table 3S1/ Authorized circulation vas related to the amount of
capital stock paid in, as described above, p. VII-7* Amounts from
which these ratios were computed are (in thousands of dollars):
1858 - $ 381; 1859 - $930j i860 - $1 ,177 ; 1861 - $1 ,227 ; 1862 $1 ,596; 1863 - $1 ,914; 1864 - $2 ,071 .
2/ Circulating notes, as shown in Table 39*
3/ Hypothetical assessment rate on total or insured obliga
tions necessary to achieve o^er a seven ys?,r period an insurance
fund equal to that existing at the end of each year.
4/ February, l36l.

vil-16
The insurance fund maintained by the Iowa Branch Banks
was larger relative to total and to insured obligations than the
insurance funds maintained in any other bank-obligation insurance
system operated prior to 1566. It will be observed that Iowa’s
insurance fund was typically about seven percent of total obligations
and between 15 and 20 percent of insured obligations. By way of
comparison, the insurance funds of Hew York and Vermont were approxi
mately one or two percent of total obligations and the insurance
fund of the Federal Deposit Insurance Corporation is about threefourths of one percent of total deposits. However, it should be
remarked again that Iowa’s insurance fund was not an amount apart
from the banking system and available for use in the event of a
bank failure; rather, it vas the total of portions of the assets
of each.' participation bank, which total was held in trust by insur
ance authorities.
It vas noted earlier that the law required that each bank
contribute to the insurance fund an amount equal to twelve and onehalf percent of the circulation it received (and presumably thereupon
issued) from the State Board. As a practical matter, the Iowa banks
kept a larger than required fund, as is shown in Table 41 and as was
described above. Apparently the fund was maintained at approximately
the level which would have been required had the Branch Banks issued
all of the circulating notes to which they were entitled by reason of
their volume of capital. Thus Table 4l shows that although the
insurance fund was in general substantially in excess of twelve
and one-half rj.ercent of actual circulation it was usually near twelve
and one-half percent of authorized circulation.
Assessments paid by the Iowa Branch Banks were made before
the bank opened for business, and thereafter only if an additional
volume of circulating notes m s delivered by the State Board. Assess
ments were therefore not paid regularly but a rough comparison can
nevertheless be made of the assessments paid by Iowa Branch Banks
with assesments paid by banks operating under other insurance systems
or today. Keeping in mind the fact that the Iowa banks received the
income from the investment of their assessments - a factor not
reflected in Table 4l - it will be observed that the computed annual
assesment on Iowa banks was equivalent during the insurance period to
about one percent of total obligations and 2.5 percent of insured
obligations. This rate was therefore much higher than those paid
by banks in Hew York and Vermont, in particular, and also is con
siderably higher than the rate paid today under Federal deposit
insurance.
Appraisal of Insurance System
Judged by the protection it provided bank creditors, Iowa’s
insurance system m s an unqualified success. The two most important
factors contributing towards this record were: l) operation during
a period of generally good times, 2) good bank supervision. Because
of the brief period during which the insurance system was in operation
it is difficult to distinguish other factors of consequence which
account for the success of the system, nor is it easy to illustrate
deficiencies in the system.

vii-17

Period of operation. Iowa's insurance system "became
operative ^ust at the beginning of the recovery from the depression
which, began in 1357* From its start in 1353 to its close in 1865
the insurance system was not faced with any general economic down
turn except for the very mild and short depression of l86l. On the
contrary, most of the years included in the Iowa insurance period
were war years, marked by rising prices and profits and relatively
few failures in any line of business.
Participating banks also found their operations easier
as a consequence of the Legal Tender Act of 1862* When United States
currency became legal tender the banks were able to redeem their
own notes in that currency, if they so chose, and specie payments
were, as a result, generally suspended. Attempts on the part of
noteholders to force the Iowa banks to redeem in specie were success
fully combatted by the State Board. For example, at a meeting of
the State Board of May 1562 it was resolved that any Branch Bank sued
for redeeming in legal tender notes rather than specie would have the
court costs borne by the Board, which in turn would be reimbursed
from assessments levied on all participating banks. 1/
It also appears from the records of the State Board that
the required specie reserve for circulating notes was allowed to fall
below the legal minimum as a consequence of the policy described
above. This is reflected in the fact that, on one occasion, it was
only "recommended" that the Iowa City Branch Banlc increase its specie
"to at least the legal amount on their circulation". 2 /
Supervision and regulation. On the basis of a study of the
records cf the State Board no substantial criticism can be directed
at the quality of supervisory activities under Iowa's insurance
system. Examinations were apparently regular and thorough, the growth
of bank capital was stimulated, condition reports were carefully
studied, there was thorough investigation of applications for admission
to the system, and, finally, good interbank relationships were
zealously promoted.
That examinations were thoroughly conducted is primarily
evidenced by the fact that the two cases of bank difficulty were
located and acted upon in sufficient time to prevent the closing of
either bank. As vas noted earlier, semiannual examinations were
apparently the rule. In addition, directors and officers of the
respective Branch Banks were ordered by the State Board to make their
cwn examinations at the time of each monthly report.
The ratio of capital stock to total assets of the Iowa
Branch Banks was on the order of 20 to 30 percent during the insurance
period. This capital position, which would of course be considered
very high today, vas further improved by the State Board through a
resolution adopted during the first year of insurance:

l/ Record of the Board of Directors, op. cit., May l 4 , 1862.
2/ Ibid., February 10, 1864.

VII-10
That the "branches he instructed to declare no dividends
hereafter without first setting apart a contingent fund
of one percent on their paid-up capital, until otherwise
ordered hy the State Board, such contingent fund to
remain a permanent fund, subject to be diminished only
by actual losses charged to said fund. 1/
During the next year (i860) several dividend declarations
were approved by the State Board only if an amount equal to one
percent of capital stock paid-in was first placed into the contingent
fund. It is presumed that this rule was not changed during the
insurance period so that in each of the following years similar
amounts were credited to this fund. The amounts involved were not
shown on published condition reports out they probably account for
the growth in the volume of ’’other items" in such reports (shown as
"miscellaneous liabilities" in Table 39)*
The porer of the State Board to approve or disapprove
dividend declarations was apparent!;/ used to secure compliance with
directives aimed at the elimination of unsafe and unsound banking
practices. For example, a resolution in 186^ stated that no dividend
would be allowed by any bank "which has failed to comply strictly"
with any order of the Board. 2/
The records of the State Board indicate that there was very
close study of the monthly statements prepared by the individual
Branch Banks. The by-laws adopted by the State Board made such task
the responsibility of the executive committee by stating: "It shall
be their duty at their regular meetings in each month carefully to
examine the monthly statements made by the several Branches and if
upon such examination they determine it necessary so to do to cause
a personal examination to be made by the president or the vice-president
of the condition of any Branch". 3/ At meetings of the full State
Board the records show that consideration of statements of condition
and proposed dividend declarations was usually the first item of
business.
After organization of the State Bank system by the Bank
Commissioners it will be recalled that responsibility for the
acceptance of new banks into the system passed to the State Board.
The records of the latter organization indicate that applications
for admission were carefully considered. The caution with which
the Board acted is perhaps best illustrated by the unfavorable report
made by the committee which investigated an application by the proposed
"Farmers Branch Bank of the State Bank of Iowa". This application was
rejected after the committee stated:

From all the information we were able to obtain
we believe the Directors and Stockholders (a list of
which accompanies this report) to be men of responsibility
and integrity and worthy of public confidence.
1/ Ibid., November 17, 165?.
2/ Ibid., November l6, 1364.
3/ Ibid..

vn-19
While bearing this testimony however, to the character
and respans ibility of the parties connected with the
organization, we feel compelled in justice, to what we
deem the tiue interests of the Branches now organized,
and to be organized under the Law creating the State
3a.nl:, to call the attention of the board of control to
the large proportion of Stock held by persons not
residing adjacent to the location at which the Branch
is proposed to be established and at points remote
from those presuned to be benefitted by its establish
ment.
For these reasons your committee while favourably
impressed with the advantages possessed by the point
named for the legitimate support of a Branch of the
State Bank, feel constrained, to advise the non acceptance
for the present of the application. 1/
Supervisor;.'' officials were also alert during the insurance
system to guard the reputation of the participating banks and to
develop favorable relations among the banks. At one of the earliest
meetings of the State Board it was declared that it be the "policy
of the several Branches of the State Bank to hold and protect each
others circulating notes, to as great an extent as possible ... and
that the cashiers of the several Branches be requested to do so”. 2/
This type of arrangement, whereby banks assisted each other in order
to preve.:t any one bank from becoming embarrassed as a consequence
of large and unexpected demands for note redemption, was fairly
common among groups of oaruis in various States throughout the
country. However, it was not unusual for banks to refuse to partici
pate in such an arrangement and, as a matter of fact even banks
as closely related as the Ohio 3ranch Banks were found, in the
earlier years of operation of the Ohio insurance system, to be mere
interested in manufacturing difficulties for other participating
banks than in cooperation.
Interbank relations were further strengthened by the Board's
policy of refusing to interfere in the operations of any Branch Bank
unless the solvency of that bank was threatened. Thus, when a
quarrel among stockholders of the Branch Bank at Mount Pleasant
led to an appeal to the Board by one side it was resolved; "Where
the safety and good standing of the Branch is not endangered, it is
not a matter requiring the attention or interference of this Board".3/
Other factors contributing to successful insurance operations.
Ead the Iowa insurance system existed for a longer period it is
probable that mere than good supervision would have been required to
continue the excellent record of the first seven years. In particu
lar, supervisory officials would undoubtedly have had to make judicious

1J Ibid., August 1C, 1859 .
2/ IbidT, May 11, l3so.
3/ Ibid., May 15, 1861.

VII-20
use of their "central bank" powers. Although these powers did not
become of practical importance during the insurance period their very
existence may well have contributed to its successful operation.
That the State Board intended to make use of this power is
clear from the records of their meetings. As early as 1858 a reso
lution was presented which stated: "It is the duty of the president
... to order any Branch to reduce its circulation, or to do any other
matter ... when in his opinion the interests of the State Bank require
it, and in case of refusal to proceed in his discretion as directed
in said section 16 /of the law/"." 1/
Comparison with other banking systems. The record of the
Iowa Branch Banks cannot be compared with that of other Iowa banks
since there was only an unknown number of private banks operating
during the same period. Comparison of the Iowa record with that of
banking systems in neighboring States suggests that the insurance
system in Iowa, together with sound supervision, may have been
responsible for that State's more favorable experience.
Between l3sg and 1865 the typical experience of banking
systems in the States bordering Iowa seems to have been disruption
of banking operations as a consequence of the war and the closing but not necessarily failure - of a number of banks. This appears
to have been particularly true of the Illinois and Missouri banking
systems.
Deficiencies of the insurance system. An insurance system
which operated as successfully as did Iowa's provides almost no
evidence as to defects which may have existed but never had the
opportunity to reveal themselves. The most that can be said on this
subject is that, with a system almost identical to that of Ohio,
insurance operations in Iowa would have inevitably found the same
problems as in the former State had the period been longer. In
particular, Iowa authorities would have found that assessments levied
on participating banks would usually come at precisely the wrong time,
i.e., during a general monetary contraction and, as happened in
Ohio, attempts to promptly reimburse the banks through quick liqui
dation of assets would result in smaller recoveries and further de
preciation of values. In addition, insurance in Iowa embraced a
diminishing segment of bank obligations, so that had operations con
tinued after 1865 serious consideration would have had to be given
to the extension of insurance coverage to deposits.
Supervisory operations in Iowa were of the same pattern as
in Indiana and Ohio; very sound, very thorough, and very conservative.
There seems no question that in Iowa, as in the two other States
with similar systems, the nature of supervisory operations was greatly
affected by the existence of mutual responsibility among the banks
and the method of selection of State Board members. Thus it is
again proper to suggest that such an arrangement may have blinded
supervisory officials to anything but the maintenance of sound banks.

1/" Ibid., December i87

VXI-21

Conclusions. Although the Iowa insurance system compiled
the best record of bank creditor protection of any of the pre-1666
systems, it was scarcely tested and therefore cannot be said to have
been as successful as the insurance systems from which it descended those of Indiana and Ohio. Nevertheless, it is clear that insurance
operations in Iowa drew upon the Indiana and Ohio experiences and
there is at least some reason to believe that its history during
a more normal period would have been similarly praiseworthy.

CHAPTER VIII
THE CONTINUITY OF BATIK-OBLIGATION INSURANCE PROBLEIvlS

The histories of the bank-obligation insurance systems
operated in six States prior to 1666 constitute merely the first
part of an insurance story which has not yet ended. Although a half
century was to pass before another State was to follow Iowa in
adopting bank-obligation insurance, there was no real cessation in
the effort to use the insurance principle in guarding against the
destructive consequences of bank failure.
3y the terras of the National Banking Act in 1863 the
guaranty of the Federal government was given the notes of national
banks, and this became a guaranty of all circulating banknotes
after 1865 when notes of State chartered banks were taxed out of
existence. Then, as bank deposits became increasingly important
in the conduct of the nation's business, proposals began to appear
in the Congress for deposit insurance on a national scale.
Without question, the early suggestions for nationwide
deposit insurance drew upon the experience of the State plans de
scribed in this volume. As a matter of fact, the first bill for
deposit insurance known to have been introduced in the Congress,
in 1886, was by a Wisconsin Congressman who had been a resident
of Iowa at the time the Iowa system was in operation. It is likely
that agitation at about the turn of the century for deposit insurance
in certain States was also influenced by these early experiments.
That part of them had not been forgotten is shown by the fact that
one of the studies authorized and published by the National Monetary
Commission in 1910 was an analysis of Hew York's experience in
insuring bank obligations between 182$ and 1866; and that the New
York, Vermont, and Indiana systems were described in issues of the
monthly periodical, Sound Currency, published in 1595 and 1898.
By I9IT at least 80 bills had been introduced in the
Congress calling for nationwide deposit insurance, and in eight
States deposit insurance systems were in operation. Thrity more
bills ware introduced in the Congress by 1929 and then, as it became
painfully clear during the bank crisis of 1930-33 that State-wide
insurance was not the answer, 4-0 additional bills were introduced.
The last of these became law on June 16, 193 3 j and the Federal Deposit
Insurance Corporation was established.
The record of bank-obligation insurance prior to i860 is
of more than historical interest. Notwithstanding the time which
has passed since these first State plans ceased operation, many of
the lessons which were, or could have been, learned then are equally
applicable today. For after all, none of the essentials has changed:
then as today, banks were institutions with obligations for the
most part payable on demand and assets for the most part not imme
diately redeemable in cash; then as today, a bank failure destroyed
a portion of the circulating medium and not only brought loss or
ruin to individual bank creditors but also great distress to the
community served by the bank.

VIII-2
Before proceeding with a discussion of the lessens revealed
by the bank-obligation insurance systems operated before the Civil
War, a few words should be said regarding the extent to which any
such insurance system - then or today - can guard against destruction
of circulating medium due to bank failure. Under most circumstances
an insurance system cannot prevent destruction of circulating medium
in the economy as a whole; but it can prevent such destruction in
the locality in which the bank is located. That is to say when dis
bursements are made to the creditors of a failed bank out of an
insurance fund* there is no net addition to assets in the banking
system which will offset the decline resulting from bank failure.
Accordingly, there must be a net decline in circulating medium, but
that decline will be spread over the entire economy, with probably
negligible effects rather then concentrated at one point. Not only
will the effect probably be negligible for the economy as a whole, but
also the confidence engendered, generally, by the payment of deposits
in the affected community will strengthen the entire economy and help
prevent additional failures. There are, it should be noted, certain
circumstances in which bank assets can be replaced or restored under
insurance procedures and when this is done there is little or no
destruction of circulating medium, either in the affected community
or the nation as a whole. This can occur, for example, when insurance
disbursements are used to restore a bank to solvency, or to facilitate
a merger with another insured bank, or when funds for the payment to
creditors of failed banks are secured by insurance authorities
through the sale of securities to commercial banks.
One of the important lessons taught by the experiences of
the six States reviewed in this volume is the need for an adequate
insurance fund. Such a fund must be sufficient, either in itself
or combined with an assured borrowing power that can be quickly
exercised, to make the necessary disbursements to insured bank
creditors as soon as possible after a bank failure. In each of the
three State systems which relied upon an insurance fund the amount
of the fund was too small. It is interesting to recall that in two
of these States (New York and Vermont) this was not because the
assessment rate did not provide sufficient income to cover losses
but because the rate did not make possible the accumulation of a
large enough reserve fund to make disbursements when needed. In
Hex,- York creditors of many of the failed banks had to wait until
arrangements could be made to borrow, and in Vermont some of the
insured creditors had to wait for years while income was accruing
to the fund. In both cases insurance protection was thereby made in
complete* 1/
Another important lesson taught by the events of 1829-66
relates to assessments and was demonstrated in five of the six cases.
As was pointed out in Chapter I, more by happenstance than by design
1/ As noted in Chapter III, some Vermont creditors-were
never paid, but this was largely because of refunds illegally made to
some withdrawing banks.

VIII-3
assessments paid by the “banks tended to be larger - sometimes in
absolute amounts and sometimes relative to total obligations - during
periods of crisis and depression than during good times. In each
State this led to difficulties which disrupted the course of insurance
operations. It is clear from the experience of these early States
that it is unwise to have insurance assessments so arranged that
the amounts paid become relatively more burdensome during depression
years; yet this is exactly what is proposed in some quarters today
for Federal deposit insurance. That is, proposals that deposit
insurance assessments should be repaid to the banks in years during
which insurance losses and expenses are low are equivalent to advo
cating that full assessments should be paid only when insurance losses
are high. Losses will almost certainly be high only during depression
periods.
The conclusion as to the need for an adequate insurance
fund may seem, at first glance, to run counter to the statement in
Chapter I that the most successful systems were those of Indiana,
Ohio, and Iowa, for it will be recalled that none of these systems
placed primary reliance upon an insurance fund, and Indiana had no
fund at all. However, the functioning of these insurance systems
was greatly affected by the fact that the insurance authorities were
also bank supervisory authorities with far more extensive powers
than the Federal Deposit Insurance Corporation; and in addition,
those authorities exercised certain central bank functions. That
is, the insurance authorities in those three States were not only
charged with the duty of paying insured creditors after a bank
failure, but also were charged with anticipating and, as far as
possible offsetting, financial developments which might result in
bank failures. The Indiana system would not have survived the panic
of 1337 and the serious depression which followed if insurance
authorities had not possessed some central bank powers. The Michigan
experience also suggests that good bank supervision cannot, by it
self, be adequate in the face of destructive monetary developments.
The experience of all these States indicates that bank-obligation
insurance, if it is to be permanently successful, should operate in
an institutional framework that provides good bank supervision and
wise and effective monetary policy.
Bank-obligation insurance in Indiana, Ohio, and Iowa, also
illustrates the importance of mutual responsibility. In those systems
the number of banks was sufficiently small so that each bank could
see that its long run interest was best served by a stable banking
system. Since each of the participating banks was also represented
on the respective supervisory boards this meant that bank supervision
was thorough and effective. Today, with thousands of banks partici
pating in Federal deposit insurance, it is clearly impractical to
have each bank directly represented in the administration of the
Corporation and the supervision of the banks. However, the Corpora
tion has endeavored to work closely with banking organizations and
State and national supervisory agencies in an effort to promote under
standing of the basic mutual responsibility which underlies Federal
deposit insurance, and to stimulate participation by the insured banks
in the development of the policies of the Corporation. The record
of bank-obligation insurance prior to 1866 suggests that this is a
thoroughly appropriate policy.

IX-1
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Harvard

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IX-2

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IX-4
Public Documents (continued)
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Indianapolis, Indiana.

IX-5
Newspapers (continued)
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Full text of Insurance of Bank Obligation in Six States During the Period 1829-1866

FRASER