Banking Lessons from the Past

Carole E. Scott is the editor-in-chief of B>Quest and a Professor of Economics, Richards College of Business, University of West Georgia. Opinion pieces of this type are appropriate for this section of B>Quest. See the 1999 issue of B>Quest to see other types of articles suitable for this section of B>Quest.

In the antebellum period some people were opposed the establishment of banks because they thought that any good banks did would be outweighed by the bad they would do. The belief that banks would invariably issue depreciating currency accounted for much of the hostility towards them Critics also believed that, while a select few would enjoy the benefits banks provided, everybody would suffer from the harm they would cause. As a result, several states in the Northwest (today's Midwest) banned banks. The recognition by some of the benefits bank loans could provide the public, coupled with a fear of banks misusing their power to create money, led them to advocate that banking be a state monopoly or, as was true in Alabama, a near state monopoly.

Antebellum farmers' persistent complaints about banks lending to merchants, but refusing to lend to them are consistent with the expected effect the a price ceiling state usury laws established. Price ceilings create shortages, and when they are in financial markets, those who go without are high risk borrowers like farmers. Banks were also criticized for trying to "screw down" prices. If they did try to depress prices, it may have been in order to increase the real rate of return on their loans by increasing the purchasing power of the dollar. On the other hand, they were also often damned as engines of inflation! This was the result of them seeking more profits by making more loans; thereby increasing the money supply and raising prices.

Railroads were absent in the early antebellum period; so long distance trade was confined to rivers and the ocean. Early railroads' function was to connect ports to the interior; as a result, commercial activities in the antebellum period were highly concentrated in the nation's largest cities, all of which were ports. These cities were where the nation's largest banks were located. During this period New York became the nation's largest port and its financial capital. In New Orleans Louisiana had one of the nation's largest ports and the South's largest city. In Norfolk Virginia had a significant port. The largest cities in South Carolina and Georgia, Charleston, Savannah, and Augusta, were ports. (The Savannah River was navigable from Augusta to Savannah.) Mountainous areas found in most Southern states were unsuitable for the large-scale, slave agriculture that produced most of the South's wealth. Like North Carolina, Mississippi had only minor ports and no large city. Florida, which only had 140,000 people in 1860, 78,000 of whom were white, had very small Atlantic and Gulf ports.

Although at its core banking today is the same business it was in the antebellum period, back then banks issued paper money, and paper money was redeemable in specie (gold or silver). Since the Great Depression of the 1930s, the bank failure rate has been lower than it was in the antebellum period. In the antebellum period inflation was never a serious problem except during wartime, and after wars the price level declined. Occurring periodically were financial panics--what we today label as depressions or recessions--during which the price level declined. Another difference between commercial banks then and now is the existence of railroad banks. To facilitate the financing of railroads in a day when securities markets were very undeveloped, many states allowed railroads to engage in the banking business. These banks often failed because the railroad was either never built or operated at a loss. While today all our banks are privately owned, including even the Federal Reserve Banks, because bank stock was potentially a lucrative investment, some antebellum banks were entirely or partly state owned in hopes that this would enable the State to avoid collecting taxes. The governor of North Carolina reported in 1818 that his State owned more than one fifth of the capital stock of the banks in the State. [Flanagan, 111] Cities, too, invested in bank stock. In the late eighteenth and early nineteenth centuries the federal government was the part owner of the Bank of the United States.

The entire supply of paper money during this period consisted of banknotes issued by banks. Coins, on the other hand, were issued by the U.S. Treasury, their supply significantly augmented early in the period by foreign coins. Shortages of coin sometimes led banks and some other businesses to issue paper money in denominations of less than one dollar even though these small notes were illegal. Banknotes frequently circulated at a discount (less than par, that is, their face value). If it was known that a bank's financial condition had deteriorated, the discount on its banknotes would rise. The discount on a bank's notes typically rose dramatically before it failed. In 1809, North Carolina banknotes were reported to have been passed in Virginia at a 20 percent discount and to have frequently been utterly rejected by "Common Oyster Wenches and Fish Mongers". [Flanagan, 150]

Because many banknotes circulated outside the immediate vicinity of the banks that issued them, there was a need for a method of converting them into specie or deposits at local banks. To meet this need there were exchange and commission brokers located in the larger trade centers who would purchase notes issued by banks in other cities and towns. Often the discounts at which they purchased them were published in special publications like Van Court's Counterfeit Detector and Bank Note List and in newspapers. Because counterfeiting banknotes was not very difficult, and there were so many different banknotes in circulation that people could not be familiar with the appearance of them all, another function of these publications was to show drawings of genuine and counterfeit banknotes.

During financial panics all banks might, despite its illegality, suspend redemption, and the average discount on all banknotes would rise. The discount on the notes of all the banks in a state would also rise as a result of the state running a trade deficit with other states because of the excess supply of its notes in the hands of people in other states. Discounts on a bank's notes were typically smaller in the city in which the bank was located than in distant cities. In part this was because the cost of redeeming a bank's notes varied depending upon how far away the bank or a correspondent bank that would redeem its notes was from a holder of its notes. New York, through which many of the imports and exports of the South flowed, was a common site of a correspondent bank that would redeem a Southern bank's notes. [The term discount was also used to refer to the interest rates on loans collateralized by securities.] Banks whose notes could be depended upon to be reliably and easily redeemed sometimes circulated at better than par. Instead of presenting banknotes to the banks that would redeem them, holders could sell them to exchange and commission brokers located in the larger trade centers who performed the same function that foreign exchange dealers to today.

Newspaper reports and legislative reports make clear the fact that though the states had laws prohibiting banks from refusing to redeem their notes, this happened periodically. Laws against banks speculating in cotton were often broken, and insider loan abuse appears to have been common. Banks also often failed to submit required financial reports to the state. Evaluating banking during this period is difficult, too, because, even though Congress required the states to report on the condition of their banks to the U.S. Secretary of the Treasury, and reports were made from 1835 to 1840, thereafter the requirement was treated as a dead letter until the Polk administration. Reports were also not made during the Fillmore administration. [House Executive Document 82] The data that is available may not be trustworthy, as, reportedly, banks cleaned up their balance sheets prior to when they issued statements.

Southern banks were overwhelmingly agricultural lenders, either directly by lending to planters, or indirectly by lending to those who supplied them. The niche they filled was shaped in large part by the fact that the South ran a substantial foreign export surplus, while the North ran a deficit. Early in the nineteenth century cotton became the nation's chief export, and a cotton-based credit cycle began. Each year with the coming to market of cotton in Southern ports in October, merchants shipping cotton drew bills of exchange (orders drawn on buyers by sellers to pay in the future) on the foreign and Northern purchasers of the cotton. These bills of exchange were then sold to banks, and the funds thus obtained were used to pay the Southern planters who grew the cotton. The planters, in turn, used these funds to pay the local merchants who, on a credit basis, had provided them with the supplies they needed. These Southern merchants used these funds to pay the Northern merchants from whom they had purchased their inventories. The Northern merchants then used these funds to acquire inventories from abroad. This process caused banking to be very seasonal, and banks' prosperity, particularly in the South, was dependent on the price of cotton per bale and the size of the crop. Because both varied significantly, the cotton market attracted many speculators. Possibility it was the combination of state usury laws that limited what banks could charge borrowers and the substantial potential profit from speculating in cotton led some bankers to break their state's law against speculating in cotton with bank funds.

The banking systems of Georgia and that of its neighbor, South Carolina, illustrate the fact that there were significant differences between the quality of states' banking systems. Unlike the performance of their banks, there was little difference in the banking legislation in Georgia and South Carolina other than Georgia's free banking law, and this was not the cause of the difference in the performance of their banking systems because Georgia only had two, short lived free banks.

Georgia's antebellum banking system has frequently been criticized for having an excessive amount of mismanagement and fraud and having failed to adequately finance industry. However, in several publications in the 1980s historian Larry Schweikart presented a less critical view than had previous students of Georgia banking. Although Schweikart failed to compare the discount rates on Georgia and South Carolina banknotes, discounts on Georgia and South Carolina banknotes published in newspapers and banknote reporters and Congressional documents support his contention that South Carolina's banking system was superior to Georgia's. On average, discounts on Georgia banknotes were consistently higher than on South Carolina banknotes. Frequently the average discount on Georgia notes was substantially higher, and never from 1839 to 1858 did the average discount on Georgia banknotes shown in Van Court's fall below South Carolina's.

The State of Georgia purchased some of the stock in the first four commercial banks it chartered. Subsequently, it established a state-owned commercial bank, the Central Bank, which served as its fiscal agent. Unlike today's Federal Reserve Banks, this bank competed with other banks. The Central Bank, which was modeled on South Carolina's state-owned bank, the Bank of the State of South Carolina (BSSC) was established to generate revenues for the State and provide loans other banks would not provide to farmers in the State's newer, interior (up country) counties. As is made clear by periodic complaints in the press that cotton was in the fields, but there was a lack of money to move it to market, by the 1830s banks had become an essential service in Georgia. Although Georgia's banking system compared, in terms of the soundness of its banknotes, well with the newer states in the South, it did not compare well with other Eastern seaboard states in the South. The most sound banknotes issued in the South were those issued by South Carolina banks.

Georgia's bank closure rate greatly exceeded South Carolina's extraordinarily low closure rate. (From 1839 to 1854, Van Court's listed the banknotes of 13 Georgia banks as being worthless.) Georgia differed from South Carolina, too, in that it had a number of wildcat banks and an unsuccessful state-owned bank. The Bank of Charleston was one of the nation's largest and most sound banks. Georgia had no comparable bank. It is, therefore, not surprising that historians who have studied antebellum banking have considered South Carolina's banking system to be superior to Georgia's.

In 1839 Georgia and New York became the first two states to pass free banking laws. Free banking had little meaning in Georgia because only two, short-lived free banks were ever chartered. New York's free banking law had a major impact on its banking system. In Georgia free banking coexisted with chartering by the State's legislature. The objective of free banking laws was to take politics out of bank chartering, protect depositors, and limit currency creation. In the case of free banks the state held bonds and mortgages belonging to these banks that it could liquidate if they failed to redeem their banknotes. The amount of banknotes they could circulate was limited by the value of the bonds and mortgages they deposited with the state. Other Georgia banks' circulation was limited by the amount of their equity capital, which was supposed to have been provided them in the form of specie. Their liabilities, excluding deposits, were limited to three times the amount of their capital.

Georgia was probably best known in this period for its wildcat banks. Wildcat banks were banks that were primarily engaged, not in serving the local market, but in providing currency in distant states where, otherwise, there would have been too little money to meet the needs of trade. So it is not surprising that there were many reports of Georgia banknotes circulating in neighboring and distant states. In its July 10, 1858 issue, for example, the Chronicle and Sentinel (Augusta, Georgia) printed a letter from the cashier of the wildcat Exchange Bank of Griffin in which he noted that the major part of his bank's business was done at its agency in Memphis, Tennessee.

George Smith, Wildcat Banker

George Smith's career as a Georgia banker suggests that wildcat banks may have been located in the backwoods, not so much, as it has often been claimed, because it made their banknotes harder to redeem, but because accepting them was the only way banks could be attracted to Georgia's backwoods. Smith first entered the American banking business in the old Northwest with his own money and funds he raised in Scotland. [Redlich, 62-63] In 1853, he purchased a controlling interest in the Bank of Atlanta, an interior (up country) town that was small even by the standards of that day. Two years later he added the Interior Bank of Griffin to his banking chain.

The State attempted to ensure that a bank had many owners scattered throughout the State, but it exempted the Atlanta Bank and some others from this requirement because it could not be met, and this is how Smith gained control of this bank. (The exemption in the case of the Atlanta Bank was due to the fact that after eight months not a share of its stock had been sold.) Much of Smith's Georgia banks' currency was sent North to fill a void caused by Wisconsin's prohibition against any business issuing currency and Illinois tying the amount of banknotes a bank could issue to the amount of bonds deposited with the state. [Knox, 740] Smith's plan to control finance in the Illinois-Wisconsin area was fought by an alliance of banks in this region that collected Smith's banknotes and took them to Georgia for redemption. Some banks were forced into this alliance by being threatened with a run unless they cooperated. Smith retaliated by threatening participating banks with ruin. [Gara, 385]

According to the Chronicle and Sentinel, on December 14, 1853 the ratio of specie (gold) to circulation (banknotes) and deposits for the Atlanta Bank was 23.2, and its ratio of capital (owners' investment) to circulation plus deposits was 61.9. For all Georgia banks according to data gathered by the U.S. Secretary of the Treasury in 1876, these ratios were, respectively, 24.7 and 65.2. But for all Georgia banks circulation was only 2.56 times deposits, while the Atlanta Bank's was 619.3 times deposits.

Like other wildcat banks, Smith's bank was disliked by many Georgians. Georgia Whig Congressman and future vice president of the Confederacy, Alexander H. Stephens, for example, wrote a Midwesterner that the Atlanta Bank was a "d--d swindling concern and ought to be burnt up--that is regarded with universal distrust and suspicion in Geo. and that if a run shd [sic] be made upon it would have to go by the board." [Heath, 390] Complaints about the Atlanta Bank caused Georgia's legislature to launch an investigation. It found nothing to substantiate the public's distrust and noted that the bank was reported to redeem its banknotes with a promptness unsurpassed by any other bank.

In his book, Banking in the American South from the Age of Jackson to Reconstruction, Schweikart contends that in the antebellum period the performance of the banking systems of the states he refers to as the Old South (Georgia, Louisiana, North Carolina, South Carolina, and Virginia) was superior to those of the states of the New South (Alabama, Arkansas, Florida, Mississippi, and Tennessee). Schweikart attributes the superiority of the banking systems in the Old South to their lesser corruption; greater commercial orientation; better regulation; and the fact that they did not attempt to make banking a state monopoly. Attempting to make banking a state monopoly was harmful, he believes, because it was anti-competitive and fostered corruption.

There is reason to believe that economic factors were more important and political factors less important than Schweikart believed in accounting for differences in the performance of different states' banking systems. Schweikart may have underestimated the importance of economic factors because he studied political entities, states, rather than economic entities. This is inappropriate because, for example, economically the typical county in North Alabama was much more like those of East Tennessee and North Georgia than the black belt counties of Middle and South Alabama. Louisiana, too, is an excellent example of the fact that political boundaries did not coincide with either economic or social boundaries. Even Schweikart acknowledges that there was a significant difference between the performance of banks in the coastal (low country) and interior (up country) regions of Louisiana. Although he classes Louisiana as an Old South state, it could, he says, readily be divided into a New South North and an Old South but to do so, he claims without explanation, would be ridiculous. Yet, although political and legal differences could conceivably explain differences between the performance of states' banking systems, how can they explain the significant variances in the performance of banks in different sections of a state?

In his dissertation, Banking in the Integration of Antebellum American Financial Markets, 1815-1859, Howard Nelson Bodenhorn says that Schweikart's portrayal of antebellum banking is typical. He observes that "...the titles of the books written on the history of antebellum banking demonstrate the preponderance of the political-legal interpretation of early banking." [Bodenhorn, 26]

The typical banking market in Schweikart's New South states of Alabama, Arkansas, Mississippi, and Tennessee bore a close resemblance to those of Georgia's up country. As was true throughout the region, the performance of Georgia's up country banks was decidedly inferior to that of its low country banks. The performance of Georgia's banking system was inferior to that of South Carolina, whose up country was relatively smaller and more developed than was Georgia's. Like the New South states relative to the Old South states, Georgia had a much less mature economy than did South Carolina.

Presumably Schweikart does not consider bank failures and fraud in antebellum Georgia to be very significant, for he remarks only very briefly on a few cases. Despite the fact that he views variances in the banking policies of state governments as being the cause of differences in the performance of their banking systems, he fails to comment on the fact that Georgia was--presumably due to lax charter provisions--the home of several wildcat banks. Late in the antebellum period a significant number of Georgia's banks appear to have been wildcats. In its August 4, 1858 issue, the Chronicle and Sentinel branded as wildcats ten of Georgia's 36 banks. South Carolina had no wildcats.

The number of banks in the various states differed for a variety of reasons. Obviously, total population and wealth played a role in determining how many banks a state had. Through much of the antebellum period there was a dramatic difference between the number of banks in Georgia and North Carolina. It was not until 1848 that there was at any one time more than three banks in North Carolina. [Flanagan, 234] Schweikart measured competition by the number of banks a state had. However, because much of the wildcat banks' business was out of state, the number of banks in Georgia would indicate to him that there was more competition than there actually was. On the other hand, because Georgia banks were active in Alabama, the number of banks in Alabama makes it appear there was less competition than there was. Also, one would expect competition to be greater between independent entities, and this was not true of some banks because banks often owned stock in other banks both in their home state and in other states.

The performance of banks in Charleston, whose economy was vastly more like New Orleans' than that of. say, North Alabama, was very much more like that of New Orleans' banks than North Alabama's. The low country of South Carolina and Louisiana were much more developed economically than was Alabama's up country. However, South Carolina was not anywhere near as bifurcated as was Louisiana either economically or culturally. The primary cause of the economic bifurcation of Louisiana was the long lag between the settlement of its low country and its up country, while its cultural bifurcation was primarily the result of the settlement of the North by Anglos and the South by people from France and Spain.

The commercial agriculture that dominated those parts of the South with access to cheap transportation--first by river and, later, by rail--shipped the majority of its output that left the region through ports. Even after the introduction of railroads, much of the trade with the North moved through low country port cities like Charleston and New Orleans. An increasingly large share of the South's cotton moved to Europe through New York, where cotton became its largest export. Banks were a necessary component of and were readily supported by port cities' commercial activities. Because they were the most desirable banking markets, these cities were where the first banks were located.

Although banks shape as well as are shaped by the markets they serve, up country banks could not overcome the handicap of being located far away from the ocean or a navigable river. When new territory, whether it be a state or a section of a state, was first settled, banks elsewhere were the initial sources of bank services. As it grew, banks and mercantile enterprises became economically viable and were established there. The relative poverty of mountainous East Tennessee was primarily due to its geography, which made it unsuitable for plantation agriculture. The mountainous areas of all the Old South states were poor relative to the parts of these states where plantation agriculture existed.

Whites financed, borrowed from, and ran the South's banks. Although in 1820 Georgia's population was only 68 percent of South Carolina's, by 1860 it was 50 percent greater. In 1860 whites comprised only 41 percent of South Carolina's population, while Georgia's whites accounted for 56 percent of its population. Therefore, by the end of the antebellum period Georgia's bank-using population was double the size of South Carolina's. Both Virginia and Tennessee had slightly more people than did Georgia and were much "whiter". The other Southern states had smaller populations than did Georgia.

In Georgia this figure was only $22.90. White South Carolinians were wealthier than white Georgians. In 1856, the value of property per white in Georgia was $954. In South Carolina it was $1,050. So, it is not surprising that in South Carolina on a per white basis, circulation and deposits were $53.70. (Schweikart computes loans plus circulation per capita. Analytically this is meaningless because banknotes are bank liabilities, a large and varying proportion of which are created in making loans, and loans are bank assets.)

A factor which may have played a role in making South Carolina's banking system more successful than that most of the nation's other states was the fact that there was a greater concentration of South Carolina's banking assets in the low country. Throughout the antebellum period the banking business in South Carolina was concentrated in Charleston. Although less concentrated in the low country than was true of South Carolina, Georgia's banking assets were also concentrated in the older and more commercialized low country.

In both the Old and the New South bank closures due to failure, fraud, or other causes were most common in the up country. In Georgia and South Carolina the up country consisted of the Piedmont Plateau and the Appalachian Mountains. Georgia's up country was absolutely and relatively larger than was South Carolina's. In both these states slavery was much less common in the up country than in the wealthier low country. Roughly one half of South Carolina's up country farmers owned slaves, while in Georgia less than 30 percent did. [Ford, 45] Fraud, bad luck, or mismanagement could lead to the insolvency of a bank. For various other reasons the owners of a bank might decide to close it. The owner of one of Georgia's free banks said that he closed his bank because he could make more money in planting.

Because banks not discovered by previous students of Georgia banking were relatively small and short-lived, even if all the banks that actually existed are considered, it is likely that the latter part of the following observation would not be much off the mark: "...The survivors [in Georgia] of the Great Depression [of 1837-1843] finally numbered thirteen banks and nine branches of the total of twenty-four banks and sixteen branches. The solvent banks, however, represented 80 per cent of the commercial banking capital and had conducted approximately the same proportion of the banking business of the state prior to the depression." [Heath, 210]

There were21 banks in Georgia in 1837. By 1854 thirteen of them had failed. Among these thirteen was every up country bank. All the banks that survived were located in the low country cities of Augusta and Savannah. In contrast, Van Court's Counterfeit Detector and Bank Note List over this period identified only two "frauds, broken, or closed banks" in each of the other Old South states.

Because the amount of specie a bank held served as a limiting factor on the amount of deposits and circulation it could legally and safely have, the relative size of its specie holdings is important. Banknotes were issued in exchange for specie, an exchange that did not affect the money supply, and to borrowers in exchange for their promissory notes, which produced interest earnings and increased the size of the money supply. In the depression year of 1840, when specie holdings were of particular importance because bank runs were much more common during financial crises, the specie holdings of Georgia and South Carolina banks were disproportionately located in the vaults of Savannah and Charleston banks. In October of that year, South Carolina's "city banks" (Charleston) held nearly three times as much specie as did the State's "country banks." The largest bank in the State, the Bank of Charleston, had 18.4 percent of the South Carolina banking system's specie. [Charleston Mercury, December 5, 1840]

In the antebellum period some of a bank's loans were financed, not with deposit liabilities, but with banknotes (paper money). Banknotes, unlike deposits, had no interest cost or maturity date, but they were redeemable by their holders on demand. Since banks' holdings of gold were only a fraction of the amount of their outstanding banknotes, there was a risk that the holders of banknotes would demand more specie than banks had. To reduce the possibility of this happening, banks could increase the ratio of their holdings of specie to banknotes, but this would reduce profits.

Banks are in the business of borrowing (accepting deposits) short and lending longer. The greater is the difference between the rate of turnover of deposits and the rate at which their banknotes are redeemed and the average maturity of their loans, the greater is the risk they take. As is well known to financial economists, a financially sound bank is one with a sufficiently high ratio of capital stock (money invested by owners) to risk assets (loans and securities) and a sufficiently small difference between the faster rate of turnover of its liabilities than the rate of turnover of its assets. Conditions in the New South and the Old South's up country were such that their banking systems could not obtain as high a ratio of capital to a given level of risk assets or as small a gap between the rate of turnover of assets and liabilities as, respectively, could those in the Old South or its low country. This was due to the lesser amount of bank capital and the relatively higher demand for long term loans in the New South states and in the up country of the Old South.

Urban banking markets like those of Charleston and New Orleans provided banks with a higher volume of business and more of the type of loans most suitable for a deposit-type institution: short-term, self-liquidating loans, than did the rural markets that predominated in the antebellum South, but more so the New South states than the Old South states. This is why Schweikart observed a correlation between the performance of a state's banking system and its commercial orientation.

Bodenhorn observed that it was "most difficult" for country banks to hew to the real bills doctrine because the hinterlands lacked a large supply of good commercial paper. As a result, they had to make longer term loans." [Bodenhorn, 82] The real bills doctrine he refers to postulates that a bank can maintain an adequate degree of liquidity if it will confine itself to making short-term, self-liquidating loans. Although it is not true that this practice will guarantee adequate liquidity, this is what people believed in the antebellum period, and bankers were encouraged and pressured to follow the real bills doctrine. It is, however, true that because banks are subject to possible demands for cash vastly exceeding the amount of cash on hand, they must hold a substantial amount of highly liquid assets like short-term, self-liquidating loans. A bank loan to a merchant for the purchase of retail inventories is a self-liquidating loan because the sale of the inventories purchased with the borrowed money should soon provide the money needed to repay the loan. In contrast, a loan to a farmer to buy land is repaid by the sale over many years of the crops grown on it.

The least satisfactory market for a commercial bank was the rural, frontier market. This is due to the fact that the multi-year loans to develop farmland in high demand in this market is both much less liquid and more likely to be defaulted than are the short term loans in high demand by merchants in a major port city. If a real estate loan is defaulted, the bank may find that the land serving as collateral on the loan can no longer be sold for enough money to repay the loan. The land may have been bought when land prices were rising on a speculative basis-- something that often happened on the frontier-- but has to be sold by the bank after the speculative boom has collapsed.

Impacting significantly on the relative soundness of the banking systems of Georgia and South Carolina was the fact that relatively risky real estate lending accounted for more bank lending in Georgia than in South Carolina. In 1836, Georgia banks invested $309,691 in real estate loans, while South Carolina banks invested only $148,470. By 1860, real estate lending by Georgia banks had risen to $8,424,463. In South Carolina it had only risen to $681, 245. Considering that shortly after the Revolutionary War large numbers of people began emigrating from South Carolina to Georgia in search of land, this difference in the importance of real estate lending is not surprising. (Like South Carolina after the Revolutionary War, North Carolina experienced substantial out migration

A bank's losses reduce its capital. If its capital is small relative to potential losses, a bank is not sound. This is because, when the economy turns sour, many potential losses will become actual losses, and the relatively smaller is a bank's capital, the more likely it is that it will be exhausted, causing the bank to fail. There was much less bank capital in the New South than the Old South, and there was much less bank capital in the up country than in the low country. Bank capital was much less scarce in the much older up country of South Carolina than the up country of Georgia or the even younger up country of Alabama. Less capital was available in the New South states and in the up country of the Old South states because they were poorer areas.

In his book, A History of Banking in the United States, John Jay Knox made estimates of banks' loans and discounts, specie, capital stock, circulation, and deposits for each of the Southern states. He estimated that capital stock in Georgia totaled $11,508,717 in 1856. In South Carolina in 1855 this figure was $16,603,253. These figures substantially exceed Alabama's $2,100,000 in 1854; Arkansas' $3,002,706 in 1845; Tennessee's $6,599,872 in 1854; Florida's $425,000 in 1861; and Mississippi's $1,110,000 in 1858. (Data for the same year is not available.) The population of these states did not differ in proportion to these differences in bank capital. Tennessee, for example, whose population slightly exceeded Georgia's and was much greater than South Carolina's, had on a per capita basis substantially less banking resources than did Georgia and South Carolina.

Just how scarce capital was in Alabama was made clear by John Jay Knox, who believed that when the first effort was made to establish the Bank of the State of Alabama, two-fifths of whose capital was to be provided by the State, there probably did not exist in the State of Alabama the $500,000 in gold and silver coins that the law required be subscribed. At the time this unsuccessful effort was made to establish this bank, Alabama had only about 85,000 white inhabitants.

In 1842, the amount of banking capital in Virginia exceeded $12 million. North Carolina's was just over three million. This meant, said the President of the Bank of the State of North Carolina that the operations of Virginia's banks, "to a very great extent, control the actions of the Banks of this State." [Cameron, 5] In the late 1850s North Carolina's banking capital was less than one-third of that of South Carolina. [Caldwell, 5]

Using Tennessee's white population in 1850, capital stock per person was less than $9. Computed using 1850 white population, Alabama's was less than $5; Mississippi's less than $4; South Carolina's more than $60; and Georgia's over $22. If blacks are included, South Carolina bank capital stock per person was over $24. Banking statistics gathered in 1876 by the U.S. Comptroller of the Currency indicated that in 1860 bank capital per white person in South Carolina was $51.40. In Georgia it was only $28.20. (At that time the head of Georgia's Western & Atlantic Railroad earned $5,000 a year.) Based on total population, in Massachusetts it was $54.00. In New York it was $28.70.

In Georgia bank size, location, age, and survival were closely correlated. Most small banks were located in the less densely populated and more recently settled up country. Except for the Central Bank, located in Milledgeville, the up country capital of Georgia, the largest banks were located in the largest cities. (South Carolina's capital, Columbia, was also an up country city.) The only old bank in Georgia to fail to survive was a small bank, the Bank of Darien. Darien was a small Georgia port. This bank was taken over by the State after its private shareholders forfeited their interest in it. Politically motivated excesses of the Central Bank and Whig opposition to it doomed it to a short, financially troubled existence. The Bank of the State of South Carolina experienced a like, but not mortal, problem. Its survival may have been due to the fact that the Whigs were so weak in South Carolina.

In comparing Georgia banks with South Carolina banks, and in comparing Georgia's up country banks with its low country banks, size matters. Despite South Carolina's smaller population, on the average its banks were larger than Georgia's. The U.S. Secretary of the Treasury's report to the 25th Congress (1837-1838) indicates that the average South Carolina bank had $882,980 in circulation and deposits, while the average Georgia bank had $687,648. Average capital (owners equity) per bank in South Carolina was $883,047, while Georgia's was $714,927. Because the average South Carolina bank loaned out more money than did the average Georgia bank, South Carolina banks' loan portfolios could have been more diversified and, therefore, less risky than Georgia's. The larger banks in both states, which were the older banks, had more branches than smaller banks. Branches should automatically diversify a bank's loan portfolio. The older, larger banks were located in the largest cities.

Georgia's Problem Banks

Unlike its wildcat banks, most Georgia banks appear to have been predominantly locally owned. Available information on the men who owned and managed them supports Bodenhorn's contention that "the characteristic of the early banks that has been largely overlooked by generations of historians is the personal, familial nature of the institution. They were not the large and impersonal abstract intermediary between investors and savers characteristic of twentieth-century theory." [Lamoreaux, 46] Complaints about failed banks indicate that, like the banks Naomi Lamoreaux studied in New England, loans made by Georgia's small up country banks appear to often have been to insiders.

In addition to incorporated commercial banks, Georgia was home to a few savings banks, some of which--although they were not supposed to--issued paper money, and some lightly regulated private (unincorporated) banks. At one time the Southern Recorder reported that the Mechanic's Savings Bank in Savannah had a circulation of $406,071, a larger circulation than 16 out of 24 commercial banks had! According to an 1861 issue of Bankers Magazine, there were then 33 private banks in Georgia, 15 of which were correspondents of the Bank of the Republic, a New York bank controlled by Georgia banker Gazaway Bugg Lamar. Schweikart does not consider these institutions in his studies. Only two private bankers were listed in South Carolina. Neither of them was a correspondent of the Bank of the Republic.

The BSSC and the Central Bank were potential honey pots that attracted corrupt politicians, some of which every state had. On the other hand, because providing political favors could reap a bank substantial benefits, privately-owned banks may also have made some politically-motivated loans, and certainly some of them made loans much more beneficial for insiders' other business interests than for the bank.

Georgia's first two bank failures, which took place in 1832, were caused by mismanagement rather than financial crisis. The first to fail was the Bank of Macon. (Macon is an up country city.) Its demise illustrates the often ineffective bank regulation in this period. Less than two years before the Bank of Macon and the other bank failed the Bank of Macon had been praised in a resolution passed by the Georgia General Assembly, which said that it had conducted its affairs in a manner deserving of approbation and the confidence of the public. [Gowan, 36] After it failed a legislative committee found that fraudulent statements had been made by the Bank of Macon to the Governor. The committee also found that its charter had been violated by the Bank making a man who was not a stockholder its president and by allowing two directors and the cashier to make loans, rather than the bank's nine directors. Frequently the cashier made loans on his own authority. It violated its charter, too, by lending too much to a single individual or partnership. Some of these loans went to its directors.

Before it failed, the Bank of Macon's board of directors ceased to exist, but a large number of loans were made after this took place. Its bookkeeping was so poor that the legislative committee had to rely on the printer who printed its banknotes in order to determine the size of its circulation. Ultimately all its capital was withdrawn, and it operated without capital. [Journal, Georgia House 1832] It failed shortly after it was purchased by New York interests. One of its officers was shot and killed over his not atypical refusal to turn over its books. A jury set his killer free. [Messenger and Bibb County Court records]

Nearly a decade after the failure of the Bank of Macon, similar problems with the Bank of the State of Georgia's branch in Macon were exposed by a stockholders' committee. It reported that the situation was deplorable, and that the Bank "must necessarily suffer heavy losses" from bad debts and fraud by the branch's officers, who had appropriated its funds "to their own mad and reckless speculations." The parent bank in Savannah, too, had problems. Its officers had "occasionally and under peculiar circumstances received discounts" [loans] that violated the Bank's bylaws."[Southern Recorder, May 10, 1842]

The heavy concentration of bank closings and failures in the New-South-like Georgia up country; the fruitless transfer of the Bank of Brunswick, the Bank of Hawkinsville, and the Bank of St. Marys to larger towns; and the failure of the State of Georgia to be able to rescue a bank located in Darien, a very small port city, suggests that economic factors peculiar to small banking markets accounted for the high failure rate of Georgia banks. (The Bank of Darien was located in a small port city that was expected to become a major port, but it didn't. In a July 22, 1841 article in the Chronicle and Sentinel it was reported that by then four-fifths of its stock was owned by the state and the rest by its cashier. Claimed was that it had been rechartered only because some legislators were made officials of the bank. Unable to salvage it, the State closed it down.)

Georgia wasn't the only Old South state where banks played fast and loose with regulations. According to William L. Royall, in antebellun Virginia banking regulations were often ignored. He notes that while Virginia law allowed each bank to issue five dollars of notes for each dollar of specie it held, Virginia's banks "entirely ignored" this restriction. [Royall, 43]

The formation of a state monopoly bank was, theoretically, not ill advised. In a message printed on November 8, 1841 in The Charleston Courier, Charles McDonald, Georgia's governor, explained why a monopoly bank made sense. He proposed as a cure for the widely recognized weakness of the existing banking system a single state bank with branches throughout the state. Besides providing the state with the convenience of a uniform currency, this would mean there would be "but little probability that those who embark in banking with the view of fabricating money for their own use could bring the institution under their control so as to execute their purpose."

If through a state-owned bank a state is going to make long-term, agricultural loans--a type of lending essential for the development of Georgia in its early years--it makes financial sense for this bank to be a monopoly so that other banks cannot deprive it of commercial loans that it needs in order to be adequately liquid. Because states wanted the dividends they earned on their investments in bank stock to eliminate the need for taxes, a state monopoly bank makes sense because monopolizing a market makes it possible to earn a higher profit. However, there is a conflict between earning a profit and making loans on the "democratic" basis that was, for political reasons, the policy of the state-owned banks.

South Carolina's banking system probably benefited from the fact that the Bank of the State of South Carolina imposed some restraint on other banks up until the end of the antebellum period. Georgia's state owned Central Bank role shrank before it was liquidated in the1840s. The BSSC's survival and less troubled history than Georgia's Central Bank seems to have at least in part been due to the fact that the Democratic Party dominated South Carolina completely, while in Georgia this party experienced spirited competition from the Whig Party, which attacked the Central Bank as a tool of the Democrats.

Alabama Governor Israel Pickens, during whose administration the Bank of the State of Alabama was established, "disposed of the possibility of additional private banks in the state by pointing out that the supply of available [shares of capital] stock in private banks was far in excess of demand. All of the existing private banks had unfilled subscriptions. The people did not have the money." Pickens said "That the demand is already supplied. The failure to subscribe for authorized capital stock in the existing banks in the State is evidence of want of disposable capital. What capacity there was in the state to subscribe," he observed, "was by those having access to the vaults of existing banks and, if this was correct, the experiment of a charter and opening of books for individual subscription would result no otherwise than the establishment of a new bank owned and governed by one or more of the existing ones." [Brantley, 95] What he described later came to be called the pyramiding of capital.

Financed entirely by the State, the Bank of the State of Alabama was finally established in 1823. From 1826 to 1836 no direct taxes were levied in Alabama. However, this gain was substantially offset by the eventual losses of this Bank. Like Georgia's State-owned Central Bank and South Carolina's state-owned Bank of the State of South Carolina, the Bank of the State of Alabama was required to distribute its loans throughout the state, and some loans were made for political reasons. Just as was true in Georgia, after the Panic of 1837 claims of mismanagement, fraud, and the use of the state bank for political gain led to a legislative investigation that condemned the way the state bank had been operated. Both Georgia's Central Bank and the Bank of the State of Alabama were liquidated in the 1840s. There was no political gain for the opponents of the political party that controlled Georgia's Central Bank and the one that controlled the Bank of the State of Alabama to claim that losses were due to the depression of the late 1830s and early 1840s that caused a great many privately-owned banks to fail. To claim, instead, that their dismal condition was due to corruption would, on the other hand, provide political gain.

The BSSC was profitable even during the Depression. Its superior performance compared to other state banks was probably due to the fact that the average local banking market in South Carolina was superior to those in Alabama and Georgia. Because South Carolina was a one-party (Democratic) autocracy, the BSSC was not subject to as strong partisan attacks as were the Central Bank and the Bank of the State of Alabama. However, it, too, was subject to complaints about corruption. (A Whig never carried a presidential or congressional election in South Carolina in the antebellum period. This was not true of Georgia.)

The antebellum railroad banks epitomize the main thing that was wrong with antebellum banking. Despite the fact that Georgia's oldest surviving bank is one of them does not disprove this contention. It is simply not prudent to finance very long term projects, particularly highly risky ones like building a railroad into territory still in the process of being settled, with liabilities payable on demand like banknotes or checking deposits or even savings deposits. This is why the banks that survived for very long were the ones whose market provided the kinds of loans appropriate for a commercial bank. Other banks might survive in boom times, but they could not survive when the economy went bust. The inappropriate financing was the result of the fact that it was not feasible to acquire the desired amount of long-term financing on an appropriate basis. (It was not until after the Civil War that railroads could readily acquire funds by issuing long term bonds.) People who were not listened to enough in the antebellum period correctly observed that commercial lending was the type of lending appropriate for a bank of issue (a money-creating bank).

The banking systems of the Old and the New South were not the products of logic. This was because politics is the art of compromise. The result is not always optimal and was not in this case. In creating their state's banking system legislatures compromised between diametrically opposing views. One of the reasons why South Carolina's banking system performed better than those of other Southern states may have been because it was a one-party autocracy. As a result, is government may have had to make fewer compromises in designing its banking system, and its banks were subject to less effective partisan attacks. Playing a role in the relative success of its banking system was the fact that it was an old state settled in the seventeenth century; had a major port; was prosperous; had no frontier communities; and one city, Charleston, dominated the State economically, politically, and socially. (Relative to the rest of the South, since 1865 South Carolina has never done anywhere near so well.)

Bank regulation in the antebellum period seems to have ranged from bad to worse. In light of the widespread ownership of bank stock by government, it is surprising how poor government oversight was. Because no state had any thing close to a set of banking laws distinctively different from those of any other state, and the same kinds of abuses were experienced everywhere, it is difficult to give a great deal credit to any state's government for the above average performance of its state's banking system. More reasonable is to attribute a state's poor performance in part to the particularly inappropriate actions of its government. Accounts of various antebellum banks indicates that inappropriate actions by banks' managers was widespread. An important aspect of this was "sweetheart" deals for insiders. Better regulation would only have been a palliative. More competition might even have made the situation worse, as competition between banks in this period seems to have often consisted of causing an excessive amount of a competing bank's notes to be redeemed.

In 1843, discounts on Georgia banknotes appearing in Van Court's Counterfeit Detector and Bank Note List ranged from 2 percent to 60 percent. The average discount was 6.88 percent. All South Carolina banknotes traded at a 1.5 percent discount. In 1858, Georgia's range was 2.25 percent to 10.0 percent. South Carolina banknotes all traded at 2.25 percent. Van Court's did not provide discounts for banks in extremely poor condition. Many more Georgia than South Carolina banks fell into this class. Other banknote reporters and newspapers in both states also reported larger discounts on Georgia notes.

Augusta's Georgia Railroad and Banking Company (later known as the Georgia Railroad Bank & Trust Company) was chartered in 1833. Late in the twentieth century it was purchased by First Union of North Carolina. A well respected Georgia institution, when it was sold its president said that "The old Georgia Railroad Bank had connotations almost of a religious organization." [Pogue, 131] It is significant that the Georgia Railroad and Banking Company was located in a part of the state where commercial loans were in high demand, and that the railroad it built, but later disposed of, was a success.

Anonymous, "The Panic and Financial Crisis of 1857," Hunt's Merchant Magazine (December 1857).

Bonner, James C. and Lucian E. Roberts, Studies in Georgia History and Government (1940).

Bodenhorn, Howard Nelson, Banking and the Integration of Antebellum American Financial markets, 1815-1859 (dissertation) Rutgers University (1990).

Cameron, Duncan, "Communications," North Carolina Legislative Documents, 1842-43.

Caldwell, D. F., "Minority Report," Documents of North Carolina, Session 1856-57.

Clark, W. A., The History of the Banking Institutions Organized in South Carolina Prior to 1860 (1922).

Cooper, William J., Jr., Liberty and Slavery, Southern Politics to 1860 (1983).

Dillistin, William H., Bank Note Reporters and Counterfeit Detectors, 1826-1866 (1949).

Engerman, Stanley L., "The Effects of Slavery Upon the Southern Economy: A Review of the Recent Debate," Explorations in Entrepreneurial History (Winter 1967).

Ershkowitz. Herbert and William G. Shade, "Consensus or Conflict, Political Behavior in the State Legislatures During the Jacksonian Era," Journal of American History (December 1971).

Flanagan, Beecher, A History of State Banking in North Carolina to 1860 (dissertation) George Peabody College for Teachers (1934).

Ford, Lacy K. Jr., Origins of Southern Radicalism, The South Carolina Upcountry (1988).

Freeman, Lorimer Bssett, The Central Bank of Georgia (masters' thesis) University of Georgia.

Friedel, Robert, "Why You Need to Understand Y2K," Invention & Technology (Winter 2000) pp. 24-31.

Gara, Larry, "The War Against Georgia Wild Cats," Georgia Historical Quarterly (December 1956), pp. 385-388.

Gowan, Thomas Payne, Banking and the Credit System in Georgia, 1810-1860 (1978).

Harrison, Joseph H., "Banking in Georgia, Its Development and Problems," Citizens and Southern National Bank, Savannah, Georgia (1968?).

Heath, Milton Sydney, Constructive Liberalism, The Role of the State in Economic Development in Georgia to 1860 (1954).

Lamoreaux, Naomi, "Banks, Kinship, and Economic Development: The New England Case," Journal of Economic History (1986).

Lesesne, E. Mauldin, The Bank of the State of South Carolina: A General and Political History (1970).

Pogue, Jan, To Wield a Mighty Influence, The Story of Banking in Georgia (1992).

Ray, Samuel J. (publisher), Georgia Laws, 1851-52, Acts of the General Assembly of the State of Georgia Passed in Milledgeville at a Biennial Session (1852).

Redlich, Fritz, The Molding of American Banking, Men and Ideas (1968 reprint).

Rogers, George C., Jr. and Ronald E. Bridwell, The South Carolina National Bank (formerly the Bank of Charleston) (1984).

Royall, William L., A History of Virginia Banks and Banking Prior to the Civil War (1907).

Schweikart, Larry Earl, Banking in the American South, 1836-1865 (dissertation) University of California.

Schweikart, Larry Earl, "Southern Banks and Economic Growth in the Antebellum Period: A Reassessment," Journal of Southern History (February 1987).

Sylla, Richard, "Forgotten Men of Money: Private Bankers in Early American History," The Journal of Economic History (March 1976) pp. 177-178.

U.S. Congress, House Executive Document 49, 36th Congress, 1st Session (December 5, 1859 - June 15, 1860).

U.S. Congress, House Executive Document 82, 33rd Congress (2nd Session, Dec. 4, 1854 - March 3, 1855).

Philadelphia Counterfeit Detector and Bank Note List renamed Van Court's Counterfeit Detector and Bank Note List

Taylor's United States Money Reporter and Gold and Silver Coin Examiner (New York)