Financial History Issue 131 (Fall 2019) - Page 25

By Ramon Vasconcellos A mass gathering of unemployed New Yorkers swelled the ranks of Tompkins Square on November 6, 1857. Speakers rallied in support of Mayor Fernando Wood’s proposal for a considerable public works program, the adoption of which could mitigate the plight of the unem- ployed due to the recent national business downturn. From the square, a “disorderly, fierce, and noisy” crowd marched on Wall Street, one marcher stating that working- men should not starve while 20 million in specie (gold and silver coin) sat unused in the city’s banks. While the crowd did not cause any ruckus on Wall Street that afternoon, the city’s financial condition had worsened since the summer; Wall Street bankers had little appetite for lend- ing, allowing specie deposits to increase by 46.7% during August alone. Further, consumer deposits in the city’s banks had dwindled from $94.5 million to $75.8 mil- lion that summer. Exacerbating the credit crisis even more and contributing to a major correction on the Street, a substan- tial creditor and holding company in New York City, Ohio Life Insurance and Trust Company, collapsed on August 24, 1857. Ohio Life Insurance and Trust Com- pany, organized and incorporated in Cin- cinnati in 1834, functioned as a life insurer, trustee, mortgage holder and financial intermediary for Ohio banks operating on Wall Street. Its founders consisted of a “who’s who” in Ohio politics: for- mer US Senator Jacob Burnet of Ohio, US District Judge Benjamin Tappan and Ohio Supreme Court judge Alvin Peace, to name a few. In accordance with its charter, the firm had a total capitaliza- tion at the time of $2 million comprised of bonds and interest-bearing notes. The charter allowed the firm to establish branches without banking powers and required that profits be invested in federal, state, municipal and corporate securities. Ohio Life could also issue bills and prom- issory notes equal to twice the amount of Painting depicting the Panic of 1857, entitled “Wall Street, Half Past Two O’Clock, October 13, 1857,” by James H. Cafferty and Charles G. Rosenberg. funds deposited for less than a year, but greater than one half its paid-in-capital. Revocation of Ohio’s charter would result from the suspension of specie payment, or if it charged interest greater than 7% on transactions. Though such policies seemed prudent, the founders were often at odds with the Ohio Life trustees over lending practices. Furthermore, the company sometimes vio- lated its state charter. For example, during the 1830s, management ignored restric- tions on the non-extension of loans beyond maturity and, in violation of its charter, issued “accommodation” paper requiring no security deposit other than the bor- rower’s reputation for the purposes of land and commodity speculation. Even debtors obliged to short-term instruments might have their notes extended beyond 100 days. One particular founder and New York financier, Arthur Bronson, whose father had co-founded the New York Mercantile Bank with Alexander Hamilton, recog- nized the imprudence of such measures and resigned from the Board of Trustees in 1837. The trustees’ cavalier, throw caution to the wind attitude of fiscal management would only set the course of Ohio Life’s demise. The harbinger of the company’s doom on the eve of the Panic of 1857 would partially rest with its New York manager, Edwin G. Ludlow, an embezzler and to some extent, pawn, of the Ohio trustees, employed with the firm since 1842. Not long after opening in Cincinnati, the company established offices in New York City. Abstaining from insurance underwriting, Ohio Life’s New York offices operated primarily as depositors for bank funds. The branches served both as bank holding companies and for the purpose of attracting capital for western indus- tries, particularly railroads, which, by the early 1850s, required substantial amounts of credit for land purchases and track con- struction. For such purposes, bank drafts originating from loans undertaken by Ohio Life through the New York money markets were sold out West. In turn, New York banks served as Ohio Life’s creditors for both loans made directly to the company and for drafts sent by Western companies due for reimbursement. As described by one historian, Ohio Life acted more as a bank of function because it was “not a bank of issue” when it came to originating bills backed by specie. Day-to-day operations of the New York offices consisted of holding bills of exchange, accepting deposits, paying drafts and engaging in collections. Having general oversight of these tasks fell to the head cashier who also served as the Trans- fer Agent of Ohio. As the state’s agent, he followed the advice of both the company’s executives and state government officials regarding the proper investment selection of surplus funds. Unlike the contempo- rary duties of a manager supervising tell- ers (cashiers) employed by a bank in 2019, the head cashier of Ohio Life acted as the lead financial officer and manager of the New York branch offices. In February of 1855, Edwin Ludlow, the aforementioned pawn who would prove central to Ohio Life’s downfall, became head cashier. Before Ludlow’s tenure and sometimes purposeful malfeasance, Ohio Life’s trust- ees, as briefly described earlier, exposed the firm to fiscal mismanagement decades before the events of 1857. An example of this is the Panic of 1837. As opposed to foreclosing on delinquent non-performing loans resulting from the crisis, the trustees granted borrowers a two-year grace period on their obligations. Though presumably altruistic in light of the degree of economic dislocation caused by the slump, it was arguably fiscally unwise given that the firm had obligations due its creditors. Overdrafts, too, involving the New York operation prompted one financially savvy cashier, George Coe, to inform Ohio Life’s president that “your paper [used as collateral for call loans by the New York branch] is not of the available and No. 1 character that the banks here most seek.” Coe further expressed his concern about the suitability of railroad securities held by the home office, commenting “that railroad securities must, from excessive creation, by and by, meet the same fate of similar securities in England.” His alarm referenced a financial crisis inflicting England in 1847. Coe’s presence as head cashier until his resignation 1853 instilled a brief period of fiscal stability at Ohio Life; his successor, Charles Rockwell, dis- played similar talents. Yet cashiers like Coe and Rockwell would unfortunately prove anomalies, and a cash strapped state government in Ohio would only com- pound the company’s troubles. Periodic fiscal instability in Ohio dur- ing the 1830s and into the 1850s found the legislature adding to the tax burden of its businesses. Since Ohio Life’s inception,  |  Fall 2019  |  FINANCIAL HISTORY  23