Financial History Issue 128 (Winter 2019) | Page 32
$5 proof note from The Suffolk Bank of Boston.
[New England] is known to be insolvent,
not by the refusal at its own counter to
redeem its paper, but by the refusal of the
Suffolk Bank to receive it on deposit.”
Just functioning as New England’s
major clearing house operation added
to Suffolk’s monopoly position. Collect-
ing funds on which a check is drawn at a
single location is the basic function of a
clearing house; Suffolk became the prin-
cipal clearing agent from the 1830s until
1858. Competition existed in the mid-
Atlantic cities of New York and Philadel-
phia, but Suffolk had zero competitors in
New England.
Furthermore, the power of the Suf-
folk System in attracting banks to its
organization resulted in New England
becoming a single currency region by
1850. As members of the System, banks
held deposits with Suffolk necessary for
specie redemption. This practice inher-
ently led to Suffolk’s notes becoming the
general medium of exchange (money)
in the area. The “universal par circula-
tion” in currency (according to one bank-
ing historian) whereby few notes were
discounted, had the unforeseen effect of
making all notes direct substitutes for one
another. Although perhaps an unintended
consequence, this was brought about by
the lack of competition in clearinghouse
operations.
Nevertheless, discounts for New Eng-
land’s banks averaged 1.037% in 1831,
down from a 2% average in 1828; by 1841,
discounts amounted to less than one-half
of 1%. 1 Still many of Suffolk’s correspon-
dents protested the fees associated with
clearing, primarily the 2.5–3% member-
ship charge based on their amount of
paid-in capital (stock received in exchange
for funds invested in banks). City banks
(in Boston) paid only one-third of 1%,
consequently burdening country bankers
with a disproportionate amount of trans-
action and association costs required for
Suffolk membership.
The procedural routine of a clearing
house adhered to a strict, daily regimen
in settling accounts. Each day, “specie”
and “settling” clerks from various banks
met each other at the clearing house. The
specie clerk approached a desk manned
by a settling clerk; the former would hand
over a packet of money (“notes”) drawn
on the settling clerk’s bank. The settler
would then copy the amounts received in
30 FINANCIAL HISTORY | Winter 2019 | www.MoAF.org
the packets onto a statement labeling the
entries “Banks Credited.” The specie clerk
would repeat back the amounts to the
settler before exiting the facility. Midday,
debtor banks sent in their balances with
specie clerks taking possession of funds
owed; representatives concluded all settle-
ments by day’s end.
While this system may seem a bit
archaic in today’s era of electronic bank-
ing, direct deposits and ATMs, it was
simplistic enough to attract a major com-
petitor for Suffolk. In 1858, Boston’s Bank
of Mutual Redemption entered the arena
as a clearing house operation, ultimately
challenging Suffolk’s monopoly privi-
lege in the region. Suffolk finally had a
competitor.
Acquiring the support of country banks
in 1855, the Bank of Mutual Redemp-
tion (BMR) received its charter and
began competing with Suffolk three years
later. The Massachusetts legislature had
incorporated BMR specifically for note
redemption. Many stockholders in BMR
(usually country bankers), viewed this as
an “instrument of state policy…” Conse-
quently, Suffolk’s dominion in note clear-
ance waned. Its reluctance to accept notes