Financial History 139 (Fall 2021) - Page 39

as collateral for loans and outlawed speculation in agriculture and corporate stock .
In the wake of the 1842 law , the banking community seemed alarmed , if not outright hostile . “ Fears are entertained that [ the bill ’ s ] consequences will be most disastrous both to the banks and the public ,” commented Thomas Morgan of the New Orleans Collector ’ s Office . An official at City Bank lamented , “ We have fallen on evil times , and our Legislature are doing everything in their power to hasten the ruin of the state .” Further , as the macro economy remained unstable , banks disagreed as to their proper role regarding the interbank cooperation that the act specified .
During this time , credit became even scarcer because of strict requirements on deposit liabilities . In addition , banks did not agree on the operational arrangements concerning interbank settlements . Solvent banks also began redeeming specie payments six months prior to the date stipulated by the act ; this made it easier for solvent banks to shy away from converting the bank notes of their insolvent partners .
As a result , in 1842 alone 35 % of noteholders found their bank notes nonconvertible because of the actions taken by the fiscally sound banks . One New Orleans financial publication criticized the bankers stating , “ A material depreciation of this paper was the immediate and natural result of the resumption of specie payments on the part of the banks .” Another point of contention involved the aforementioned proviso that sound banks absorb loans of less economically viable institutions .
Anti-bank Democrats voiced concern that policies enacted by the act contributed to the pre-existing economic dislocation plaguing both the country and Louisiana at the time . Consequently , both a Democratic governor and legislative majority were elected in 1842 with some members advocating for the elimination of all banks . Though prohibitions on banking activities did commence under Democratic rule , the Banking Act of 1842 remained in place .
The act would influence the soundness of the state ’ s banks in weathering future business downturns and contribute , in part , to ensuing domestic and federal banking legislation . The financial impact of the Panic of 1857 , for example , is said to have had little effect on Louisiana ’ s banks . This was partially due to the South ’ s reliance on cotton exports , but it can also be attributed to the reserve requirements enforced by the act .
Furthermore , in early January 1859 , Louisiana ’ s specie resumption and deposits exceeded pre-panic levels with lending resuming its 1857 volume later in the year . Even throughout its debate and subsequent modifications , the legislation had its impact as far as New England , when Massachusetts lawmakers incorporated the reserve requirement idea into the Massachusetts Bank Law of 1838 . Samuel Hooper of Boston , who later served in the US Congress and was a member of the Congressional Banking Committee , commented , “ No one can doubt that the Louisiana law is safer for banks and the public ” and that similar legislation should be passed “ in every state where banks exist .”
Congressmen Hooper integrated the reserve ratio concept of the Louisiana Banking Act into the National Bank Act of 1863 . As the nation ’ s first national bank law , nationally chartered banks had to meet minimum capital requirements and refrain from speculative lending , directives which were fundamental to the 1842 law .
In turn , the National Bank Act of 1863 laid the groundwork for the Federal Reserve Act established in the early 20th century , carrying forward the stipulation that reserve requirements were essential to banking solvency . Essentially , members of the Federal Reserve System had to maintain reserves on its customer ’ s deposits as a means of helping the Fed control the money supply . Though the Fed has a much larger scope of influence than did the Act of 1842 , its practice in maintaining adequate reserves is rooted in Forstall ’ s ideas from the antebellum era .
Six years prior to Forstall ’ s death , Italian Senator Giulio Adamoli called upon the former banker when touring New Orleans in 1867 . In a letter describing his visit , Adamoli recognized Forstall as an “ active and vigorous man ” possessing a “ clearness of intellect .” He no doubt still exhibited traits notable to his days in the legislature and as a private banker .
At the time of Adamoli ’ s stopover , Forstall had regained a degree of prominence lost in the wake of the Banking Act ’ s passage . His contemporaries offered more than just tacit respect for his judgment and financial acumen , while his chroniclers recognized the importance of his legacy . Some financial historians have opined that his ideas may not have been anything new to commercial banking management , but instead pre-existing orthodoxies he chose to promote . Perhaps , yet “ The Forstall System ” instituted benchmarks and practices indelible to contemporary banking .
Ramon Vasconcellos is a history professor and lecturer in Accounting and Economics at Barstow Community College in Barstow , CA . He has published numerous biographical and topical articles on the history of the West , particularly related to finance . Ramon has also taught Economics and History at the University of London .
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