Public Canal Finance and State Banking in Ohio, 1825-1837 Harry N
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Public Canal Finance and State Banking In Ohio, 1825-1837 Harry N. Scheiber" Historians have recently given much attention to the active, formative role of state governments in the American economy before the Civil War.l The states exercised nearly exclusive control over many aspects of economic life, and in such areas as labor, banking, and corporation policy the federal government interfered relatively little. The consequence was considerable decentralization of power in policymaking, together with variations in policy from state to state.2 Perhaps in no policy area were variations so dramatic as in state legislation on banking. In some states banking was prohibited outright, while in others the state government itself established and operated banks, sometimes on a monopoly basis. Elsewhere, safety funds were established and banks required to meet minimum standards of specie reserve and the like; and in a few states, stringent regulatory policies were pursued, with public commissioners given considerable discretion in administering p01icy.~ This study considers another type of interaction between state government and privately owned banks: the deposit of state funds and their management by state officials and bank officers. Nathan Miller's exccllent analysis of the Erie Canal Fund in New York has demonstrated that when the Erie Canal, a unique financial success among American canals, produced large surplus revenues, the state government treated this surplus as a fund for development, depositing the money in selected banks and thereby providing reserves on which the banks expanded their note issues and commercial credit.' In this article, the comparable experience of Ohio-the first western state to under- take public canal construction-in the management of canal funds is the focus of attention. Unlike New York, Ohio did not enjoy a surplus of revenues over expenses that permitted such imaginative policies as were pursued by the Erie Canal Fund commissioners. Nonetheless, from 1825 to 1832 Ohio did borrow $4.5 million of eastern capital by issuing state bonds to finance its first canals. Because the ten state chartered banks operating in Ohio in 1825 had paid-in capital totalling only about $1 million, the *Harry N. Scheiber is professor of history at Dartmouth College, Hanover, New Hampshire. 1 See Carter Goodrich, Government Promotion of American Canals and Railroads, 1800-1890 (New York, 1960); James Willard Hurst, Law and the Conditions of Freedom in the Nineteenth Century United States (Madison, 1956), 1-76. 2 Harry N. Scheiber, The Condition of American Federalism: An Historcan's View (89 Cong., 2 Sess., U.S. Senate, Committee on Government Operations, com- mittee print, October 15, 1966), 2-7. SThe classic account of banking and bank policy is Bray Hammond, Banks and Politics in America from the Revolution to the Civil War (Princeton, 1957). 4Nathan Miller, Enterprise of a Free People: Aspects of Economic Development in New York State during the Canal Period, 1792-1838 (Ithaca, 1962), 115ff. 120 Indiana Magazine of History $4.5 million of investment that flowed into the state was itself an important stimulus to development. Because the public canal officials decided to deposit these funds with banks and to disburse them to canal contractors and laborers through those banks, the bond issues had an especially important impact on the structure of banking operations in The canal era began in the West in February, 1825, when the Ohio legislature voted to build two canals: (1) the Ohio Canal, a 307-mile line to run from Cleveland, on Lake Erie, south to the Muskingum River, thence westward to a point near Columbus, then southward through the Scioto Valley to the Ohio River at Portsmouth; and (2) the Miami Canal, a 67-mile waterway to be constructed between Cincinnati and Dayton in the south- western corner of the state. Since Congress had refused to grant any financial aid in support of the Ohio projects, the state decided to make the attempt alone. All its hopes rested on its ability to attract capital through bond issues in the East or in Europe, as New York State had done.s Careful field surveys, which had been conducted during 1822-1824, indicated that the two canals would cost at least $3 million. Under the February, 1825, law the canals were to be built and operated by the state. All funds obtained through bond issues (as well as private gifts, special taxes, and any future federal aid) and any revenue collected from tolls once portions of the lines were completed would be placed in a “Canal Fund.”? Responsibility for managing the canal fund was vested in a board of three commissioners. Named to serve on the board were Ethan Allen Brown, a United States Senator from Ohio and former governor; Ebenezer Buckingham, a banker and general entrepreneur who lived in Zanesville; and Simon Perkins of Warren, who like Buckingham was one of Ohio’s leading bankers.* The commissioners were authorized to borrow $400,000 in 1825 and additional sums in ensuing years. Despite the weight of this and other responsibilities, the fund commissioners received no salaries; and only after 1827 did the legislature consent to pay their out-of-pocket expenses. They had no office at the capital, and were permitted to engage no staff other than a part time secretary. Thus parsimony and the antibureaucratic tradition overcame any realistic appraisal of the board’s needs? SOhio banking is treated well in C. C. Huntington, A History of Banking and Currency in Ohio before the Civil War (Ohio Archaeological and Historical Society Publications, Vol. XXIV; Columbus, 1915). 8 John S. Still, “Ethan Allen Brown and Ohio’s Canal System,” Ohio Historical Quartedy, LXVI (January, 1957), 22-29; Harry N. Scheiber, “The Ohio Canal Movement, 1820-1825,” ibid., LXIX (July, 1960), 231-37. 7Acts of February 3, February 4, 1825, Ohio Laws: General, 1825, original prints in the Ohio Historical Society, Columbus. 8 Still, “Ethan Allen Brown,” 41ff.; Harry N. Scheiber, “Ebenezer Buckingham,” Museum Echoes, XXXIII (December, 1960), 90-93; Harry N. Scheiber, “Simon Perkins,” ibid. (June, 1960), 43-46. vOhio, Executive Documents (1845-1846), Vol. 11. Documents I and I1 provide a full and detailed account of the board’s operations. Discussion of compensation and lack of office space at Columbus may be found ibid., 580, and in Ohio, Senate Journal ( 1825-1826), 207-208. One commissioner spoke bitterly of the legislature’s Public Canal Finance and State Banking in Ohio 121 Table 1" OHIO BONDS SOLD, 1825-1832l Year Interest and redemption date Amount2 Premium3 1825 5 per cent, 1850 $ 400,000 (--$~O,OOO) 1826 6 per cent, 1850 1,000,000 8,475 1827 6 per cent, 1850 1,200,000 77,580 1828 6 per cent, 1850 1,200,000 48,840 1830 6 per cent, 1850 600,000 105,400 1832 6 per cent, 1850 100,000 24,000 1Bond issues shown in this table comprise the entire long term debt incurred by the state for construction of the canals authorized in February, 1825. All sales were to New York or Philadelphia investors and paid in eastern funds. 2 Par value (redemption) of principal. 3 Amount paid by purchasers in excess of par value (1825 sale wan at $10,000 discount, all other sales, 1826-1832, at premiums). Unusually high premiums paid in 1830 and 1832 were the consequence of a general decline in interest rates for government securities in the American market. Amount actually received by the state from bond purchasers is the total of columns (3) and (4). *Source: Ohio, Executive Documents (1845-1846), Part 11, 650-59. 122 Indiana Magazine of History Despite such handicaps, the fund board carried out its work with remarkable success. In early 1825, it marketed the $400,000 bond issue in New York, permitting construction of the canals to commence under direction of a sister agency, the board of canal commissioners. In the years that followed, the fund commissioners successfully marketed additional bond issues, amounting in all to $4.5 million-sufficient to complete the two canals’O (See Table 1). A key factor which explains the efficiency of their operations was their early decision to employ the banks in Ohio. The banks were privately owned, but were chartered by the legislature and were already closely interrelated with the state government since they enjoyed tax ex- emptions and the state held a small amount of stock in each one. The ten banks which had survived the Panic of 1819 and the ensuing depression in Ohio were all small scale, local enterprises. As noted earlier, their total paid-in capital was then less than $1 million; and they had all curtailed their operations severely during the years of depression since 1819.l’ The fund board-bank relationship was established immediately after the bond issue had been marketed in New York in April, 1825. To hold canal funds in the East, and to act as the state’s agent in stock transfer and interest payment transactions, the fund board selected the Bank of Manhattan in New York City. The board agreed to keep a minimum of $50,000 on deposit there, and to withdraw funds payable in Ohio at not less than 120 days’ notice. The Manhattan Bank, in turn, paid 5 per cent interest on the deposit.12 Then the fund board invited four leading Ohio banks to become depositories for canal funds in Ohio on the following terms: (1) The banks would accept funds as withdrawn from the Manhattan Bank, treating 120-day drafts as cash deposits. (2) The banks would honor checks drawn by the canal commissioners for payment of construction expenses to contractors and suppliers; and should payments exceed current state deposits, the banks would advance funds at 5 per cent interest.