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Suffolk Bank was a privateclearinghouse bank inBoston,Massachusetts, that exchangedspecie or locally backedbank notes for notes from country banks to which city-dwellers could not easily travel to redeem notes.[1]
The bank was issued itscorporate charter on February 10, 1818 by the38th Massachusetts General Court to a group of theBoston Associates (includingPatrick Tracy Jackson andDaniel Pinckney Parker), and the charter's holders and bank's directors met periodically from February 27 to March 19 at theBoston Exchange Coffee House to discuss the organization of the bank. On April 1, the bank opened for business in rented offices onState Street until the bank moved permanently to the corner of State and Kilby Streets on April 17. In addition to Jackson and Parker, other prominent shareholders of the bank includedWilliam Appleton,Nathan Appleton,Timothy Bigelow,John Brooks,Gardiner Greene,Henry Hubbard,Augustine Heard,Amos Lawrence,Abbott Lawrence,Luther Lawrence,William Prescott,Dudley Leavitt Pickman, andBenjamin Seaver.[2]
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During pre-Civil War times in theUnited States, banks around the country issuedbank notes as a form ofcurrency. The large number of banks led to a large number of diversebank notes that circulated around the country. Although many banks issued only enough bank notes that could be backed up byspecie (gold andsilver during the time), riskier banks gave into temptation and issued more than they could cover. This practice caused many people to doubt the exact worth of certain notes and in turn have little faith in some banks. In 1819, the Suffolk Bank ofBoston was founded and only five years later it had developed the Suffolk System and recruited six otherBoston banks to join. The system was set up to ensure that banks could always back up theirbank notes issued.[3] This was accomplished by forcing all of the banks within the system to hold higher reserves of specie and keep deposits in the Suffolk Bank, resulting in the first everclearing house agreement for currencies in country banks.[4]
Only a year later in 1825, allbank notes that passed through the Suffolk System were taken at par. In just a single year the Suffolk System had given these sevenBoston banks a uniform currency. As the Suffolk Bank grew in size it became able to assert pressure on other country banks and by 1838, over 300 banks (basically all ofNew England's banks) redeemed their notes through the Suffolk System.[5] All of New England now had a uniform currency. Throughout the system's existence, The Suffolk Bank was sure to keep all of the country banks within the system honest by presenting banks with their notes and requestingspecie. The discipline enacted by the Suffolk Bank made virtually allbank notes inNew England equal to their face value, allowing them to be traded within banks. The uniform currency was the first of its kind in theUnited States and remained in use all the way until 1858.[3]
TheSuffolk System was the firstregulatory banking system arrangement of remotebanks created in theUnited States. Starting in 1824, the Suffolk Bank, along with six other banks, created a system that required country (non-federal) banks to deposit reserve balances in one or more of the participating banks, which guaranteed that each country bank could redeem theirbanknotes in specie. The Suffolk Bank became one of the most profitable in the country and continued to operate under the Suffolk System until 1858, when rival institutions complained of dictatorial practices and eventually national legislation banned statebanknotes. The Suffolk System was the predecessor to modern banking practices and led to the creation of theFederal Reserve that still operates today.[4]
The bank operated byredeeming country banks' notes atpar value, so long as the banks maintained an account with Suffolk Bank. To qualify for such an account, a bank was required to remit a starting deposit of $2,000 or more, and—in the case of banks not located in Boston—to maintain a sufficient balance to redeem any of the banks' notes that Suffolk Bank might receive for redemption. Beginning in 1824, "all of the banks in Boston, with the exception of the New England [a competing clearinghouse bank], agreed to make the Suffolk Bank their agent for the redemption of bills of outside banks."[6] The Suffolk Bank enabled member banks to deposit notes from other banks at par value, and to be credited for these deposits within one business day.[7] The bank operated in this manner until theBank of Mutual Redemption was organized in 1858 and assumed this role for all of New England.[6][8]
Throughout the existence of the Suffolk System many important banking practices were discovered and put into practice. After the system became in place, the role ofcounterfeiting in the New England area fell dramatically. Before the appearance of a uniform currency, many rural banks issued their own bank notes creating a large amount of different notes. This not only caused confusion, but also led many criminals to counterfeit bank notes creating an ever-present risk of accepting bank notes that may not be worth what they claimed.The presence of bank panics during the existence of the Suffolk System also led to new banking practices that would continue in practice until present day. ThePanic of 1837, adeflationary backlash inducingdepression andunemployment, was caused by many different factors including the practices of theSecond Bank of the United States and political failures. Although the country entered arecession, the activities of the Suffolk Bank led the New England area to fare much better than the rest of the country. These practices included, lending reserves to other banks and keeping the payment system operating. Today central banks adopt these same practices that started with the private, commercial Suffolk Bank.[9] More banking panics happened during the reign of the Suffolk System (Panic of 1839, Panic of 1857) but their practices continued to minimize the depression in New England.
The Suffolk Bank has been considered by some to be acentral bank, however it is highly contested due to its private nature. Some economist have argued that it can not be labeled acentral bank because of a lack of control of themoney supply, while others claim the system certainly had a degree of control or it would have been altogether ineffective. Although it seemsThe Suffolk Bank cannot be considered completely private, it has proven that private individuals acting outside of political control are capable of providing the same functions of acentral bank at lower costs.[10]
Although the Suffolk System was a great regulator of unsound banking practices, it lacked the ability to properly administer the total volume ofbanknote circulation. The Suffolk System regulated how many bank notes could be issued by country banks, but it was ineffective regulating thebank note circulation of the system. It has been considered a "good regulator of a bad system".[11] In 1858 the Suffolk System ended and was later replaced by the advent of the Bank of Mutual Redemption. The Suffolk System's many good qualities could no longer outweigh the lack of their ability to increase note circulation.[12]
Although the Suffolk System was done away with by national legislation, the system of centralizing reserves among only a small number of banks developed into modem banking practice. The Suffolk System was responsible for creating strong banking techniques and in making smaller banks responsible for all of theirbanknotes issued. The system created a uniform currency throughout New England and most importantly the system help lead United States banking practices into what they are today.
Following passage of theNational Bank Act of 1864, the Suffolk Bank was reorganized and renamed as theSuffolk National Bank on January 1, 1865,[13] and continued to operate as anational bank until it merged in 1902 with the Washington National Bank to form theNational Suffolk Bank which was liquidated in 1903.[14]
Economic historians still disagree on the original purpose of the Suffolk System. Although the system would later lead to stronger banking practices and a uniform currency for the Northeast, not all historians believe this was the System's original intention. Some believe the Suffolk Bank was not attempting to police the currency markets inBoston, but rather tomonopolize the brokerage of all the paper notes of the country banks in order to decrease circulation and open the markets for themselves.[15] Although the systems’ initial intentions are unknown, its results are evident.
In hisHistory of Money and Banking in the United States,Murray Rothbard credits the Suffolk Bank with exercising "a stabilizing influence on theNew England economy."[16]John Jay Knox Jr., a formerComptroller of the U.S. Treasury, stated that the success of the Suffolk Bank demonstrated that:
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