State Level Deposit Insurance Before the FDIC

The Federal Deposit Insurance Corporation (FDIC) has been the government agency responsible for providing deposit insurance to banks since its creation in the Glass-Steagall Act of 1933. While the establishment of the FDIC was an important event in the history of government regulation of the economy, it was not the first instance of deposit insurance in the United States. Several states had previously had state level institutions of deposit insurance in the 1800s and early 1900s.

President Franklin D. Roosevelt signing the Banking Act of 1933 (Glass-Steagall Act), which established the FDIC.

At various times before the Civil War, Vermont, Michigan, Indiana, and New York insured both banknotes and deposits, while Iowa and Ohio insured only banknotes. Most of these systems operated successfully up to the Civil War, with the notable exception of Michigan’s which had been established immediately before the Panic of 1837 and had failed rather quickly. These state deposit insurance systems generally required participating banks (and participation was voluntary) to pay for insurance to pay off deposit returns from failed banks.

Such systems did not survive the Civil War and nationalization of the banking system. However, interest in state level deposit insurance systems was increasing again by the end of the 1800s, though it was not until 1907 that Oklahoma became the first state since the Civil War to establish a state deposit insurance system. Seven more states followed suit in the following ten years. The deposit insurance systems of the early 20th century had less positive results and unintended consequences. A common observation of banks insured by state deposit insurance in the 1920s was that in spite of nominal regulations against risky behavior by banks, the state deposit insurance actually encouraged risky behavior by banks, increasing the proportion of bank failures and thus insurance burden. By the end of the 1920s the state deposit insurance schemes had largely failed. In some states voluntary participation left banks the option to simply opt out, and most did, while in other states high insurance costs led to deposit insurance being repealed. Yet while state level deposit insurance appeared to be a failure, it was a model that would pave the way for the establishment of the FDIC, deposit insurance on the federal level and subject to stricter regulation.

Vaughn Rennie  is a summer museum intern at the Museum of American Finance.

 

The Anthropology of the Banker: MoAF’s Warren Miller “New Yorker” Cartoon

Published in the “New Yorker” on 8/3/92
2012.01.094

The Museum of American Finance has humble beginnings. In 1988, founder John Herzog set up an experimental, freestanding exhibit in the historic New York City Customs House (now the Museum of the American Indian). He was inspired to teach economic and financial history after experiencing firsthand the chaos and confusion of the 1987 stock market crash. The trial museum was a success; over 6,000 visitors visited the display of historic financial documents.

It was only after 1989 that MoAF became a tax-exempt organization. In 1992, the Museum moved into its first home at 24 Broadway. The city noticed the new kid on the block and famous New Yorker cartoonist W. Miller honored MoAF with a cartoon on August 3, 1992. The picture is drawn in the signature style of Miller, who was a famous New Yorker mainstay and published his first piece in the magazine in 1961. In the cartoon, a humorless butler announces to his financier boss, “A field anthropologist from the new Museum of American Financial History, sir.”

The Museum has the original cartoon by Miller in its collection. The picture shown above is a direct scan of the cartoon’s print, signed by Miller. The Museum has grown by leaps and bounds since 1992 and financial history is proving to be just as important as ever. It’s only a matter of time until another cartoonist has a go at portraying our beloved MoAF.

Lily Goodspeed is a summer museum intern at the Museum of American Finance and a History major at Brown University. Her twitter handle is @lilygoodspeed. Julia Yeung is also a summer museum intern and attends Pace University studying Business Economics. Her twitter handle is @YeungJulia.

Fractional Currency: Spencer Clark “Five Cents”

Original scan of “Five Cents” fractional currency note featuring Spencer Clark. On loan from the collection of Mark D. Tomasko.

Fractional currency notes were issued by the US federal government from 1862 to 1876 in denominations of 3, 5, 10, 15, 25 and 50 cents to combat the shortage and hoarding of coins, which contained metals more valuable than the money the coins represented during the Civil War. The currency notes were originally called “postage currency,” but they officially became  “fractional currency” after the passing of the Congressional Act of March 3, 1863.

Several fractional currency notes are on display in the Museum’s “Money: A History” exhibit. One particularly fascinating currency note is the “five cents” issue, lent to the Museum by collector and honorary curator of engraving Mark D. Tomasko. This particular “five cents” issue is the third version of the fractional currency note, and the first issue to contain signatures in order to prevent counterfeiting that had occurred with the previous issues. The currency note features the face of little-known Spencer Morton Clark, who served as the first Superintendent of the National Currency Bureau, which is now the Bureau of Engraving and Printing (BEP). The BEP was in charge of the production of these notes, and a large sensation erupted when Clark’s face appeared on the new print of “five cents” notes.

It is said that Congress initially intended the currency to honor William Clark of the Lewis and Clark expedition, but they failed to specify which “Clark.” Spencer M. Clark took the opportunity to instead make himself the model of the portrait on the bill. A much less famous Clark, Spencer Clark was already under investigation for embezzlement, fraud and sexual harassment. By the time the government began to take action, Clark had already printed the notes in significant quantities.

Nineteen days after the new bills went into circulation, an outraged Congress passed a law forbidding the portrait of anyone living to be used on US currency, stamps or coins. Interestingly, Francis E. Spinner, the US Treasurer at the time, didn’t make much of a fuss when Clark placed him on the 50 cent note without his consent. Although he had the authority to select portraits on new notes, Spinner was pleasantly surprised by the choice.

Clark was able to keep his job only because of the interference of Treasury Secretary Salmon P. Chase. These notes still remain in legal tender today, as the law did not null notes with living portraits if the bills had already been printed before the passing of the law.

Julia Yeung is a summer museum intern at the Museum of American Finance and attends Pace University studying Business Economics. Her twitter handle is @YeungJulia.

Lily Goodspeed is a summer museum intern at the Museum of American Finance and a History major at Brown University. Her twitter handle is @lilygoodspeed.

 

Uncovering the Paternity of the Hedge Fund Industry in the Museum’s Collection

Graham and Newman, 1959
Benjamin Graham (right) and Jerry Newman, 1959.

 

For the past few months I have been a guest contributor to Bloomberg’s Echoes blog, which is edited by historian Stephen Mihm and focuses on the history of business and finance.  While most of my columns have tied in with significant anniversaries or events in financial history, for this week’s post I was invited to instead write an article on one of the Museum’s collections.

I have several favorite collection items, but I chose to focus on the Graham-Newman Collection.  It’s a fascinating archive of business documents, personal correspondence, rare first edition books and personal effects belonging to Warren Buffett’s mentor and the father of value investing, Benjamin Graham, and his business partner, Jerry Newman.

And, as I assert in my article, within this collection may lie the answer to the on-going debate over the origins of the hedge fund industry.

To learn more, read “What Was the Very First Hedge Fund? Ask Warren Buffett.”

Happy New Year!

To honor the Lunar New Year, we’re proudly displaying this 14th century Ming Dynasty note, one of the oldest objects in our collection. Ming notes such as this one hold special significance because they are among the earliest forms of paper money available to collectors. Paper money is a relatively new phenomenon in the West. Informal paper money was first introduced in the Netherlands in 1574 and the first government issued notes were pioneered by the Massachusetts Bay Colony in 1690. This was almost 800- 900 years after paper money was instituted in China.

ming dynasty note
Ming Dynasty Note

While Ming Dynasty notes predate the first instances of paper money in the West by over a century, paper money has been circulated in China since the reign of Emperor Yung heu of the T’ang Dynasty (c. 650 AD). No examples of this early T’ang Dynasty currency exist today except in the illustrations of early numismatic (the study and collecting of currency) volumes.  In the ninth century, “flying money” or fei-chien was frequently used as an informal currency although it was basically paper IOUs issued by merchants for trade, especially for payment across long distances when copper coins were too cumbersome and dangerous to carry.  By the Song Dynasty around 1000 AD, there were at least 16 private banks in the Sichuan Province alone issuing notes. Soon a special bureau was set up by the government to control the circulation of these notes and eventually it took over the printing bills, which could be exchanged for hard currency.

The Ming note from our collection, featured here, is made of mulberry bark. Mulberry bark paper was often used in early Chinese notes for its distinctive color that was difficult to counterfeit. Many Ming Dynasty notes have survived today because they were often placed under statues of Buddha, much like how coins are placed in foundation stones to commemorate the date of construction here.  Many were discovered during the Boxer Rebellion in the first years of the 20th century when Buddhist statues were overturned. The Ming notes were first issued in 1368 and circulated for more than a century until they were withdrawn due to devaluation.

If you are interested to learn more about early Chinese currency, we recommend the following books.

  • Kranister, W. 1989. The Moneymakers International.  Cambridge: Black Bear Publishing.
  • Kuhlmann, Willhelm. 1983. China’s Foreign Debt 1865-1982. Hannover: Freiberg Druck.
  • Narbeth, Colin, Robin Hendy and Christopher Stocker. 1979. Collecting Paper Money and Bonds. London: Studio Vista.

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