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Rogue Finance: The Life and Fire Insurance Company and the Panic of 1826

Published online by Cambridge University Press:  14 April 2011

Eric Hilt
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Extract

In July of 1826, a financial panic on Wall Street caused several companies to fail abruptly and precipitated runs on two of New York City's fifteen banks. Life and Fire Insurance became the largest of the bankruptcies. In violation of New York's banking statutes, the firm had engaged in lending on a massive scale during the speculative boom that prevailed in 1824–25. Innovative lending techniques had been developed outside the traditional banking sector—in this case, in the insurance industry. These lending practices, based on an instrument known as a post note, were initially sound, but were later extended to riskier borrowers and ultimately proved ruinous. In the credit crisis that began in late 1825, the value of the Life and Fire's assets fell dramatically, and in a desperate effort to raise cash, the directors resorted to fraud.

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Articles
Information
Business History Review , Volume 83 , Issue 1: A Special Issue on Scandals and Panics , Spring 2009 , pp. 87 - 112
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Copyright © Harvard Business School 2009

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References

1 At the time, the NYSE was known as the “New York Stock and Exchange Board.” The names of listed firms and the prices of their shares can be obtained from Sylla, Richard, Wilson, Jack, and Wright, Robert, Price Quotations in Early United States Securities Markets (Inter-University Consortium for Political and Social Research, 2005).Google Scholar The pages of New York City's newspapers from that month contain vivid descriptions of the failures; see especially the Enquirer and the Evening Post.

2 New York Commercial Advertiser, 18 and 19 July 1826.Google Scholar

3 The liabilities are best characterized as post notes; see the discussion below. The total stock of outstanding post notes of these companies is a rough approximation, calculated from contemporary newspaper accounts of the failures. At the time, the total money supply in the United States was around $108 million. See Temin, Peter, The Jacksonian Economy (New York, 1969).Google Scholar

4 For an overview, see Calomiris, Charles W. and Gorton, Gary, “The Origins of Banking Panics: Models, Facts and Bank Regulation,” in U.S. Bank Regulation in Historical Perspective, ed. Calomiris, Charles W. (New York, 2000)CrossRefGoogle Scholar; Kindleberger, Charles, Manias, Panics and Crashes: A History of Financial Crises (New York, 1996)CrossRefGoogle Scholar; and Rockoff, Hugh, “Banking and Finance, 1789–1914,” in Engerman, Stanley and Gallman, Robert, eds., Cambridge Economic History of the United States (New York, 2000).Google Scholar

5 The panic of 1907 originated with trust companies, which had recently emerged as competitors to banks but did not face the same regulation or enjoy membership in clearinghouse systems; see Moen, Jon and Tallman, Ellis W., “The Bank Panic of 1907: The Role of Trust Companies,” Journal of Economic History 68 (Sept. 1992): 611–30CrossRefGoogle Scholar; and Bruner, Robert F. and Carr, Sean D., The Panic of 1907: Lessons Learned from the Market's Perfect Storm (Hoboken, N.J., 2007).Google Scholar On the macroeconomic context, see Odell, Kerry and Weidenmier, Marc, “Real Shock, Monetary Aftershocks: The San Francisco Earthquake and the Panic of 1907,” Journal of Economic History 64 (Dec. 2004): 1002–27.CrossRefGoogle Scholar The panic of 2007–08 is still ongoing at this writing, but preliminary analyses of these events include Gorton, Gary, “The Panic of 2007,” NBER Working Paper Series, no. 14358 (2008).Google Scholar

6 Niles'Register, 29 July 1826.Google Scholar

7 The panic began in the second half of 1825 in Britain; see Neal, Larry, “The Financial Crisis of 1825 and the Restructuring of the British Financial System,” Federal Reserve Bank of St. Louis Review 80 (May-June 1998): 53–76Google Scholar; and Temin, Jacksonian Economy.

8 Life and Fire Insurance had a capital of $600,000, second only to Globe Insurance, which had a capital of $1 million.

9 The power and influence of these men was attacked by newspaper publisher Mordecai Noah, M., whose New-York National Advocate and Enquirer exposed frauds within their operations. The anonymous satirical play Wall-Street As It Now Is (New York, 1826) also attacks these men without naming them. It features characters such as “Mr. Banker” and “Sir Cunning,” who clearly represent Henry Eckford and Jacob Barker, prominent figures in Life and Fire Insurance.Google Scholar

10 For example, general banking histories, such as Hammond's, BrayBanks and Politics in America from the Revolution to the Civil War (Princeton, 1957)Google Scholar, mention the events of 1825–26 only briefly. Werner, Walter and Smith's, Steven T.Wall Street (New York, 1991)Google Scholar describes some of the transactions conducted by the directors of Life and Fire, but provides few details. Banner's, StuartAnglo-American Securities Regulation (New York, 1998) also includes only a brief mention (p. 238).CrossRefGoogle Scholar

11 “Republican Revisions: Political Economy in New York after the Panic of 1819,” in Pencak, William and Wright, Conrad E., eds., New York and the Rise of American Capitalism (New York, 1989).Google Scholar

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13 See, for example, Barker, Jacob, Disclosure of the Real Parties to the Purchase and Sale of the Tradesmen's Bank (New York, 1826)Google Scholar; Trial of Jacob Barker, Vermilya, Thomas and Davis, Matthew L., for Alleged Conspiracy (New York, 1827)Google Scholar; Jacob Barker's Letters, Developing the Conspiracy Formed in 1826 for his Ruin (New York, 1827)Google Scholar; The Speeches of Mr. Jacob Barker and his Counsel, on the Trials for Conspiracy (New York, 1827)Google Scholar; Incidents in the Life of Jacob Barker (Washington, 1855)Google Scholar; and The Conspiracy Trials of 1826 and 1827: A Chapter in the Life of Jacob Barker (Philadelphia, 1864). See also the contemporary accounts in New York City's newspapers, such as the Commercial Advertiser, the Evening Post, or the Spectator. Although the newspaper accounts and Barker's Trial of Jacob Barker contain detailed summaries of the testimony presented, they are fraught with omissions and inaccuracies—they are not verbatim transcripts. Moreover, many of the witnesses contradicted each other's testimony, and many seemingly critical questions of fact were never clearly resolved in the trials.Google Scholar

14 See Bodenhorn, Howard, State Banking in Early America (New York, 2003); Bray Hammond, Banks and Politics; and Wright, Banking and Politics. It was not uncommon for the sponsors of bills for new bank charters to resort to offers of credit or shares of stock to the state, or even outright bribes to individual legislators, in support of their efforts.Google Scholar

15 The founding of the Manhattan Company and Merchants Bank are described in detail in Hammond, Banks and Politics.

16 New York Laws, 1804, ch. 117. New York was the third state to enact such a statute; Massachusetts and New Hampshire enacted theirs in 1799, and another eleven states enacted similar statutes over the fifteen-year period subsequent to 1804. See Fenstermaker, Joseph Van, The Development of American Commercial Banking: 1782–1837 (Kent, Ohio, 1965), 22.Google Scholar

17 Merchants Bank ultimately received a charter in 1805, likely with the help of bribes. See the discussion in Wright, Banking and Politics, ch. 8.

18 At the time, there was no government-issued paper money; the remaining currency was specie, including many different foreign coins. Estimates of the total money supply, and its components, are provided in Temin, Jacksonian Economy, 71.

19 Alternatively, banks could grant the borrower deposit credit; about half of bank loans went to deposits. See Hammond, Banks and Politics.

20 Distance from the issuing bank also influenced the market price of a note, since it would need to be transported back to t he bank for redemption. Gorton, Gary, “Reputation Formation in Early Bank Note Markets,” Journal of Political Economy 104 (Apr. 1996): 346–97, presents a model of banknote values and empirically analyzes banknote discounts for a large sample of mid-nineteenth-century banks.CrossRefGoogle Scholar

21 Hammond, Banks and Politics, 172, tells the story of the first major American banking failure, that of the Farmers Exchange Bank of Gloucester, Rhode Island, which issued hundreds of thousands of dollars in notes on very little capital and evaded redemption by getting the notes circulated in distant cities.

22 Mackenzie, William L., The Lives and Opinions of Benjamin F. Butler and Jesse Hoyt (Boston, 1845)Google Scholar: 21. On the political rhetoric surrounding efforts to form banks, see Bodenhorn, Howard, “Bank Chartering and Political Corruption in Antebellum New York: Free Banking as Reform,” in Goldin, Claudia and Glaeser, Edward, eds., Corruption and Reform: Lessons from America's Economic History (Chicago, 2006).Google Scholar

23 Founded in 1789, the Society of St. Tammany, commonly known by t he name of the building in which it met, Tammany Hall, was a political club that became a powerful force within the New York Republican party under Aaron Burr's leadership. Barker, a protégé of Aaron Burr, rose to the rank of “Sachem” in the Tammany Society. Myers, Gustavus, The History of Tammany Hall (New York, 1917).Google Scholar

24 Although he describes his loan-contracting endeavors as patriotic efforts to support the war, Barker in fact helped create the federal government's acute need for credit by campaigning against the renewal of the charter of the Bank of the United States, and he sought to earn windfall profits from his loan contracts. Barker was ultimately denied these windfall profits, and he pursued legal claims against the federal government for decades afterwards. See Barker, Incidents. The early history of loan contracting, an early form of investment banking, is described in Redlich, Fritz, The Molding of American Banking: Men and Ideas (New York, 1968).Google Scholar

25 Barker's Exchange Bank was certainly not the only private bank of its time in New York. The banknote table of the Commercial Advertiser, 5 June 1817, for example, mentions a few others, including “Nathan Meyer's” and “Levi M'Keen's.” But Barker's was much more successful than the others, and has been described as the “only important private bank” in the city at the time. Redlich, Molding of American Banking, vol. 2: 60.

26 The incorporated banks initiated a qui tarn action (a suit by a private individual to assist in a criminal prosecution, which entitles them to recover the penalties) against Barker.

27 Bristol v. Barker, 14 Johns. 205 (NY Sup. Ct. 1817).Google Scholar

28 New York Laws, 1818, ch. 236.

29 New-York Columbian, 5 Mar, 1818.Google Scholar

30 Barker, Jacob, Letter from Jacob Barker to his Friend at Bristol, Pennsylvania, in Relation to the Late Conspiracy to Destroy the Exchange Bank (New York, 1819)Google Scholar: 7. See also Riesman, , “Republican Revisions,” and Pintard, John, Letters from John Pintard to his Daughter Eliza Noel Pintard Davidson (New York, 1840 “1816–33”), vol. 1: 201.Google Scholar

31 Redlich, Molding of American Banking, vol. 2: 60. Redlich also mentions that “large batches” of Exchange Bank notes were floated in Georgia, which of course made them more difficult to redeem.

32 This was the Bank of Washington and Warren, located in remote Sandy Hill, New York. See the Annual Report of the Bank of Washington and Warren, New York Assembly Journal,1818, p. 352. That bank subsequently failed as well. See Mackenzie, Lives and Opinions.

33 Since New York City banks would only accept country notes at a larger discount, the Exchange Bank's red notes were quite attractive to holders of country notes, and the red notes therefore achieved an extensive circulation. See Barker, Exchange Bank. As would be expected, these red notes traded at a significant discount relative to other New York City banknotes.

34 Riesman, “Republican Revisions,” 21. The bank faced runs in 1816, May of 1819, and finally succumbed to a third run in June of 1819. New York Commercial Advertiser, 5 May 1819, and New York American, 30 June 1819. Barker claims that the runs were conducted by a nefarious “conspiracy” of the incorporated banks, who acted through “puppets” in the market to destroy him. Barker, Exchange Bank. Barker later maintained that the bank's “depositors, however, were paid, and “the” entire circulation redeemed,” but if the circulation was redeemed, it was almost certainly done at a deep discount, implying that the note holders suffered significant capital losses. Barker, Conspiracy Trials, 47.

35 Barker sought charters of incorporation for the Exchange Bank in 1817 and 1819 as well, but evidently he was not influential enough to get those bills passed. New-York Columbian, 26 Dec. 1817; 7 Jan. 1819.Google Scholar

36 New York Laws, 1816, ch. 52, sec. 2,12, and 9, respectively.

37 For example, the New York Columbian, 18 Mar. 1817, reports the notes of Utica Insurance at a 4 percent discount, the same as the notes of the Bank of Niagara.

38 Albany Argus, 19 Nov. 1816.Google Scholar

39 Ibid. In the issue of 5 Jan. 1817, this paper printed an even more vigorous defense of the company in the form of a letter from “A Citizen of Genesee,” whose author claimed that the availability of credit from the firm “enabled the farmer to obtain a high price in cash for his produce.”

40 People ex rel Attorney General v. Utica Insurance, 15 Johns. 358 (NY Sup. Ct. 1818). This long and detailed decision issued by the New York Supreme Court touched on a number of complex issues relating to the power of corporations, and was quite influential.

41 The firm applied to t he legislature for a modification of its charter to include banking powers, but its efforts were unsuccessful. When it became clear that the firm would never be able to operate as a bank again, a large fraction of the capital stock was returned to its investors. Argus, Albany, 31 Jan. 1820.Google Scholar

42 New York Laws, 1818, ch. 97, sec. 2,10.

43 At the time, some banks accepted “personal bonds” as security for loans. See Van Fenstermaker, Development of American Commercial Banking, 51, for a specimen. The securities issued by these companies were analogous to those personal bonds. However, the name “bonds” is somewhat misleading and confusing, because these instruments were often used to lend.

44 Redlich, Fritz, “Bank Money in the United States during the First Half of the Nineteenth Century,” Southern Economic Journal 10 (1944): 212–21, describes the history of the post note, and its uses in nineteenth-century American banking. In his memoirs, Barker described the operations of Mercantile Insurance as “issuing bonds payable at distant periods in exchange for commercial paper and other securities.” Barker, Conspiracy Trials, 62.CrossRefGoogle Scholar

45 A detailed account of the transactions by which post notes were issued by insurance companies to facilitate discounting operations is presented by the Evening Post, 15 July 1826.Google Scholar

46 Bodenhorn, State Banking, 48, and Lamoreaux, Naomi, Insider Lending: Banks, Personal Connections and Economic Development in Industrial New England (New York, 1994)CrossRefGoogle Scholar: 1, present lucid descriptions of the discounting procedures of early nineteenth-century banks.

47 Barker, Conspiracy Trials, 62.

48 The New-York National Advocate, 25 Jan. 1825, presents something of a typology of the transactions used by different insurance companies in their discounting operations. The significance of the issuance of an insurance policy is discussed below.

49 Barker, Conspiracy Trials, 62. On t he panic of 1819 and conditions in the banking industry around that time, see Rothbard, Murray N., The Panic of 1819: Reactions and Policies (New York: 1962).Google Scholar

50 On the political economy of usury laws, and their effects on the composition of borrowers, see Rockoff, Hugh, “Prodigals and Projecture: An Economic History of Usury Laws in the United States from Colonial Times to 1900,” NBER Working Paper Series, no. 9472 (2003)Google Scholar; and Benmelech, Efraim and Moskowitz, Tobias, “The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century,” NBER Working Paper Series, no. 12851 (2008).Google Scholar

51 The firm was originally chartered in 1822 as the “New York Mechanic Life Insurance and Coal Company,” but its name was changed to “Life and Fire” in 1823. New York Laws, 1823, ch. 159. Barker, Conspiracy Trials, 63, describes Eckford's founding of Life and Fire.

52 The firm's advertisement in the National Advocate, 24 June 1826, states that Life and Fire “insure[s” lives at their office, No. 38, William street. They also grant facilities as heretofore to those who effect insurance, by exchanging securities … [N] o charge is made for such accommodations, nor are they ever granted except in cases where life insurance has been effected in this office.” Insurance companies at the time routinely extended credit to their customers in the form of “policy notes.” The founders of life and Fire Insurance evidently required borrowers to insure their lives so that they could claim that their discounting was part of an insurance contract.

53 Testimony at the subsequent criminal trial indicates that, on 1 Aug. 1824, the company had accumulated a surplus of $60,360. Barker, Trial of Jacob Barker, 32.

54 The three borrowers were Christopher Adams, Nicholas Wilson, and William Kenner. Jacob Barker, manuscript reply in chancery suit Barclay v. Eckford, 22 May 1827, p. 6. New York County Clerk, Division of Old Records, ref. BM 282-B.

55 See Hunt, Bishop C., The Development of the Business Corporation in England, 1800–1867 (Cambridge, Mass., 1936).CrossRefGoogle Scholar

56 7 May 1825.

57 See Rothbard, , Panic of 1819.Google Scholar

58 Longworth's New York City directory for 1826 lists six New Jersey banks, along with one other New Jersey corporation, as operating in New York City.

59 Barker, Conspiracy Trials, 63.

60 New York Senate Journal, 19 Apr. 1825.

61 61 Some of the largest borrowers were mentioned in testimony in the subsequent criminal trials. For example, in mid-1826, New York broker Thomas Ash owed the firm $50,000, the merchant David R. Dunham owed Life and Fire $6,000, and the merchant Neils B. Gram owed the firm $40,000. Testimony of R. H. Hough as transcribed in Barker, Trial of Jacob Barker, 135–36.

62 Testimony by Horatio Kingsland, clerk of Life and Fire, indicated that there were no entries in either the ledger or the journal after August 1824. A new set of books was begun in early 1826. Barker, Trial of Jacob Barker, 32.

63 In rare cases, financial reporting requirements were inserted into the charters of corporations in the early nineteenth century; see Hilt, Eric, “When Did Ownership Separate from Control? Corporate Governance in the Early Nineteenth Century,” Journal of Economic History 68 (Sept. 2008).CrossRefGoogle Scholar

64 These securities were not listed in newspaper tables of either stock prices or banknote discounts. However, occasionally newspaper stories did mention the yields on these bonds; see in particular the New York Enquirer for 1826.Google Scholar

65 New York National Advocate, 25 January 1825. Emphasis in original.

66 Jacob Barker, undated draft letter, in Jacob Barker Papers, New-York Historical Society, New York, N.Y.

67 Testimony of R. H. Hough, as transcribed in Barker, Conspiracy Trials, 137.

68 See Hunt, Development of the Business Corporation.

69 The New York Spectator, 12 June 1826.Google Scholar

70 See Albion, Robert G., The Rise of New York Port, 1815–1860 (New York, 1939)Google Scholar; and Chandler, Alfred Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977): ch. 1.Google Scholar

71 Albion, New York Port, 114.

77 Brown Brothers & Company was the New York branch of Alex Brown & Company of Baltimore. Its letter of 22 Nov. 1825 to McLoskey & Hagan of Mobile, Alabama, names eleven failures, including several commission merchants and jobbers whose debts in some cases were estimated to be up to a million dollars. Brown Brothers Papers, New-York Historical Society. On the operations of such firms, see Porter, Glenn and Livesay, Harold C., Merchants and Manufacturers: Studies in the Changing Nature of Nineteenth-century Marketing (Baltimore, 1971).Google Scholar

73 Niles'Register, 15 Oct., 26 Nov., and 31 Dec, 1825, The banks that failed were the Eagle Bank of New Haven, the Lombard and Derby banks of New Jersey, and the banks of Niagara and Plattsburgh in upstate New York.

74 Niles' Register, 26 Nov. 1825. In the banknote tables of the Shipping and Commercial List in the July 1825 issues, there are four upstate country banks whose notes were trading at a discount in New York City; in the issue of 28 Dec, the notes of twenty-one such banks were trading at discounts of from.75 percent to 2 percent; in some cases no market rate could be reported.

75 As Brown Bothers & Co. wrote to a merchant in New Orleans, “Here money continues scarce, this arises more however from want of confidence in private security than anything else, as money can be had here on U.S. Bank or U.S. Stock security at 6 per cent … from individuals who seem afraid of anything else.” Letter of 19 Jan. 1826 to Benjamin Story of New Orleans, Brown Brothers Papers.

76 Jacob Barker, manuscript reply in chancery suit Barclay v. Eckford, 22 May 1827, p. 6. New York County Clerk, Division of Old Records, ref. BM 282–B.

77 These sales were conducted through Thomas Vermilyea, a broker closely identified with the company and a member of its board of directors. The total amount sold by Vermilyea during these months was just over $640,000. In an indication of the firm's increasing use of this tactic, Vermilyea's sales between August and November of 1825 were just $116,000. Testimony of Murray Hoffman, receiver of Life and Fire Insurance, as recorded in a manuscript account of criminal trial kept by Peter Augustus Jay, attorney for the prosecution, in Peter A. Jay Papers, New-York Historical Society.

78 Report of Elbert Herring, master in chancery, in Barclay v. Eckford, 6 Oct. 1830, schedules B and C. New York County Clerk, Division of Old Records, ref. BM 282–B.

79 Jacob Barker, manuscript reply in chancery suit Barclay v. Eckford, 22 May 1827, schedule B. New York County Clerk, Division of Old Records, ref. BM 282–B.

80 Henry Eckford also provided his personal guarantee for the securities. Receipt, 1 July 1826, executed by Henry Eckford, in Jacob Barker Papers, New-York Historical Society.

81 Testimony of Horatio Kingsland, clerk of Life and Fire, as transcribed in Barker, Trial of Jacob Barker, 38. Barker paid the company in checks drawn on City Bank. It is not clear whether these were overdrafts, but in any case the checks were "always honored" by the bank.

82 Jacob Barker, undated draft letter, in Jacob Barker Papers, New-York Historical Society.

83 83Testimony of Murray Hoffman, receiver of Life and Fire Insurance, as recorded in a manuscript account of criminal trial kept by Peter Augustus Jay, attorney for t he prosecution, in Peter A. Jay Papers, New-York Historical Society.

84 Statement of Hugh Maxwell, district attorney of New York, as reported in the New-York American's supplement containing a summary of all testimony at the trial, 21 Oct. 1826.Google Scholar

85 Such an arrangement was quite common at the time. See Hammond, Banks and Politics. The shares of stock served as collateral on the loan; the loan was known as a “stock note.”

86 Tradesmen's Bank was chartered in 1823, and had an authorized capital stock of $600,000.

87 Statement of Hugh Maxwell, district attorney of New York, as reported in Barker, Trial of Jacob Barker, 151.

88 Statement of William H. Falls, cashier of Tradesmen's Bank, as reported in Barker, Trial of Jacob Barker, 151.

89 Testimony of Murray Hoffman, receiver of Life and Fire Insurance, as recorded in a manuscript account of criminal trial kept by Peter Augustus Jay, attorney for the prosecution, in Peter A. J ay Papers, New-York Historical Society.

90 90 Author's calculations from Schedules B and C of the Report of Elbert Herring, master in chancery, in Barclay v. Eckford, 6 Oct. 1830. The exact maturity dates were only given for notes issued beginning in March; for those issued in prior months the same maturity structure was assumed.

91 The New York Enquirer printed an account of the transaction in its issue of 7 July 1826; on 8 July there was a run on Fulton Bank.

92 Commercial Advertiser, 17 July 1826.Google Scholar

93 Jacob Barker, undated draft letter, in Jacob Barker Papers, New-York Historical Society.

94 Commercial Advertiser, 18 July 1826.Google Scholar

95 Jacob Barker, manuscript reply in chancery suit Barclay v. Eckford, 22 May 1827, schedule C.

96 People v. Vermilyea and Barker, 7 Cowen 369 (N.Y. Sup. Ct. 1827).Google Scholar

97 See the account in Barker, Conspiracy Trials.

98 Lambert v. The People, 9 Cowen 578 (N.Y. Corr. Err. 1827).Google Scholar

99 Attorney General v. Life and Fire Insurance Company, 9 Paige 470 (N.Y. 1842).Google Scholar

100 Petition of defendants, in Barclay v. Eckford, 20 Oct. 1829, New York County Clerk, Division of Old Records, ref. BM 282–B.

101 See, for example, Life and Fire Insurance Company of New York v. Christopher Adams, 34 U.S. 573 (1835)Google Scholar; and Life and Fire Insurance Company of New York v. The Heirs of Nicholas Wilson 33 U.S. 291 (1834).Google Scholar

102 Kindleberger, Manias, Panics and Crashes, 1.