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NOTE 18. Suffolk's Stabalizing Effects

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Suffolk's Stabilizing Effects

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Even though Suffolk's initial objective had been to increase the circulation of Citibanks,

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this did not happen.

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In fact, by having their notes redeemed at par, country banks gained a new respectability.

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This came, naturally, at the expense of the number of notes issued by the worst former

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inflationists.

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But at least in Massachusetts, the percentage of Citibank notes in circulation fell from

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The biggest, most powerful weapon Suffolk had to keep stability was the power to grant

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membership into the system.

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It accepted only banks whose notes were sound.

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While Suffolk could not prevent a bad bank from inflating, denying it membership ensured

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that the notes would not enjoy wide circulation.

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And the member banks that were mismanaged could be stricken from the list of Suffolk-approved

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New England Banks in Good Standing. This caused an offending bank's notes to trade

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at a discount at once, even though the bank itself might be still redeeming its notes

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and specie.

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In another way, the Suffolk exercised a stabilizing influence on the New England economy. It controlled

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the use of overdrafts in the system. When a member bank needed money, it could apply

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for an overdraft, that is, a portion of excess reserves in the banking system. If Suffolk

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Suffolk decided that a member bank's loan policy was not conservative enough, it could

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refuse to sanction the bank's application to borrow reserves at Suffolk.

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The denial of overdrafts to profligate banks thus forced those banks to keep their assets

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more liquid.

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Few government central banks today have succeeded in that.

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This is all the more remarkable when one considers that Suffolk, or any central bank, could have

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earned extra interest income by issuing overdrafts irresponsibly.

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But Dr. George Trivoli, whose excellent monograph, The Suffolk Bank, we rely on in this study,

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states that by providing stability to the New England banking system, quote, it should

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not be inferred that the Suffolk Bank was operating purely as public benefactor, end

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quote. Suffolk, in fact, made handsome profits. At its peak in 1858, the last year of existence,

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it was redeeming $400 million in notes, with a total annual salary cost of only $40,000.

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The healthy profits were derived primarily from loaning out those reserve deposits, which

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Suffolk itself, remember, did not pay interest on.

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Not surprisingly, Suffolk stock was the highest-priced bank stock in Boston, and by 1850, regular

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Other dividends were 10%.