Operation Begins
During the next several years, city banks found their notes representing an ever smaller part of the total New England money supply.
Country banks were simply issuing far more notes in proportion to their capital, that is, gold and silver, than were the Boston banks.
Concerned about this influx of paper money of lesser worth, both Suffolk Bank and New England Bank began again in 1824 to purchase country notes.
But this time they did so not to make a profit on redemption, but simply to reduce the number of country notes in circulation in Boston.
They had the foolish hope that this would increase the use of their better notes, thus increasing their own loans and profits.
But the more they purchased country notes, the more notes of even worse quality, particularly from faraway main banks, would replace them.
Buying these latter involved more risk, so the Suffolk proposed to six other city banks
a joint fund to purchase and send these notes back to the issuing bank for redemption.
These seven banks, known as the Associated Banks, raised $300,000 for this purpose.
With the Suffolk acting as agent and buying country notes from the other six, operations
began March 24, 1824.
The volume of country notes brought in this way increased greatly to $2 million per month
by the end of 1825.
By then, Suffolk felt strong enough to go it alone.
Further, it now had the leverage to pressure country banks into depositing gold and silver
with the Suffolk to make note redemption easier.
By 1838, almost all banks in New England did so and were redeeming their notes through
the Suffolk Bank.
The Suffolk ground rules from beginning 1825 to end 1858 were as follows.
Each country bank had to maintain a permanent deposit of specie of at least $2,000 for the
smallest bank, plus enough to redeem all its notes that Suffolk received.
These gold and silver deposits did not have to be at Suffolk as long as they were at some
place convenient to Suffolk so that the notes would not have to be sent home for redemption.
But in practice, nearly all reserves were at Suffolk.
City banks had only to deposit a fixed amount, which decreased to $5,000 by 1835.
No interest was paid on any of these deposits.
But in exchange, the Suffolk began performing an invaluable service.
It agreed to accept at par all the notes it received as deposits from other New England
banks in the system, and credit the depositor bank's accounts on the following day.
With the Suffolk acting as a quote clearing bank, accepting, sorting and crediting bank
notes, it was now possible for any New England bank to accept the notes of any other bank,
however far away and at face value.
This drastically cut down on the time and inconvenience of applying to each bank separately
for specie redemption.
Moreover, the certainty spread that the notes of the Suffolk member banks would be valued
at par.
It spread at first among other bankers and then to the general public.