Correlating Population with Bank Solvency

In the previous post we discussed two assumptions about Hill et al's 1977 argument regarding the prudence of opening a savings society in Kirtland in 1836. Recall that they had used Coover's enumeration of Ohio banks to conclude that the population in Kirtland should have been sizeable enough to support a modest bank. The presupposition of this claim is, as I noted

• Population size is a good predictor for bank success.

In this post I want to break down the claim that is wrapped in this statement into its constituent parts. The current formulation, though not an inappropriate assumption based on the data that Hill et al had used to make their case, sounds too statistical in nature, while the argument that Hill et al had in mind was in all likelihood more qualitative.

The basic observation is that banks require specie to operate. Specifically, they have to have specie to have their bank notes accepted and to make loans to customers (where the interest charged is part of the income that the bank produces). The way banks obtain specie, other than by accepting deposits, is to take down payments for subscribed stock that they issue. In my dissertation I detail some of the rules of how subscriptions worked and how much of the stock value had to be paid in as specie by what point during the subscription period by the subscribers [RCK15, 230-238] and I replicate the information from Coovers' research in the appendix [RCK15, 425f]. 

Since there is no residency requirement for subscription, subscribers can come either from 

• within the community wishing to have a bank; 
• or can be American financiers, usually at that point in time from the East Coast, 
• or Europeans engaged in trade with the US who wish to park their profits from their trade within the Americas within the US of A. 

Europeans here means wealthy non-Americans and in the majority, British traders. Though the world economy was rapidly moving toward integration---Joseph Smith Sr had been exporting East Coast Ginseng root to China in the years before Joseph Smith Jr had been born [RCK15, 79]---the wealthy traders from Africa, India or the Far East were not involved in American frontier banking.

As Charles Clifford Huntington showed in his 1915 thesis, A History of Banking and Currency in Ohio before the Civil War (available at the Internet Archive), there was much concern about capital flight in Ohio in the 1830s, due to the large number of financiers from the East Coast and even from outside the country proper that were involved in buying Ohio banking stock (Hunt15, 137f). In fact they owned over 70%, US$3.35 million of the US$4.73 million in capital stock in the state, before March of 1834 [RCK15, 233], as researched by the Cincinnati Republican.

There were examples of banks completely supported by the community, such as the infamous Owl Creek bank; or the Bank of Wooster that failed in spite of $150,000 paid-in stock and a leverage of 1.29 [RCK15, 245]; but the more typical case was the Ohio Life Insurance & Trust Company, who had only three residents of Ohio among its twenty board members and was held, in the words of the Ohio Monitor of March 14, 1836, "by the Wall Street gentry of New York" [RCK15, 234]. The company had given loans totalling almost US$2 million in 67 counties of Ohio, which were secured with some US$4.34 million worth of real estate---a very different league from the banks of Wooster mentioned above or of West Union, which had $20,000 of species at 2.42 leverage when it failed.

With this information at our fingertips, we can now note two things:

• For the successful banks, the majority of the capital stock was held by out-of-state financiers.
• Banks that were predominantly funded from within the community failed during the banking crisis of 1837.

Again, the Bank of Wooster is the most interesting example. Its was chartered in February of 1834 with US$100,000 and immediately oversubscribed by its population by 25% [Hunt15, 141]. In 1837, with a leverage of 1.29, it was almost stellar, $150,221 paid in for a circulation of $194,289 notes. Perhaps the easiest way to explain this is the lack of expertise?