were promptly returned to them as deposits or in payment of loans. Under the operation of Gresham's Law the worst money that would circulate drove out the better. The Boston banks, although possessing more than half the banking capital in New England, had only one twenty-fifth part of the circulation. Country bank notes accumulated in the hands of merchants, and they either sold them to brokers or - sent them by messengers to the issuing banks for redemption. The discount in Boston on the notes of Massachusetts country banks averaged per cent. On those of the other New England States it ranged from 1 to 5 per cent according to the distance of the banks and the cost of securing redemption. The Suffolk Bank of Boston was chartered in 1818 as an ordinary bank of issue and deposit. Its managers conceived the idea of making a profit out of the redemption of country bank notes. They offered to redeem all such notes at par, if the issuing banks would provide funds for that purpose and would also make permanent deposits in the Suffolk Bank, the use of which should compensate it for its trouble. At first only a few of the country banks acceded to this proposal. (The Suffolk Bank then sent home for redemption all the notes of the non-assenting banks that it could get. The other Boston banks joined the Suffolk and contributed a fund for carrying on the campaign in all the New England States. Eventually all the country banks were forced into the arrangement, because it was found to be cheaper to redeem their notes in Boston than at home. They found also that under the Suffolk system their credit was so much improved that their notes gained circulation in all parts of the United States and Canada. The system was, in fact, advantageous to them as well as to the public. When the system had been thoroughly established, the Suffolk Bank accepted the notes of all solvent New England banks at par and offset them against each other, thus serving as a clearing house for New England bank-note issues. The legislature of Massachusetts testified its approval of the system by passing a law prohibiting banks from paying out any notes but their own, thus making it necessary to send to the Suffolk for prompt redemption the notes of other banks which came into their hands. The redemptions, or clearings, at the Suffolk Bank reached the sum of $400,000,000 per year. As the total circulation of New England banks at that time was only $40,000,000, it followed that the notes were redeemed, on the average, ten times each year. The Suffolk system continued until 1865, when it was superseded by the national banking system. It brought banking in New England to a state of responsibility, order, and solvency unknown before. AUTHORITIES Whitney's History of the Suffolk Bank. Stetson's History of the State Bank. Root's New England Bank Currency ("Sound Currency". series). Knox's History of Banking in the United States. Reports of Bank Commissioners of Massachusetts. CHAPTER X THE SAFETY FUND SYSTEM NEW YORK has made two contributions of the first importance to banking science: (1) the safety fund system, or mutual insurance of circulating notes; (2) the free bank, or bond deposit, system for securing circulating notes, which was the precursor of the national banking system. During the first half century banking in New York was an integral part of the spoils of politics. Federalists would grant no charters to Republicans, and Republicans none to Federalists. After a few banks had been established they united, regardless of politics, to create a monopoly by preventing other persons from getting charters. When charters were applied for and refused, the applicants began business on the commonlaw plan. Then, at the instigation of the favored ones, the politicians passed a law to suppress all unchartered banks. The latter went to Albany and bribed the legislature. In short, politics, monopoly, and bribery constitute the key to banking in the early history of the state. Banks and The Bank of New York, described in a previous chapter,1 was controlled by Federalists. As the anti-Federalists knew that the legislature would not grant a charter to them, Aaron Burr conceived the idea of procuring one by stealth. The city had recently been scourged with yellow fever, the ravages of which were attributed in part to the bad water. Accordingly a petition was presented for a charter for a 1 See page 248. The Manhattan company with a capital of $2,000,000 to supply New York City with pure water. In it was a clause authorizing the company to use any surplus of capital, over and above the amount needed for the water works, in any moneyed transactions not inconsistent with the constitution and laws of the state or of the United States. The Council of Revision (of which John Jay was president), whose approval was necessary, did not suspect that banking powers were concealed in the charter. The charter was granted, and the company applied one half of its capital to water works and the other half to the banking business. This was the Manhattan Company, which ceased to be a water company in 1840, but has continued as a bank to the present day. When the Republicans came into power they refused all applications for bank charters to Federalists; and the existing banks of which there were six in the state prior to 1804, made common cause to prevent any new ones from entering the field. In that year the Merchants' Bank of New York City, which was already in operation under the common law, applied for a charter. It was refused. The bank bought its way through the legislature amid scenes of excitement, which included fist fighting in open session. In 1811 the Bank of America repeated the operation on a larger scale. In 1821 the people of the state sought to put an end to these scandals by a clause in the constitution of that year requiring a two-thirds vote of both branches of the legislature to pass a bank charter, but the only effect was "to increase the evil by rendering necessary a more extended system of corruption.' "1 In 1828 forty bank charters were in force, out of fortythree which had been granted, three small country banks having become insolvent. The charters of thirty of the 1 Hammond's History of Political Parties in the State of New York. survivors were about to expire, and all efforts to renew them had failed to secure the necessary two-thirds vote. The legislature was determined to impose on the banks some new conditions, in the public interest. At Joshua Forman. this juncture (January 24, 1829) Mr. Joshua Forman of Syracuse addressed a letter to Martin Van Buren, governor of the state, proposing a plan for the mutual insurance of banks. His suggestion was that each bank should be required to contribute annually to a common fund for the payment of the debts of such banks as should fail, this contribution to continue till it should reach half a million dollars and be kept up to that sum by further contributions when needful. Safety Fund Mr. Forman's plan was adopted, and a law was passed providing that every bank whose charter should be granted or extended thereafter should pay into a 66 bank fund" one-half of 1 per cent of its capital each year, until the contributions should be equal to 3 per cent of its capital stock. This fund was to be applied solely to the payment of the debts (exclusive of the capital stock) of failed banks belonging to the system. The fund was not to be used, however, until the assets of the failed bank had been exhausted and the deficiency determined by judicial proceedings. Whenever the fund should be reduced in this way, the comptroller was to call on the banks for fresh contributions, at the same rate, as to time and amount, as the original ones. The same act provided for the appointment of three commissioners to examine all the banks three times each year, or oftener if required to do so. Any three banks might call for a special examination of any bank in the system. In 1837 three safety fund banks, all in the city of Buffalo, were reported to be in difficulties. The legislature passed a law authorizing the comptroller to make immediate payment, |