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NOTE 16. Operation Begin

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Operation Begins

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During the next several years, city banks found their notes representing an ever smaller part of the total New England money supply.

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Country banks were simply issuing far more notes in proportion to their capital, that is, gold and silver, than were the Boston banks.

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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.

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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.

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They had the foolish hope that this would increase the use of their better notes, thus increasing their own loans and profits.

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But the more they purchased country notes, the more notes of even worse quality, particularly from faraway main banks, would replace them.

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Buying these latter involved more risk, so the Suffolk proposed to six other city banks

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a joint fund to purchase and send these notes back to the issuing bank for redemption.

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These seven banks, known as the Associated Banks, raised $300,000 for this purpose.

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With the Suffolk acting as agent and buying country notes from the other six, operations

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began March 24, 1824.

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The volume of country notes brought in this way increased greatly to $2 million per month

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by the end of 1825.

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By then, Suffolk felt strong enough to go it alone.

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Further, it now had the leverage to pressure country banks into depositing gold and silver

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with the Suffolk to make note redemption easier.

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By 1838, almost all banks in New England did so and were redeeming their notes through

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the Suffolk Bank.

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The Suffolk ground rules from beginning 1825 to end 1858 were as follows.

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Each country bank had to maintain a permanent deposit of specie of at least $2,000 for the

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smallest bank, plus enough to redeem all its notes that Suffolk received.

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These gold and silver deposits did not have to be at Suffolk as long as they were at some

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place convenient to Suffolk so that the notes would not have to be sent home for redemption.

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But in practice, nearly all reserves were at Suffolk.

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City banks had only to deposit a fixed amount, which decreased to $5,000 by 1835.

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No interest was paid on any of these deposits.

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But in exchange, the Suffolk began performing an invaluable service.

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It agreed to accept at par all the notes it received as deposits from other New England

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banks in the system, and credit the depositor bank's accounts on the following day.

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With the Suffolk acting as a quote clearing bank, accepting, sorting and crediting bank

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notes, it was now possible for any New England bank to accept the notes of any other bank,

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however far away and at face value.

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This drastically cut down on the time and inconvenience of applying to each bank separately

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for specie redemption.

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Moreover, the certainty spread that the notes of the Suffolk member banks would be valued

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at par.

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It spread at first among other bankers and then to the general public.