Financial History Issue 128 (Winter 2019) | Page 31

issued notes used for currency. Merchants,
the general public and other banks com-
monly accepted these notes as payment
for goods and private debts. They would
later present them to the bank having
issued the note in exchange for “specie.”
After the War of 1812, financially sound
banks in Boston competed with rural insti-
tutions in the circulation of bank notes.
However, many banks outside of Bos-
ton proved fiscally unsound, often lacking
adequate specie reserves in support of
their notes. Sometimes the excess cur-
rency in circulation resulted in inflation,
an accidental but unfortunate occurrence.
In the hope of strengthening the position
of banks in the area and reducing the like-
lihood of economic instability in New Eng-
land, the Suffolk Bank implemented prac-
tices uncommon to most other banks. For
instance, it required deposits of non-inter-
est paying certificates and subjected banks
holding specie to unannounced, on the
spot redemption calls. Suffolk also, given
its monopoly status, stifled the growth of
competitors in the New England area.
The bank’s position as a pillar of sta-
bility within the New England economy
stemmed from its creation of the “Suffolk
System.” The “system,” developed in 1825,
functioned as a consortium of Massachu-
setts banks, led by Suffolk, which cleared
bank notes for the purpose of settling pay-
ments owed to banks who had advanced
gold and silver to their clients. Until then,
bank notes issued by depository institu-
tions outside of Boston (“country banks”)
were often so numerous that they some-
times posed a great deal of risk to city
banks when presented for clearance. The
larger the number of notes in circulation,
the less purchasing power they afforded—
leaving the clearing agent holding bank
paper of diminished value. Further, these
notes were often “discounted” in that they
were only accepted by clearing agents
below face value. Discounting protected
the clearing agents because, sometimes,
country banks would not pay clearing
agents the full (face) value of the notes.
Recognizing the risks associated with
redemption borne primarily by Boston’s
banks, Suffolk addressed a letter to the
managers of the city’s banks in 1824. The
memo cautioned that “…bills thus removed
from circulation are replaced by a worse
description of paper.” Furthermore, if
banks continued clearing out of town notes,
they “must be attended with some risk.”
By 1825, most of these banks under-
stood their individual risk exposure and
decided to join together under the “Suf-
folk System.” The agreement stipulated
that rural banks would have to redeem all
notes at par value, with the Suffolk Bank
and its members reserving the right to
discount based on risk of non-payment.
A rural institution could, however, forfeit
a redemption call if it held $2,000 on
deposit at the Suffolk Bank.
As support of Suffolk’s policies became
known, rural banks joined the system;
over time, the bank functioned as the
collection agent for banks spanning from
New York to Maine. Many of these institu-
tions became “correspondent members,”
as their clearing services were provided
under Suffolk. In addition, those banks
keeping all of their deposits with Suffolk
had the prerequisite balance requirement
for specie redemption waived. From its
inception in 1825, until it eventually suc-
cumbed to competition in note clearing
by 1858, the Suffolk System asserted a
monopoly in the clearing of notes and,
to some degree, accumulation of deposits
within the region.
In practice, the bank functioned very
much like a monopoly. The price or fee
charged to rural banks included network
services for correspondents. This encom-
passed 2.5–3% of their paid-in-capital
(funds in excess of a bank investors’ con-
tribution). Similar to a monopoly, this rate
more than offset the cost of Suffolk’s note
clearance expenditures while substantially
covering its marginal cost of operation—
the additional cost incurred for clearing
each note. Furthermore, those banks with
less than $100,000 in capital deposits were
required to maintain a $2,000 reserve and
keep a redemption account with Suffolk.
How might Suffolk have justified such
charges? Possibly the allowance for price
discrimination, or charging different
users various prices (a practice commonly
utilized by monopolies), could explain
the scheme. Boston’s banks collectively
had a total capital position estimated at
$18,180,000 in October of 1846, 58% of all
Massachusetts’s bank capital at the time.
Accordingly, their asset position might
have rationalized why Suffolk charged
higher fees to less adequately capitalized
banks. The demand for Suffolk’s clear-
ing services—given banks had no other
substitute clearing agent—may have also
been a factor.
Banks declining to join the system faced
threats and intimidation. The Worcester
Bank of Massachusetts refused to join
Suffolk and kept its deposits with the
New England Bank of Boston. Using its
monopoly power, Suffolk accumulated
over $38,000 in the bank’s notes—half
of its circulation—and demanded specie
redemption. Although the bank agreed to
Suffolk’s demands, it did not act promptly
enough to placate the Suffolk Bank. Suc-
cessfully, Suffolk’s agent had Worcester’s
property attached. Other critics opined
that Boston gained an unfair trade advan-
tage over the region due to the draw of
bank notes and specie. Still, proponents
of Suffolk emphasized that the flow of
notes to Boston was the effect of the city’s
growth, not the cause of it.
By the early 1830s the waning influ-
ence of the Second Bank of the United
States, as an alternative to Suffolk in note
redemption (somewhat self-inflicted by
the political jousting match engaged in
between its director and then President
Andrew Jackson), increased the volume
of redemptions handled by the bank. Cor-
respondent banks, too, began to apply
for more credit; Suffolk started limiting
overdrafts to $10,000, a conservative level
for the time.
By 1833, overdrawn accounts greater
than or equal to $16,000 required pay-
ment in specie by Monday, if not received
by Saturday. “On the spot” redemptions
where Suffolk agents would demand
immediate payment in specie also became
common. Describing the hegemony of
Suffolk over its members, The Bankers’
Magazine and State Financial Register
commented in August 1846: “A bank there
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