Gotham_ A History of New York City to 1898 - Edwin G. Burrows [355]
In theory, these institutions kept their credit under tight control, following the conservative precepts of a banker and banking philosopher named Isaac Bronson. Bronson had come down from Connecticut after the Revolution, made a fortune speculating in securities, and become one of New York’s ten wealthiest men. To his way of thinking, banks should provide only short-term credit (no longer than ninety days) and accept only the best collateral (actual goods in transit). Nor should banks give their money to farmers, manufacturers, and other high-risk borrowers: that was a job for independent investors.
Because their counterparts elsewhere tended to be less cautious with their assets, New York bankers wanted Congress to create a new national bank that could rein in irresponsible lenders and stabilize the country’s financial system. John Jacob Astor, having invested heavily in federal securities during the War of 1812, helped secure the legislation that established the second Bank of the United States in 1816.
Headquartered in Philadelphia, the BUS was to be the fiscal agent of the federal government—holding its revenues, paying its bills, and ensuring a uniform currency. As a central bank, it would restrain state banks’ lending by refusing to accept their notes if not adequately backed with specie and by demanding payment as soon as it did accept them. It also had the authority to open offices in other parts of the country. Astor, a director of the parent body, became the first president of the Manhattan branch.
Disaster struck the national bank almost immediately. In the get-rich-quick climate of 1817—18, Astor and his friend Stephen Girard of Philadelphia, the two most conservative members of its board, lost control to incompetent and corrupt plungers who issued loans far in excess of reserves. When swooning cotton prices on the European market brought sudden ruin to thousands of unwary land and commodity speculators, the BUS called in its loans to overextended state banks—which then demanded payment from their customers. A financial panic swept the nation in 1819, followed by two or three years of deflation and stagnation that caused great suffering in the South and West. Although the BUS survived, it was widely blamed for the crisis; some casualties, among them a planter named Andrew Jackson, vowed revenge.
In the meantime, a new kind of bank was making its New York debut, summoned into existence to help finance the Erie Canal. The legislature had resolved to pay for the project by selling bonds, but commercial banks as well as wealthy individual investors hung back, unconvinced they would get their money back if the canal failed (all the more so once the panic started). To solve this problem, William Bayard, John Pintard, Thomas Eddy, and other canal men proposed creation of a savings bank. Its capital would consist entirely of deposits made by working people, and it would be allowed to invest only in government securities—thus encouraging thrift among the improvident classes and having them bear risks that the rich considered unacceptable. In 1819, impressed by the ingenuity of this scheme, the legislature chartered the Bank for Savings in the City of New York; within five years it boasted thirty thousand depositors and assets of $1.5 million and was the single largest holder of Erie bonds. More savings banks weren’t far behind—the Seamen’s Bank for Savings (1829), Greenwich Savings Bank (1833), and Bowery Savings Bank (1834), among others.
Concurrent with the appearance of savings banks was the advent of a second new institution, the investment bank. Its story centers