Financial History 139 (Fall 2021) - Page 38

on short-term commercial paper .” Already the Bank of England had imposed such requirements on their banking operations by 1832 , and former Secretary of the Treasury Albert Gallatin expressed similar ideas for the nation ’ s banks .
Still , as the bill progressed through the legislature , it had its critics , namely businessmen from New Orleans and throughout the state who viewed conservative lending practices as a hindrance to economic development . Forstall recalled some years later , “[ I ] was opposed by the whole commerce of New Orleans .” Furthermore , having some doubt as to its constitutionality , Governor Edward D . White vetoed the bill in 1838 .
From 1837 and until its passage in 1842 , the Louisiana Banking Act of 1842 underwent debate and revisions until a final , bipartisan piece of legislation was adopted . Pro-bank members of the Whig party and anti-bank Democrats in the legislature either fought ( in the case of the Whigs ) for a less economically stringent act or , like the Democrats , adoption of greater fiscal restraint over lending institutions .
Regarding party adherence and ideology , some writers have recognized nuances in the behavior of Louisiana ’ s politicians during this era . For example , as opposed to “ Whigs v . Democrats ” aligning themselves with their respective parties ’ national platforms , differences on bank regulation in Louisiana at the time boiled down to “ urban v . rural ” interests with party affiliation playing little role . Still , national platforms have influence among regional and local politics , and Louisiana in the late 1830s was no exception .
Their philosophies on banking , while not entirely etched in stone and making compromise next to impossible , to some degree did reflect the contemporary attitudes of the national Whig and Democratic parties . The Whigs had supported the rechartering of the recently defunct Second Bank of the United States against President Andrew Jackson ’ s efforts to abolish it . The Democrats ( or “ The Democracy ”), believing that “ hard money ” ( specie ) should be at the crux of banking with banks maintaining sufficient specie reserves , supported an independent Treasury system .
These political delineations advanced at the national level had some impact on the debate over regulation . When Governor White ( a Whig ) vetoed the 1838 version of the bill , he implied that banks and the
Congressman Samuel Hooper of Massachusetts , who integrated the reserve ratio concept of the Louisiana Banking Act into the National Bank Act of 1863 .
“ credit system ” were fiscally sound . As to the suspension of redeeming paper money from the public in exchange for specie ( a practice several banks had suspended in the wake of the Panic of 1837 ), Governor White blamed “ external ” causes brought on by Jackson ’ s veto of the re-chartering of the Second Bank of the United States .
Banking historian George Green indicated that anti-bank Democrats only tacitly expressed their reservations during the debate . However , after the bill ’ s passage , they voiced strong criticism blaming the Banking Act for contributing to the state ’ s economic woes .
Since a number of Louisiana ’ s banks had reneged on their specie payments by early 1842 , the legislature wanted the Banking Act to address specie resumption . Early versions did , but the debate pitted those seeking immediate resumption against legislators wanting more generous timetables for redemption . The ensuing compromise between both Whig and Democratic factions allowed for a “ post note ,” which was currency redeemable in gold or silver coin at some future date .
Furthermore , insolvent banks and the potential equity losses sustained by their owners was an issue . The legislature then agreed to allow “ strong banks ” to accept assets of the aforementioned equal to the amount of notes in circulation they now held ( at par value ) of the insolvent banks . In addition , the act required fiscally sound institutions to hold loans originated by insolvent banks and granted borrowers owing the latter extended payment arrangements .
National Archives and Records Administration
When Governor A . B . Roman signed the Louisiana Banking Act of 1842 into existence on February 5 , 1842 , its first section mandated that “ loans on deposits and specie ” backed by paper money issued by the bank “ shall be restricted to 90 days , so as to effectually insure a rapid movement in the daily receipts .” The bill further stipulated that “ the loans and investments on the capital shall be denominated the ‘ deadweight .’”
The term “ deadweight ” referred to loans on capital due and payable beyond 90 days . Banks could not increase their deadweight without maintaining a cash liability-to-specie ratio of three to one ; the remaining two-thirds was payable in 90 days . These two “ fundamental rules ”— rapid movement and deadweight — functioned as the cornerstone of the Banking Act by essentially dividing bank operations into separate categories along commercial and investment banking lines . In retrospect , Forstall had promoted similar “ fundamental ” rules for Citizens Bank in 1836 . Presumably , his suggestions were incorporated into the Louisiana Banking Act , since he was a proponent of the legislation when co-chairing the Joint Committee of Finance in the late 1830s .
Financial historians have suggested such categories governing the act ’ s fundamental regulations might be defined , and better understood , by applying modern banking classifications relevant to commercial and investment banking operations . For example , bank specie and loans on deposit were more commercial banking in nature . The investment banking elements , on the other hand , involved deadweight assets .
Other stipulations required banks to publicize their financial condition and make weekly settlements , in hard money , of balances accumulated between banks holding one another ’ s notes . Green opined that publicity compelled banks to hold adequate reserves in hopes of ensuring confidence amongst creditors and depositors . The frequency of weekly settlements would force banks into redeeming notes , thereby not over-saturating the money supply and inflating the value of bank currency .
In the hopes of safeguarding bank solvency , the law even went as far as requiring the circulation of blacklists spotlighting debtors in delinquency to banks . Other regulations prohibited dividend payments when specie redemption had been suspended , restricted the use of a bank ’ s stock
36 FINANCIAL HISTORY | Fall 2021 | www . MoAF . org