Financial History 139 (Fall 2021) - Page 36

The Historic New Orleans Collection , Gift of Olga and Yvonne Tremoulet , 2005.0345.3
By Ramon Vasconcellos
Editorializing in the fall of 1842 how three of Louisiana ’ s largest banks had weathered the Panic of 1837 , the Times of London extolled Consolidated Association of Planters (“ Planters Bank ”), Citizens Bank and Union Bank for “ struggling on in the payment of their dividends .” These lauds proved a bit premature , consequently , given that the state of Louisiana had placed Union and Citizens into liquidation that October .
In fact , many state chartered banks throughout the country had liquidated during the 1837 – 1843 period , leaving the US Treasury no longer able to deposit
Portrait of Edmund Jean Forstall with his 12-year-old daughter , Desirée Forstall , by Jean Joseph Vaudechamp , 1836 .

Edmund J . Forstall and the Louisiana Banking Act of 1842

funds in the now defunct Second Bank of the United States . The Treasury was also limited as to the number of federal depository institutions extant , with only two throughout the entire South . As expected , the depression beginning in 1839 impacted planters ( many in the South ) who relied on banks for working capital .
The president of Citizens Bank in 1838 , Edmund Jean Forstall , expressed his displeasure at that time with the lending operations of Citizens since , like several other southern banks , it had become accustomed to underwriting loans exclusively on mortgages and commercial property . Such risks only exacerbated the lending crisis that Louisiana experienced during the depression prompting Forstall — a cochairman of the state ’ s Joint Committee of Finance — into lobbying for a state banking reform bill . Through his efforts and cooperation with others , the Banking
Act of 1842 ( often known as “ The Forstall System ”) improved the fiscal stability of Louisiana ’ s banks and became the model for subsequent banking legislation at the national level .
Forstall had much experience as a banking insider many years before the passage of the 1842 act . When engaged in merchant-banking ( the financing of production and / or trade in commodities ) after the War of 1812 , he served as the director of the Louisiana State Bank in 1818 . By 1829 , Governor Pierre Derbigny appointed him comptroller for the Consolidated Association of Planters of Louisiana , the first “ property bank ” created by the legislature for the purposes of financing sugar production .
Property banks ( sometimes referred to as “ planter banks ”) formally existed for the purpose of supplying credit to those engaged in agriculture . During the 1830s , Forstall forged a partnership with Barings Bank of London that lead to the creation of another one of Louisiana ’ s property banks , Union Bank , co-owned by Barings ’ New York affiliate — Prime , Ward , King and Co .— with Forstall writing much of its charter .
Citizens Bank chose Forstall to fill a director ’ s post , and he was subsequently elected bank president in 1836 . His practices , however , ran afoul with the aims of the bank ’ s directors . In the hopes of staving off fiscal ruin — though much to the displeasure of the Board of Directors — he restricted the amount of loans available for the purpose of maintaining adequate capital reserves . These actions prompted his resignation , but he later rejoined Citizens ; upon the bank ’ s suspension of specie for bank notes in 1839 , Forstall made his resignation permanent by 1843 . During his remaining years at Citizens , he became a member of the state legislature and , observing the need for greater regulatory authority over banks , began advocating for standardized banking practices within Louisiana .
At Citizens , Forstall described in a letter to a business associate abroad , “ that the Bank should hold at all times an amount of gold and silver equal to one third of its whole cash responsibilities .” Specifically , “ Deposits and Bank [ money in circulation ] and also short commercial paper maturing in rapid succession ,” would help banks maintain their profitability . He further noted that in practice , Citizens during his presidency made loans on “ short
34 FINANCIAL HISTORY | Fall 2021 | www . MoAF . org