Bank of Indiana - AbsoluteAstronomy.com

The state Bank of Indiana was a government chartered banking institution established in 1833 in response to the state's shortage of capital caused by the closure of the Second Bank of the United States

Second Bank of the United States

The Second Bank of the United States was chartered in 1816, five years after the First Bank of the United States lost its own charter. The Second Bank of the United States was initially headquartered in Carpenters' Hall, Philadelphia, the same as the First Bank, and had branches throughout the...

by the administration of President Andrew Jackson

Andrew Jackson

Andrew Jackson was the seventh President of the United States . Based in frontier Tennessee, Jackson was a politician and army general who defeated the Creek Indians at the Battle of Horseshoe Bend , and the British at the Battle of New Orleans...

. The bank operated for twenty-six years and allowed the state to finance its internal improvements, stabilized the state's currency problems, and encouraged greater private economic growth. The bank closed in 1859. The profits were then split between the shareholders, allowing depositors to exchange their bank notes for federal notes, and the bank's buildings and infrastructure were sold and reincorporated as the privately owned Second Bank of Indiana.

Background

The Indiana Territorial

Indiana Territory

The Territory of Indiana was an organized incorporated territory of the United States that existed from July 4, 1800, until November 7, 1816, when the southern portion of the territory was admitted to the Union as the state of Indiana....

legislature had charted two banks in 1813. With no other established banks operating in Indiana, they were the first attempt by the government to bring banking and a standard currency to the young territory. The banks were granted twenty-year charters, but they quickly fell into financial difficulties following the Panic of 1819

Panic of 1819

The Panic of 1819 was the first major financial crisis in the United States, and had occurred during the political calm of the Era of Good Feelings. The new nation previously had faced a depression following the war of independence in the late 1780s and led directly to the establishment of the...

. By 1823 both banks had folded. Without any banks in the state, the government and the citizens came to rely on the use of notes issued from the Second Bank of the United States

Second Bank of the United States

.

In 1832 President Andrew Jackson

Andrew Jackson

veto

Veto

A veto, Latin for "I forbid", is the power of an officer of the state to unilaterally stop an official action, especially enactment of a piece of legislation...

ed a bill to extend the charter of the Second Bank of the United States and removed federal deposits, forcing it to cease most operations by 1833 due to a lack of reserve cash. The result caused a shortage of hard money

Hard currency

Hard currency , in economics, refers to a globally traded currency that is expected to serve as a reliable and stable store of value...

(coin) at a critical time in Indiana's development. The state had just begun a large series of internal improvements and was funding the projects with millions of dollars of loans. The sudden hard money shortage required the use of paper money to pay maintenance on the state's debt, but with the closure of the national bank there was no means by which the state could easily obtain paper money.

The looming crisis became a major political issue in the state's 1833 election campaign. That year a Whig

Whig Party (United States)

The Whig Party was a political party of the United States during the era of Jacksonian democracy. Considered integral to the Second Party System and operating from the early 1830s to the mid-1850s, the party was formed in opposition to the policies of President Andrew Jackson and his Democratic...

majority was elected to the Indiana General Assembly

Indiana General Assembly

The Indiana General Assembly is the state legislature, or legislative branch, of the state of Indiana. It is a bicameral legislature that consists of a lower house, the Indiana House of Representatives, and an upper house, the Indiana Senate...

. They responded to the problem by passing legislation to establish the Bank of Indiana with the intention that the bank would be able to issue paper money and help to finance the state's debt. The bill was drafted by Samuel Hannah and was enacted into law on January 28, 1834.

Formation of the bank

On February 13 the seven member board of directors met to begin organizing the bank. The board of directors included James Lanier

James Lanier

James Franklin Doughty Lanier was a entrepreneur who lived in Madison, Indiana prior to the outbreak of the American Civil War . Lanier became a wealthy banker with interests in pork packing, the railroads, and real-estate.-Biography:James Lanier was born in 1800 in Beaufort County, North Carolina...

, who would personally benefit from the bank the greatest. They elected James M. Ray as cashier. The state created a charter for the new bank similar to the one used by the national bank. There were some modifications to make the bank better fit the needs of Indiana including limiting the bank to thirteen branches, and promising to allow no other bank to be established in the state. The directors choose to establish branches in Indianapolis

Indianapolis

Indianapolis is the capital of the U.S. state of Indiana, and the county seat of Marion County, Indiana. As of the 2010 United States Census, the city's population is 839,489. It is by far Indiana's largest city and, as of the 2010 U.S...

, Lawrenceburg

Lawrenceburg, Indiana

Lawrenceburg is a city in Dearborn County, Indiana, United States. The population was 5,042 at the 2010 census. The city is the county seat of Dearborn County...

, Richmond

Richmond, Indiana

Richmond is a city largely within Wayne Township, Wayne County, in east central Indiana, United States, which borders Ohio. The city also includes the Richmond Municipal Airport, which is in Boston Township and separated from the rest of the city...

, Madison

Madison, Indiana

As of the census of 2000, there were 12,004 people, 5,092 households, and 3,085 families residing in the city. The population density was 1,402.9 people per square mile . There were 5,597 housing units at an average density of 654.1 per square mile...

, New Albany

New Albany, Indiana

New Albany is a city in Floyd County, Indiana, United States, situated along the Ohio River opposite Louisville, Kentucky. In 1900, 20,628 people lived in New Albany; in 1910, 20,629; in 1920, 22,992; and in 1940, 25,414. The population was 36,372 at the 2010 census. The city is the county seat of...

, Vincennes

Vincennes, Indiana

Vincennes is a city in and the county seat of Knox County, Indiana, United States. It is located on the Wabash River in the southwestern part of the state. The population was 18,701 at the 2000 census...

, Bedford

Bedford, Indiana

As of the census of 2000, there were 13,768 people, 6,054 households, and 3,644 families residing in the city. The population density was 1,157.1 people per square mile . There were 6,618 housing units at an average density of 556.2 per square mile...

, Terre Haute

Terre Haute, Indiana

Terre Haute is a city and the county seat of Vigo County, Indiana, United States, near the state's western border with Illinois. As of the 2010 census, the city had a total population of 60,785 and its metropolitan area had a population of 170,943. The city is the county seat of Vigo County and...

, and Lafayette

Lafayette, Indiana

Lafayette is a city in and the county seat of Tippecanoe County, Indiana, United States, northwest of Indianapolis. As of the 2010 census, the city had a total population of 67,140. West Lafayette, on the other side of the Wabash River, is home to Purdue University, which has a large impact on...

. A Fort Wayne

Fort Wayne, Indiana

Fort Wayne is a city in the US state of Indiana and the county seat of Allen County. The population was 253,691 at the 2010 Census making it the 74th largest city in the United States and the second largest in Indiana...

branch was added in 1835 and branches in South Bend

South Bend, Indiana

The city of South Bend is the county seat of St. Joseph County, Indiana, United States, on the St. Joseph River near its southernmost bend, from which it derives its name. As of the 2010 Census, the city had a total of 101,168 residents; its Metropolitan Statistical Area had a population of 316,663...

and Michigan City

Michigan City, Indiana

Michigan City's origins date to 1830, when the land for the city was first purchased by Isaac C. Elston. Elston Middle School, formerly Elston High School, located at 317 Detroit St., is named after the founder....

in 1836.

Each branch had an initial investment of $160,000, at first there were only ten branches and the total bank's value was $1.6 million dollars. The start up money was all hard money in Spanish

Spain

Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...

and Mexican

Mexico

The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...

silver dollar

Trade dollar

-United States:The United States trade dollar is a silver dollar coin that was issued by the United States Mint and minted in Philadelphia, Pennsylvania, Carson City, and San Francisco from 1873 to 1885. Trade dollars intended for circulation were last produced in 1878 while proof coin production...

s. The money was raised by issuing stock sold at $50 per share. Half of the stock was to be purchased by the state and the other half was sold to the public. By May 20, 1834, all the public stock for the new bank had been issued. The state allowed the public stock to be sold at $18.75 per share, with the other $31.25 being financed on the state's credit, until the purchaser could pay the full amount back to the state with 6% interest. On August 6, the state completed its purchase of 50% of the bank's stock. The money to purchase the stock came through the sale and mortgage of thousands of acres of public land. On November 19 Governor

Governor of Indiana

The Governor of Indiana is the chief executive of the state of Indiana. The governor is elected to a four-year term, and responsible for overseeing the day-to-day management of the functions of many agencies of the Indiana state government. The governor also shares power with other statewide...

Noah Noble

Noah Noble was the fifth Governor of the U.S. state of Indiana from 1831 to 1837. His two terms focused largely on internal improvements, culminating in the passage of the Mammoth Internal Improvement Act, which was viewed at the time as his crowning achievement...

declared the bank open for business.

Hugh McCulloch

Hugh McCulloch

Hugh McCulloch was an American statesman who served two non-consecutive terms as U.S. Treasury Secretary, serving under three presidents.-Biography:...

, who served under four presidents as United States Secretary of the Treasury

United States Secretary of the Treasury

The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...

, begin his career in banking at the Bank of Indiana. He was one of the few prominent businessmen in the young state, but had no experience in banking. He was chosen as president of the bank by the directors because he was "better fitted for the place than anybody else whose services they could obtain", he was the best they could get. Indiana was still a virtual wilderness inhabited by roving bands of American Indians

Indigenous peoples of the Americas

The indigenous peoples of the Americas are the pre-Columbian inhabitants of North and South America, their descendants and other ethnic groups who are identified with those peoples. Indigenous peoples are known in Canada as Aboriginal peoples, and in the United States as Native Americans...

and not at all appealing to the professional bankers of the east

Eastern United States

The Eastern United States, the American East, or simply the East is traditionally defined as the states east of the Mississippi River. The first two tiers of states west of the Mississippi have traditionally been considered part of the West, but can be included in the East today; usually in...

.

In its initial report to the shareholders, the bank reported that it held deposits of $127,236, had $456,065 of paper cash in circulation, $751,083 of cash on hand, and another $78,150 invested in other banks. This showed the bank to be in excellent financial health and to have a promising future.

Operation

The bank charter had various clauses to help prevent possible insolvency and reduce risks. Bank officers were not permitted to receive loans at a rate different from that offered to the public. The bank could not issue securities on its own stock, and any loan over $500 had to be approved by five-sevenths of banks board members. Any losses were to be paid by the individual shareholders up to an amount equal to their stock value. At it highest point, in 1851, the bank had $4 million of bank notes in circulation and $2 million in specie reserves The bank was an early success. Many who had purchased the stock on credit found that the dividends paid out exceeded the interest they were charged, and by the time the bank's charter expired almost all of the public stock had been paid for with investors receiving as much a 650% return on investment

Return on investment

Return on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...

when the bank closed.

The state used the bank to continue financing its internal improvements. They issued bank bonds that were sold on the London

London

London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...

exchange

Stock exchange

A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...

. The state miscalculated on the amount of credit they could afford, and by 1841 the state was on the edge of bankruptcy having borrowed more than $10 million dollars, an equivalent to the state's previous fifteen years of tax revenue. In response to the bankruptcy crisis the state sent James Lanier

James Lanier

to London to negotiate with the bondholders. The negotiations led the state to liquidate all of its public works, except the Wabash and Erie Canal

Wabash and Erie Canal

The Wabash and Erie Canal was a shipping canal that linked the Great Lakes to the Ohio River via an artificial waterway. The canal provided traders with access from the Great Lakes all the way to the Gulf of Mexico...

, turning them over the creditors in exchange for the bonds being reduced 50% in value. The result was a large negative impact to the state's credit, but the cut in the bond value allowed the state to payoff the debt before the bank charter expired.

The profits the state made from the bank were large, by owning 50% of the bank, and then devaluing the state debts by 50%, the bank was able to turn a high profit. The state received at least a 500% return on investment

Return on investment

, but the profit was less than half the amount lost on the internal improvements, most of which were never completed or quickly fell into disrepair and became unusable. The state's profits were small in comparison to the enterprise spurred by the bank. With the ready available of capitol at low rates of interest, small business sprung up across the state finally transformed Indiana's mostly barter system into a cash system of trade.

With the state's credit ruined, the onset of the Mexican American War found Indiana in a poor condition to finance the regiments it needed to send in support of the war effort. With no other creditor willing to lend the state money, each of the branches was asked to furnish a loan of $10,000 for the effort and all came through with the money for the request.
The bank was one of the most stable in the country and its banknotes were accepted throughout the Mississippi Valley and the Midwest. It only suspended exchange of paper money for hard money once in 1837, when all the other banks in the nation did the same. The bank's coinage was almost exclusively silver

Silver

Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...

, but it did contain a small amount of gold

Gold

Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...

. It increased its gold holding significantly after the 1848 California Gold Rush

California Gold Rush

The California Gold Rush began on January 24, 1848, when gold was found by James W. Marshall at Sutter's Mill in Coloma, California. The first to hear confirmed information of the gold rush were the people in Oregon, the Sandwich Islands , and Latin America, who were the first to start flocking to...

led to more availability of gold, but silver remained the primary coin in circulation.

At the time of the 1837 suspension, the bank had over $1.5 million in federal deposits. Because of the nationwide suspension the federal government was desperately short of hard money. Lanier personally delivered $80,000 in hard money to the Levi Woodbury

Levi Woodbury

Levi Woodbury was an Associate Justice of the Supreme Court of the United States, a U.S. Senator, Governor of New Hampshire and cabinet member in three administrations. He was the first Justice to have attended law school....

, the Secretary of the Treasury, knowing their situation. Because the bank was the only one in the nation that voluntarily gave hard money to the treasury, the treasury increased their deposit amount in the bank, further adding to its stability.

The bank was able to maintain its large reserves of hard money because many of the farmers in the state made their initial deposits in coin. There having been no prior bank in the region to issue paper money, hard money was the most widely used currency. The bank came under criticism in the 1840s. The "Free Bankers" considered the state bank a monopoly, which it was, and thought it was not liberal enough in offering loans. They claimed the bank was more likely to loan money to a farmer with assets than to private enterprises. The Free Bankers were dominant at the 1851 Constitutional Convention

Constitution of Indiana

There have been two Constitutions of the State of Indiana. The first constitution was created when the Territory of Indiana sent forty-three delegates to a constitutional convention on June 10, 1816 to establish a constitution for the proposed State of Indiana after the United States Congress had...

and instituted clauses that would end the state bank and authorize other banks to being operating in Indiana, ending the bank's monopoly. Many of the competing banks lost solvency in the Panic of 1857

Panic of 1857

The Panic of 1857 was a financial panic in the United States caused by the declining international economy and over-expansion of the domestic economy. Indeed, because of the interconnectedness of the world economy by the time of the 1850s, the financial crisis which began in the autumn of 1857 was...

, but the bank of Indiana remained strong and did not even require the suspension of specie payment.

The bank lobbied to have its charter extended, but the Democrats and Free Bankers who controlled the General Assembly refused. The bank charter expired in January 1857, but the bank was permitted to continue operating until 1859 to help exchange the bank's currency for notes from the new national bank. Governor Joseph A. Wright

Joseph A. Wright

Joseph Albert Wright was the tenth Governor of the U.S. state of Indiana from December 5, 1849 to January 12, 1857, most noted for his opposition to banking. His positions created a rift between him and the Indiana General Assembly who overrode all of his anti-banking vetoes...

was bitterly opposed to the bank and the extension of its charter. Before the bill was passed he went to the House of Representatives to personally deliver a speech indicting the bank for "corruption and fraud", and alluded that the bank bribed members of the assembly to have its charter extended. Despite his speech and veto of the bill, the General Assembly passed the act with a super-majority.

Aftermath

The closure of the bank did not have any significant impact on the regional economy. The state bank notes were exchanged for federal bank notes or hard money, and the surplus of funds was paid out to the bank shareholders. In 1851 General John Coburn

John Coburn

John Coburn was an Australian painter. He is also known for his tapestries.Coburn served in the Navy during World War 2 and later enrolled at the National Art School.He won the Blake Prize for Religious Art twice....

, a delegate at the constitutional convention, proposed that any profit the state made from the bank be applied to the state's common school system. At the time most delegate believed the bank would end with a debt and thought the suggestion was fanciful, but the clause was added to constitution. The state's share of the profit, which was more than $3.5 million dollars, was put into an education fund which helped the state continue to maintain the first state funded school system in the nation.

Many of the bank's notes were still not redeemed when the bank closed. To remedy this problem, and to maintain their reputation, the bank made arrangements with the national bank to deposit an amount equal to the outstanding notes that could be redeemed at the national bank out of that account, even if the Bank of Indiana ceased to operate. The bank is one of the few in history up to that time that was still solvent when it closed and actually paid out a profit to its investors.

The state passed legislation late in 1859 to permit the bank to incorporate privately. By then its stock had mostly been paid out, but it still retained its branch buildings and infrastructure which was reincorporated as the Second Bank of Indiana, a private institution with McCulloch continuing as president. James Lanier became so wealthy from his investments that when the state verged on bankruptcy during the American Civil War

American Civil War

The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...

that he was able to privately bankroll the state and pay maintenance on their debt. He would use his wealth to become the largest shareholder in the Second Bank of Indiana, which during the Civil War financed the cost of calling up and equipping the state's regiments. The second bank continued until 1865 when, in an attempt to reestablish the primacy of the national bank, a 10% tax was created on bank notes that crippled the bank's profitably, forcing it to close.

Background

Formation of the bank

Operation

Aftermath

See also