A Short History of Paper Money and Banking
Chapter XVIII. Of Speculations in Bank Stock, and of other Stock Jobbing
It is well worthy of remark, that, though the Banks derive as much profit as private capitalists, from so much of their capital as is invested in real estate and public securities, however they may have got that capital, and however they may have formed it: and though they derive from 12 to 18 per cent. from so much of their capital as is employed in discounting, they do not, on an average, divide more than six per cent. When the proposal was made to form a “safety fund,” by a tax on the Banks, the proprietors of stock in the city Banks of New York objected to it as a great hardship, alleging that they had not, for a series of years, received more than 5½ per cent. per annum. The heavy expenses of these institutions in the payment of Presidents, Cashiers, and Clerks, and the heavy losses that are necessarily sustained when corporate interest superintends the business of lending, are the reasons that the stockholders get much less than the people pay. Such being the fact, the anxiety to establish new Banks might create surprise, if we did not know that the object of the projectors of such institutions is not to lend money, but to make money. People who have money, can lend it without the intervention of Boards of Directors. They can lend it more securely, and watch over it more easily. But a new Bank will afford to some favored gentleman a snug birth as President for life, and to another an equally snug birth as Cashier. Poor cousins can be very conveniently provided for by giving them clerkships. To some, the new Bank will afford facilities for borrowing; to others, it will afford facilities for lending—at two or three per cent. a month. To those who are to be Directors, it will impart additional consequence in society, and give great advantages over their neighbors in business. Others hope to make fortunes by speculations in the script. To further all these objects, nothing is necessary but a charter from the Legislature, and the means of paying the first instalment. By the convenient contrivance of stock notes, the stock of the Bank can be completed. The circulation and deposits will prove a certain source of revenue.
When a charter is granted, the speculators evince great anxiety to possess the stock, and thereby create an idea that it is something very valuable. In New York, their practice is to subscribe a much greater amount than the nominal capital, and then clamor for a pro rata division. In the case of the Broome County Bank, the capital of which was fixed at 100,000 dollars, the subscriptions amounted to eight millions. In Pennsylvania, where subscriptions are not received beyond the amount of nominal capital, draymen and other able-bodied persons are hired by the speculators to get the script for them. They struggle at the windows with so much violence, as to give and receive severe personal injury. The most disgraceful riots that occur in Philadelphia, are those which are produced by the opening of the books of subscription for a new Bank.
These doings have their effect on simple-minded people; and, from the prospect of large profits, they prefer Bank stock to land and houses. The founders of the Bank kindly spare them some of the script at an advance of five or ten per cent., retaining only enough to keep the control of the institution in their own hands.
Even those who are not “simple-minded, do not hesitate to buy the script at an advance, for they hope to sell it at an additional advance. They know that the price of Bank stock in the market is regulated principally by the rate of dividends, and that few make inquiry into the solidity of these institutions, or have, indeed, the means of ascertaining whether, on the winding up of affairs, they can pay fifty cents in a dollar.
From the peculiar nature of their operations, Banks may sustain their credit, and continue to make high dividends, even when nearly all their capital is gone. In one instance, in Philadelphia, a sum equal to the whole capital of a Bank, was actually taken from it by some of its clerks and their coadjutors out of doors, without the Directors knowing any thing about it. The Bank continued its operations as before, supported by its deposits and its circulation. Its stock sold as high in the market as ever. When the defalcation was discovered, the credit of the Bank received a shock. But the Directors called in one or two additional instalments, and the Bank recovered its credit. Its stock is now much above par.
On common gambling principles, speculations in Bank stock are, perhaps, as eligible as speculations in any thing else. But it may be made a question, if executors, guardians, and trustees, act with sound judgment, when they, merely for the sake of facility of management, invest the property entrusted to their care in stocks of this description. The ability of a Bank to pay any thing to the purchasers of its shares, depends on the ability of the original subscribers to pay their stock notes and accommodation notes, and on the ability of borrowers to pay their promissory notes. This ability depends on various contingencies, all which ought to be duly considered by those who contemplate making permanent investments of the funds in their hands.
In making temporary investments, there is less risk. “The house is crazy,” says the weary traveller to himself, “and must fall; but not to-night. I may therefore venture to sleep in it.” When it has no profits, the Bank may make dividends on its capital, and the fact be concealed from all but the Directors. If its stock should fall in the market, it may be raised again by a few pretended sales, effected through the instrumentality of brokers.
Sometimes the funds of a Bank are employed in purchasing its stock, and then, if the price offered be sufficiently high, those who have the management contrive to sell their own shares. In 1826, four thousand eight hundred and eighty-three shares of the Franklin Bank of New York, were bought up with the funds of the Bank, at an advance of 62,850 dollars. When an investigation was made of the affairs of the Bank, in 1828, it was found there was not enough left to pay the remaining stockholders 50 cents in a dollar.
When a Bank gets into difficulties, it sometimes sustains itself for a period, and affords its agents a considerable chance of profit, by allowing them to have its notes at a discount, on condition of their putting them in circulation in distant places. On an investigation of the affairs of the State Bank at Trenton, in 1825, it was proved that one of its agents had sold bills of the Bank to the amount of 18,500 dollars, at an average discount of 37½ per cent. The very day before the Bank stopped payment, its notes were quoted in the Philadelphia Price Current, at only 1½ per cent. discount.
Every now and then the speculators find it convenient to break a Bank. This enables them to purchase up the notes at a discount, and therewith pay what they owe to the Bank. “There are instances,” says Mr. Gallatin, “in which the stockholders, by paying for their shares in their own notes, and afterwards redeeming their notes with the stock in their name, suffered no loss; and this fell exclusively on the holders of Bank notes and depositors.”
In the New York American, for June 1825, the following account is given of a mode of operation which was adopted by the knowing ones of that city.
“The mode of proceeding is simple and not expensive, and acquires strength by its own action. We will illustrate it by a case. It is desired to get possession of Insurance Company A, for example. The stock bears a premium in the market, say of five per cent. Enough money is raised among the contributors to pay the premium; and the residue is borrowed from other individuals or companies, on a pledge of the stock A, at par. The original advance of the combination is thus small, and they are thence enabled to be operating in the stock of many Companies at once, till, having acquired a control in the several concerns, they turn out all the old administrators, put in their own men, and then go to work again with renewed energy, and means increased by the whole amount of the capitals they have thus acquired the control of. By artful management, assiduous puffing, magnificent predictions, and supplies of stock skilfully curtailed as the demand increases—any one of the stocks thus owned, may be blown up to an absurd rate—and spared as a favor to the public, until the Managers have sold all out, and realized their profits, leaving the new purchasers to come in and assist at the bursting of the bubble.”
The Editor of another New York paper, the Inquirer, said in June, 1826, that certain men had, “by their bonds, rags, and hypothecation of stock, managed to control a nominal capital of nearly four millions of dollars in different institutions, and I do not believe” said he, “the whole confederacy is worth 100,000 dollars.”
The same editor afterwards gave a list of thirty-four Banking, Insurance, and other companies, all which, he asserted, were under the control of a certain gang of stock-jobbers.
If a Legislature will only grant charters enough, the speculators will have no difficulty in providing a full “assortment” of stocks—Banking, Insurance, and of every other description that may be wanted to suit all the varieties of taste to be found in men and women who have money to part with. If they have one Bank under control, they can use that as a means of putting half a dozen other Corporations into active business. So, the Northern Bank of Pennsylvania was set a going by means of a certificate for thirty-five thousand dollars said to be deposited in one of the New York Banks: and so, the Sutton Bank of Massachusetts was put in operation by means of 50,000 dollars in specie, borrowed for one day from the City Bank of Boston.
Several of the kind of doings described in this chapter, are regarded with horror by Banks which have reputations to sustain. But, in a view of the whole system, it is necessary to take them into consideration. The aggregate of loss sustained by simple-minded people, through such doings, is enormous.
Another way of making money through the medium of incorporated paper-money Banks, is by dealing in Government stocks. Voltaire gives us some insight into this, in one of his letters from Ferney, in Switzerland.
“Here I am,” he says, “living in a way suited to my habits, and caring but little for to-morrow; for I have a friend, a Director in the Bank of France, who writes to me whenever money is to be made in the public funds. Sometimes he writes to me desiring me to sell, because the Bank is going to withdraw its notes: at other times, he bids me to buy, for we are going to issue a quantity of notes; and so, through the kindness of my friend, I always make money, though living two hundred miles from Paris.”
