Financial History Issue 114 (Summer 2015) | Page 15

all Boston banks except one had banded
together to form the “Suffolk System”
under which they paid the Suffolk Bank
a proportion of $300,000, based on their
level of capitalization, to act as their agent
for redeeming bills from outside banks by
returning them to their place of origination for specie. The Suffolk System was
the first of several private regulatory bodies that not only improved the efficiency
of Boston banking but, importantly, also
helped to instill a sense of public confidence in them.
Soon the system was expanded to include
drafts and notes from banks outside of Boston. Like foreign exchange markets, these
outside participating banks were each
required to deposit $2,000 in specie at the
Suffolk Bank and sufficient additional specie
to redeem that bank’s notes at par any that
ended up in Boston. In both cases, participating banks received quick and reliable
redemption of its notes, creating a higher
level of stability, while Suffolk Bank paid no
interest on those deposits, which it could
lend to itself at no cost. By 1858, another
organization, the Bank of Mutual Redemption, was created to serve as agent for the
redemption of bills from all New England
banks. Two years earlier, an additional
improvement to make the exchange of
banks’ bills and checks more efficient was
developed with the establishment of the Boston Clearing House, which began operations on March 29, 1858. Previously, banks

had made daily settlements with each bank
separately. Under the new arrangement, all
settlements were made through the clearing house. The new facility established a
one-day record of exchanges amounting to
$31,321,877, which “were settled within an
hour and the balances within a short time
afterwards.” Boston had the second oldest
clearing house after New York’s, and Boston’s soon expanded from servicing 29 to 55
Boston banks, and to 42 Boston area banks
by the early 1890s. By 1893, only one bank
associated with the clearing house had failed.
19th century banks, including those in
Boston, were exposed to periodic depressions, often due to overextensions by
banks, land speculation, and other factors. By 1837, Boston had 34 banks, while
the number in Massachusetts outside
of Boston numbered 95. Boston banks
had $21,350,000 in capital, deposits of
$6,560,000, and circulation of $4,386,414,
compared with $16,930,000, $1,907,000
and $5,886,704, respectively, for out-ofBoston or “country” banks. During that
year, the start of the longest and most
serious depression in the 19th century,
specie payments were suspended by Boston banks.
At the same time, those banks created
an ad hoc organization, the Associated
Banks of Boston, to help maintain public
confidence in the banking system. Conditions at most Boston banks were serious
but not life-threatening. At the Shawmut

Collection of the Museum of American Finance

© Corbis

Bank (1814), with combined authorized
capital in the six banks of $8,550,000.
During the same time frame, seven
banks (plus the Bank of North America)
were set up in Philadelphia, with a capitalization of $7,743,000; seven banks in
New York City, with a total capitalization
of $11,840,000; and eight banks in Baltimore, with a capitalization of $6,750,000.
Boston was second only to New York City
in capitalization for its banks, and rivaled
the other Atlantic seaport communities in
the number of its banks.
During the antebellum years, Boston
banks also began to develop a reputation
as conservative and stable institutions that
maintained their bank notes at parity with
specie. As one Boston bank president
noted, “circulation based upon specie,
and loans upon strictly mercantile paper,
were two of the cardinal principles in the
directors’ system of banking.” The US
Constitution had made it illegal for states
to print their own money, but privatelyowned state banks could issue bank notes
that were convertible to specie.
While the four Boston banks in 1813 had
a substantial specie reserve — $4.5 million
in specie to $1.5 million in circulating bank
notes — it became apparent by the 1810s
that the rising number of local banks in
other parts of the country, even distant
places in New England, were of questionable solvency, particularly in times of economic downturn or depression. By 1824,

Rare example of a $3 note from the Union Bank in Boston, dated August 3, 1805.

www.MoAF.org  |  Summer 2015  |  FINANCIAL HISTORY  13