18. Suffolk's Stabalizing Effects

0:00Suffolk's Stabilizing Effects Even though Suffolk's initial objective had been to increase the circulation of Citibanks, this did not happen. In fact, by having their notes redeemed at par, country banks gained a new respectability. This came, naturally, at the expense of the number of notes issued by the worst former inflationists. But at least in Massachusetts, the percentage of Citibank notes in circulation fell from The biggest, most powerful weapon Suffolk had to keep stability was the power to grant membership into the system. It accepted only banks whose notes were sound. While Suffolk could not prevent a bad bank from inflating, denying it membership ensured that the notes would not enjoy wide circulation.

0:49And the member banks that were mismanaged could be stricken from the list of Suffolk-approved New England Banks in Good Standing. This caused an offending bank's notes to trade at a discount at once, even though the bank itself might be still redeeming its notes and specie. In another way, the Suffolk exercised a stabilizing influence on the New England economy. It controlled the use of overdrafts in the system. When a member bank needed money, it could apply for an overdraft, that is, a portion of excess reserves in the banking system. If Suffolk Suffolk decided that a member bank's loan policy was not conservative enough, it could refuse to sanction the bank's application to borrow reserves at Suffolk. The denial of overdrafts to profligate banks thus forced those banks to keep their assets more liquid.

1:34Few government central banks today have succeeded in that. This is all the more remarkable when one considers that Suffolk, or any central bank, could have earned extra interest income by issuing overdrafts irresponsibly. But Dr. George Trivoli, whose excellent monograph, The Suffolk Bank, we rely on in this study, states that by providing stability to the New England banking system, quote, it should not be inferred that the Suffolk Bank was operating purely as public benefactor, end quote. Suffolk, in fact, made handsome profits. At its peak in 1858, the last year of existence, it was redeeming $400 million in notes, with a total annual salary cost of only $40,000. The healthy profits were derived primarily from loaning out those reserve deposits, which Suffolk itself, remember, did not pay interest on.

2:24Not surprisingly, Suffolk stock was the highest-priced bank stock in Boston, and by 1850, regular Other dividends were 10%.