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Investment Constraints and New York City Mutual Savings Bank Financing of Antebellum Development

Published online by Cambridge University Press:  11 May 2010

Alan L. Olmstead
Alan L. Olmstead
Affiliation:
University of California, Davis
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Extract

In studying the history of capitalism, one rarely encounters business enterprises without a capital stock or a profit account, founded and managed by men who expressed no desire for monetary rewards, and lacking owner-entrepreneurs. This paper deals with just such institutions—mutual savings banks. It has been recognized for some time that during the antebellum period mutual savings banks were relatively large and influential institutions. In 1860, when mutuals held a total of $150,000,000 in assets, the next most important type of non-bank financial intermediary, life insurance companies, held assets of only $24,000,000. More impressive was the size of some of the individual mutuals, for in 1860 several mutuals ranked among the ten largest business organizations in the country. Throughout most of the antebellum period the nation's largest mutual was the Bank for Savings in the City of New York. In 1825 this one bank held 56 percent of the nation's savings bank deposits; and ten years later, in 1835, it still accounted for over 34 percent of the country's deposits and 42 percent of its customers. Another New York institution—the Bowery Savings Bank—surpassed the Bank for Savings as the nation's largest mutual in 1860. At that time each of these banks commanded deposits in excess of $10,000,000 and a third New York mutual, the Seamen's Bank for Savings, was approaching that mark. In all, nineteen mutual savings banks were founded in New York City between 1819 and 1860. Table 1 shows the date that each bank opened for business, and the amount on deposit on January 1, 1861.

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Articles
Information
The Journal of Economic History , Volume 32 , Issue 4 , December 1972 , pp. 811 - 840
Copyright
Copyright © The Economic History Association 1972

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References

I wish to acknowledge the valuable comments of Ralph Andreano, Jeffrey Williamson, Eugene Smolensky, Thomas Mayer, Victor Goldberg, C. Daniel Vencill, James Sturm, and David Bunting.

1 United States Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1957 (Washington, D.C.: G.P.O., 1960), p. 676Google Scholar.

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3 For a complete listing of New York mutual deposits and assets see Olmstead, Alan Lester, “New York City Mutual Savings Banks in the Ante-Bellum Years, 1819–1861” (Ph.D. thesis, University of Wisconsin, 1970), pp. 285–327Google Scholar. Tables showing yearly assets by bank are available from the author upon request.

4 Miller, Nathan, The Enterprise of a Free People: Aspects of Economic Development in New York during the Canal Period, 1792–1838 (Ithaca, New York: Cornell Univ. Press, 1962)Google Scholar; Scheiber, Harry N., Ohio Canal Era: A Case Study of Government and the Economy, 1820–1861 (Athens, Ohio: University of Ohio Press, 1969)Google Scholar.

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6 Payne and Davis, “From Benevolence to Business …,” p. 404.

7 Davis, Lance E., “The New England Textile Mills and the Capital Markets: A Study of Industrial Borrowing 1840–1860,” The Journal Of Economic History, XX, No. 1 (March, 1960), p. 4, fn. 10Google Scholar.

8 This means that they were managing the mutual to maximize the return on its portfolio given legal constraints. It should not be construed to mean that they were trying to profit personally from their position.

9 Olmstead, “New York City …,” pp. 85–134.

10 For example see: Minutes of the Trustees of the Bank for Savings in the City of New York, Vol. I, October 12, 1824, p. 393. (Hereafter cited as Minutes, B.F.S….) Pintard, John, Letters from John Pintard to His Daughter Eliza Noel Pintard, Vol. I in the New York State Historical Association Collections, Vols. LXX-LXXIII (New York: New York Historical Society, 1937–1940), July 10, 1820, p. 302Google Scholar; the trustees of the Savings Bank of Baltimore gave the same reason for restricting their Bank's customers (Payne and Davis, Baltimore …, p. 23).

11 Miller, Enterprise …, pp. 63–67, 77–82.

12 Ibid., pp. 66–67; Pintard, Vol. I, December 16, 1817, p. 97.

13 Miller, Enterprise …, p. 2.

14 Sadove, A. Robert and Fromm, Gary, “Financing Transport Investment,” in Fromm, Gary, (ed.), Transport Investment and Economic Development (Washington, D.C.: The Brookings Institution, 1965), p. 225Google Scholar.

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16 Minutes, B. F. S., Vol. I, November 10, 1819, p. 63.

17 First Annual Report of the Bank for Savings in the City of New York, 1820, reprinted in Knowles, History …, p. 178.

18 Charter and By-Laws of the Bank for Savings in the City of New York (New York: Mahlon Day, 1832), p. 6Google Scholar.

19 The Case I assumption—that the Bank must invest all its assets in New York debt—is made for clarity of exposition and is not historically accurate. In 1819 the Bank could also invest in United States debt. If this assumption were relaxed to fit historical reality, d1d1 (Figure I) would not be perfectly inelastic, but would still be relatively inelastic compared to d2d2—the demand curve under the free choice (Case II). The market demand D2D2 would not be as far to the left nor would it be as elastic as shown in Figure II.

20 Minutes, B. F. S., Vol. I, 1819, p. 44; March 8, 1820, p. 88; Knowles, History …, p. 178.

21 Minutes B. F. S., Vol. I, February 14,1821, p. 149.

22 Myers, Margaret G., The New York Money Market, Vol. I (New York: Columbia Univ. Press, 1931), p. 23Google Scholar.

23 Minutes, B. F. S., Vol. I, July 12, 1820, p. 116.

24 Ibid., Vol. I, July, 1820, pp. 117–18.

25 Ibid., Vol. I, January 1, 1821, p. 145.

26 Ibid., Vol. I, February 14, 1821, p. 149.

27 Ibid., Vol. I, June 21, 1821, p. 175; Fritz Redlich mistakenly described this trip to Albany as the Bank's first attempt to buy a new issue of securities directly from the canal commissioners. As noted above it succeeded in doing this a year earlier in 1820. Fritz Redlich, The Molding of American Banking: Men and Ideas, Part I, 1781–1840, in A History of American Business Leaders (New York: Hafner Publishing Corp., Inc.,

Nathaniel Prime was a member of Prime, Ward & King, one of the City's leading private banking houses. The Bank for Savings' minutes show that the Bank paid a premium of 6.05 percent on these bonds and that Prime refused to sell another $50,000 worth of canal bonds at the same price.

28 Minutes, B. F. S., Vol. I, February 13, 1822, p. 213.

29 Miller, Enterprise …, p. 99.

30 Ibid., p. 88.

31 Ibid., p. 86.

32 Ibid., p. 87; Minutes, B. F. S., Vol. I, February 14, 1821, p. 149.

33 Shaw, Ronald, Erie Water West: A History of the Erie Canal, 1792–1854 (Lexington, Kentucky: Univ. of Kentucky Press, 1966), p. 16Google Scholar.

34 Ibid., pp. 38–39. Clinton was closely connected with the Bank for Savings. He attended several meetings which led to the founding of the Bank, and he was listed as a director of the Bank in 1816 before it was chartered. Knowles, History …, pp. 25–26.

35 Shaw, Erie Water …, pp. 39–40; Miller, Enterprise …, pp. 31–32.

38 Shaw, Erie Water …, p. 46.

37 Eddy, Bayard and Cadwallader Colden would become trustees of the Bank. A fourth organizer of this meeting (Clinton) was also connected with the Bank. Ibid., p. 56.

38 Ibid., pp. 56–57.

39 Ibid., p. 57.

40 New York State Assembly Documents, 1834, pp. 16–17.

41 Ibid., p. 16; Minutes, B. F. S., Vol. I l l, April 13, 1836, p. 1211.

42 Minutes, B. F. S., January 1, 1834, p. 1017.

43 New York State Assembly Documents, 1834, pp. 16–17.

44 Ibid.

45 Miller, Enterprise …, p. 135

46 Ibid., pp. 115–17, 124–25, 133–34. New York State Assembly Documents, 1834, pp. 16–17.

47 Minutes, B. F. S., Vol. II, January 2, 1829, p. 649. Data on New York City debt before 1830 are scarce. At the end of 1830 the Bank for Savings held over 45 percent of the City's net bonded debt of $774,556. For total New York City debt figures (1830–1896) see Durand, Edward, The Finances of New York City (New York, 1898), pp;. 374–75Google Scholar. Much of this money was used to purchase the Greenwich prison and grounds from the State government. See Stokes, I. N. Phelps, An Iconography of Manhattan Island, 1498–1909, 6 Vols. (New York: R. H. Dodd, 1918–1928), Vol. V, p. 1678Google Scholar.

48 The Merchants' Association of New York, An Inquiry into the Conditions Relating to the Water Supply of the City of New York (New York: I. H. Blanchard, Co., 1900), p. 566Google Scholar.

49 Minutes, B. F. S., Vol. III, January 1, 1836, p. 1187.

50 Pintard, Letters …. Vol. IV, August 19, 1832, p. 88.

51 Ibid., p. 89.

52 Nevins, Allan (ed.), The Diary of Philip Hone, 1828–1851 (New York: Dodd Mead, and Co., 1936), p. 837Google Scholar.

53 The Merchants' Association of New York, Table XI, p. 566.

54 Minutes, B. F. S., Vol. III, February 8, 1837, p. 1295.

55 Miller, Enterprise …, pp. 173, 180.

56 Keyes, Emerson, A History of Savings Banks in the United States, Vol. I (New York: Bradford Rhodes, 1876), p. 377Google Scholar.

57 Scheiber, Harry N., “Enterprise and Western Development: The Case of Micajah T. Williams,” Business History Review, XXXVII (Winter, 1963), pp. 348–349Google Scholar.

58 Ibid., p. 349.

59 It will be remembered that at this time the canal commissioners of the State of New York were trying to persuade the Bank for Savings to redeem its Erie bonds, which in part may explain the legislature's willingness to grant the Bank's petition.

60 Minutes, B. F. S., Vol. II, February 13, 1828, p. 595.

61 Jenks, Leland, The Migration of British Capital to 1875 (London and New York: Alfred A. Knopf, 1927), p. 361Google Scholar, footnote 25. Jenks noted that small amounts of Ohio debt first appeared on the London market in 1828.

62 Minutes, B. F. S., Vol. II, February 4, 1832, p. 872; figures for Ohio State debt are found in Bogart, Ernest L., Internal Improvements and State Debt in Ohio (New York: Longmans, Green, 1924), pp. 242–243Google Scholar. Bogart's figures are for the end of each year.

63 Scheiber, Ohio Canal Era …, p. 374.

64 Minutes, B. F. S., Vols. II and III, 1832 to 1837.

65 An indication of the extent to which the Bank's aggressive bidding in a limited bond market could have driven up bond prices is given in an article by Lance Davis dealing with the Boston financial market. Professor Davis observed a sudden drop in the long-term interest rate from 6 percent to 3 percent in 1849. He suggested that this drop was caused by “a flood of new long-term loans made by several Massachusetts savings banks and by the Provident Institution for Savings in the Town of Boston in particular. Within the space of a few weeks these banks placed several hundred thousand dollars in additional funds into the long-term loan market, and the decline in interest rates appears to represent the market adjustment to this sudden increase in supply.” Lance Davis, “The New England Textile Mills …,” p. 20.

68 Charter and By-Laws of the Bank for Savings, 1832, p. 7. In 1832 a similar provision was added to the Seamen's charter.

69 Ibid. The latter provision of the Act of 1830, which allowed deposits in commercial banks, just sanctioned what the trustees had been doing since the first day the Bank opened for business.

68 These Alabama bonds, although contracted for in 1830, were not actually purchased until January, 1831. See Minutes, B. F. S., Vol. II, January 3, 1831, p. 794; February 4, 1832, p. 872.

69 Jenks, Migration …, p. 361, footnote 25.

70 Minutes, B. F. S., Vol. III, January 1, 1835, p. 1085.

71 Figures for Alabama debt in 1835 are not readily available, but MacGregor shows the state had issued $2,300,000 of debt by 1835. If this figure approximates the amount of debt actually outstanding, then the Bank for Savings held about 17 percent. See MacGregor, John (ed.), Commercial Statistics of America: A Digest of Her Productive Resources, Commercial Legislation, Customs, Tariffs, Shipping, Imports and Exports, Monies, Weights, and Measures (London, 1847), p. 1073Google Scholar.

72 Secretary's Minutes, Seamen's Bank for Savings, Vol. I, 1829–1838; Annual Reports of the Trustees of the Seamen's Bank for Savings, in New York State Documents; 1831, 1833–37; Annual Reports of the Trustees of the Greenwich Savings Bank, in New York State Documents, 1834–1836, 1838; Secretary's Minutes, Bowery Savings Bank, Vol. 1,1834–1838.

73 Payne and Davis, Baltimore …, p. 111.

74 Payne and Davis, “From Benevolence to Business …,” p. 399.

76 Willcox, James M., A History of the Philadelphia Savings Fund Society, 1816–1916 (Philadelphia: Lippincott, 1916), p. 157Google Scholar.

76 Payne and Davis, Baltimore …, p. 98.

77 Payne and Davis, “From Benevolence to Business …,” p. 400.

78 Ibid., p. 390.

79 Secretary's Minutes, Seamen's Bank for Savings, Vol. I, March 4, 1835, p. 94. Technically, the Bank for Savings' loans to the Public School Society in 1830 were mortgage loans.

80 Ibid., August 6, 1834, p. 84; September 3, 1834, p. 86. For a description of this firm's activities see Aitken, Hugh, “Yates and McIntyre: The Close of the New York Lottery System,” Journal Of Economic History, XIII, (Winter, 1953), pp. 36–57CrossRefGoogle Scholar.

81 New York Assembly Documents, 1837, Vol. III, No. 180, pp. 1–2.

82 Bond and Mortgage Book, Bank for Savings, no page numbers.

83 Minutes, B. F. S, Vol. III, January 20, 1836, pp. 1171–1172.

84 The committee estimated that mortgage loans would yield a two percent higher rate of interest than government bonds. Ibid., p. 1172.

85 Emerson Keyes, Special Report on Savings Banks, New York Senate Documents, Vol. I, No. 7, 1868, pp. 341–43. The first of these changes appeared in 1848 in the charters of two new banks. The General Bank Act of 1853 extended the right to make these types of investments to all the older mutuals. This Act also stipulated that mutuals could not purchase bonds below their par value; this applied to all bonds, not just city and county issues. This stipulation was intended to increase the market for, and to help support the price of, the debt of up-state cities. These municipal governments could adjust the interest rates, maturity date, and par price of their bonds so that they would circulate at, or above, par and thus be acceptable investments for mutuals constrained by the Act of 1853. This same Act would exclude many of the outstanding bonds issued by Southern and Western states which were circulating below par, and thus eliminate one of the up-state cities' competitors for mutual funds. The legislature made other changes in the regulations affecting mutual investments, which were partly designed to increase the intrastate flow of capital. One such change already mentioned was to allow many of the mutuals chartered after 1848 to make real estate loans outside of the New York City area.

86 Leland Jenks maintained that if it had not been for the Erie's “sensational success,” large quantities of British capital would not have flowed into other states' transport projects. Jenks, Migration …, p. 73.

87 The one essential characteristic necessary for an institution to be classified as a “development bank” is that it specializes in supplying long-term credit. Diamond, William, Development Banks (Baltimore, Maryland: Johns Hopkins Press, 1957), pp. 1–5Google Scholar; Landes, David, Bankers and Pashas: International Finance and Economic Imperialism in Egypt (Cambridge, Massachusetts: Harvard University Press, 1958), pp. 8–9Google Scholar.

88 Diamond, Development Banks …, p. 23. Both Landes and Cameron have applied the term to earlier institutions established in western Europe.

89 Cameron, Rondo, France and the Economic Development of Europe, 1800–1924 (Princeton, New Jersey: Princeton University Press, 1961), pp. 137–138Google Scholar.

90 Ibid.

91 Ibid., p. 139.

92 Although this has been an important characteristic of many development banks it is not a necessary condition for an institution to meet in order to be so classified.

93 Perhaps the best example of bankers supplying entrepreneurial inputs is that of Emile and Isaac Pereire in Cameron, France …, pp. 134–148.