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Debt, Investment, Slaves
Credit Relations in East Feliciana Parish, Louisiana 1825â"1885
By Richard Holcombe Kilbourne Jr.
The University of Alabama Press Copyright © 1995 The University of Alabama Press
All rights reserved.
The Origins of the Antebellum Credit System
The Accommodation Endorser
Banking in the antebellum South has received a rather thorough examination. Louisiana, in particular, was the subject of a monograph by George D. Green twenty years ago. Larry Schweikart's recent study of the region also includes in-depth treatment of Louisiana. Both studies, however, are concerned primarily with state-chartered banking institutions. Green's book is especially valuable for its analysis of the commercial banking philosophy as opposed to that of investment banking or of the mix of the two that came to predominate in Louisiana during the depression of the 1840s.
Schweikart discusses the possibility that a great deal of southern banking was conducted outside chartered banking channels. He suggests that extrapolations about money supply, drawn mostly from the very incomplete archives of antebellum chartered banks, may represent only a partial accounting, a possibility raised by Fritz Redlich as long ago as 1977.
This exploration of credit relations in East Feliciana Parish at least confirms what others have suspected about the complex composition of the money supply, especially the role of "private" paper in everyday commercial arrangements. A study of chartered banks and their impact in the parish would not be without interest, but it would be of limited importance in piecing together the credit history of the area. Excepting the years 1832 to 1839, state-chartered banks had no presence in the parish.
In the years before 1845, most financial arrangements in the parish involved a local lender, an accommodation endorser, or a New Orleans factor. Three property banks chartered in the 1830s by the state legislature were actively engaged in investment banking in the parish, making loans collateralized with mortgages on land and, to a lesser extent, with slaves. However, all three banks were in liquidation proceedings by 1844. The Union Bank and Citizens Bank were revived by the legislature in the 1850s, but as commercial banks, not investment banks.
Accommodation paper has a bad reputation in most of the literature. Green suggests that it had inflationary consequences and should be considered beyond the pale of ordinary commercial banking activities. Making a strict dichotomy between "real bills," which originate in commercial transactions, and accommodation paper provides a useful perspective for understanding exchange operations and short-term credits for moving processed staples from producers to consumers. It also provides a more-or-less-correct representation of the lending activities of New Orleans's commercial banks.
The distinction, however, is far less useful in grappling with the debt market for agriculture. The picture that emerges in the locality is complicated by a variety of credit instruments that were primarily distinguished by their relative liquidity (i.e., their convertibility into specie or a cash equivalent). Accommodation paper was not a necessary evil; rather, it was simply one more mechanism for collateralizing loans of money and loans of credit. Obviously, sterling exchange could not be purchased with such paper, but the paper passed freely as money in a variety of local and even regional contexts.
In his examination of financial fluctuations in the nineteenth century, Green explores three monetary theories: the "central banking" school, the Friedman school, and the "financial intermediary" school. The last of these theories appears to have the most relevance when attempting to explain the behavior of debt instruments, other than true bills, at any given time in the pre–Civil War period. It is the third financial variable mentioned by Green, "the ratio of 'ultimate liquidity' to aggregate income," that seems especially relevant for elucidating the relationship between the debt market and the monetary system. Private investors in plantation debt were willing to hold debt instruments for long periods of time provided the relative loss of liquidity was compensated for with various premiums. Land sales on credit, which were the norm, generally resulted in a rise of 25 to 50 percent in the acre price. Short-term loans denominated in specie-convertible bank notes carried a discount premium of 1 percent per month for less than six months. Long-term financing arrangements with factorage firms generally did not entitle the borrower to a fixed interest charge; rather, the borrower paid the financing costs borne by the firm, which varied with the short-term costs of money. Private investors, then, who held various debt instruments had fewer incentives to liquidate such paper at a sacrifice in periods of financial stringency. It must be remembered, too, that during a bank suspension of specie convertibility, bank notes continued to circulate, but at a deep discount. The whole debt market became relatively less liquid, but private paper of every description compensated for such inherent risks.
The market for plantation debt was many times larger than the exchange and discounting operations of the handful of New Orleans commercial banks. New Orleans banks accounted for less than 5 percent of the mortgage-backed loans made in the parish during the 1850s. Clearly, someone was willing to lend on mortgage-backed securities and provide financing in a variety of other situations.
Accommodation endorsers predominated in the locality's loan relationships in the decades prior to 1845. They lent their credit, not their financial capital, as security for loans from third parties. Just how they were compensated is not clear, but it is unlikely that most such suretyships were merely gratuitous. Only the proliferation of state- chartered banks with mortgage banking powers in the 1830s overshadowed accommodation endorsers, or at least further obscured their important role as primary lenders in the local economy.
A typical arrangement involved a promissory note made payable to the order of the endorser, who then endorsed the note, thus collateralizing it with his credit and good name; the maker subsequently negotiated it to a willing third-party lender. A note made payable to "bearer" could be collateralized with a simple endorsement. A party might also make an accommodation by drawing a note in favor of the debtor.
Bills of exchange did not arise often in commercial transactions; a bill of exchange was in fact a form of accommodation paper that was sometimes substituted for a promissory note. The face of such an instrument simply showed an order to pay a stated sum, usually at thirty, sixty, or ninety days, to a named party. The borrower would get an acceptance from the drawee, the accommodating party, and then would negotiate the paper to a lender.
The names of the wealthiest households in East Feliciana Parish rarely appear as borrowers in the mortgage records. They do appear as mortgagees, however, with their accommodation endorsements or suretyships serving as considerations for such mortgages. Some speculated in cotton and probably used their credit resources to guarantee a regular and sure supply of the commodity by guaranteeing credit arrangements for small growers in return for their consignments. Others may have received a percentage of the loan proceeds. In lawsuits on notes, a few accommodation endorsers asserted as a defense in collection proceedings that they had received no portion of the loans. The defense was without legal merit, but it evidences an understanding that compensation for lending one's credit was customary.
During the worst years of the depression that began in 1839, those who valued their reputations continued to redeem their liabilities, primary and contingent, in specie or its equivalent in depreciated paper. Certain guaranties could be negotiated at or near par, something that could not be done with any of the note issues of city banks.
A few names predominate in the mortgage office books as accommodation endorsers in the years from 1825 to 1840. That of William Silliman, a scion of an old Connecticut family and brother of Benjamin Silliman, was one. His connection with the area predated statehood, and like several other successful planters in the parish, he eventually established a factorage business in New Orleans. By the 1840s he had amassed a valuable portfolio of commercial properties in the city's financial district and owned hundreds of thousands of dollars of bank and insurance company stocks.
Others included Benjamin Kendrick, Elias Norwood, Thomas Scott, Albert G. Carter, A. D. Palmer, and David Pipes. All had interests besides planting and were well connected in the financial world of the city. Some operated factorage businesses at various times, both in the locality and at New Orleans. Others were simply private lenders who underwrote financial arrangements that had no connection with their own planting operations. Silliman and Norwood made direct loans of cash, most of which were collateralized with mortgages on slaves.
It should be pointed out, however, that many endorsements, and probably the majority, never were formally collateralized. Consequently, there is no record whatsoever of such transactions unless the paper ended up in lawsuits.
Many others besides the individuals enumerated above lent their names as endorsers. This was especially so in the decade of the 1830s, when discounts from newly chartered banks were readily available for the asking. In many an instance it is likely that the accommodation endorser was relatively naive about his potential liability in the event of a default. The much-maligned property banks owed many of their collection woes to defaults on accommodation paper, not to mortgage-backed stock subscriptions.
Loans on accommodation paper reached a zenith during the heyday of the property banks. Families in the parish subscribed to more than $200,000 in stock in the Union Bank and almost as much in the Citizens Bank.
In the ten years before the legislature ordered the Union Bank's liquidation in 1843, the bank experienced a 1-percent default rate annually on its mortgage-backed stock subscriptions in the parish. Most who gave mortgages to secure stock in the institution apparently did so in part to diversify their assets and, at least indirectly, to tap the lucrative loan market and obtain cash income from dividends. Some had paid off their stock subscriptions in full within four or five years of the initial subscription offer. Others clearly intended to borrow against their stock. However, subscribing to the stock to gain access to a loan was not especially efficient or safe. A subscriber was liable for the full amount of the subscription but could only borrow fifty cents on every dollar subscribed.
Most of the Union Bank's difficulties in the parish stemmed from accommodation paper discounted at its Clinton branch. It would be a mistake, however, to assume that such paper was totally worthless, although it usually was necessary to institute suit to make a recovery. When Darius L. Green borrowed $1,075 from the bank in 1835, the debt was evidenced and secured by a promissory note endorsed by Joseph Brown, Elias Boatner, and A. E. Brady. Sixteen months later the bank sued Green and the three endorsers and obtained a judgment against Green and Brady. Boatner and Brown had not received timely notice when the note was protested, so they escaped liability. In 1841 Elias Norwood assumed to pay the judgment, which with interest was well over $1,400. He had a writ of fieri facias issued and seized fourteen slaves belonging to Brady. Seven of the slaves were adjudicated to him at sheriff's sale in satisfaction of the judgment. In two subsequent suits Boatner was himself sued as the primary obligor, along with his accommodation endorsers.
In one especially egregious case, the bank discounted a bill of exchange for seven thousand dollars drawn by Frederick Taylor on a Natchez businessman named L. H. Besancon, who had accepted it, to the order of William M. Gwynn. The bank failed to have the bill timely protested and consequently discharged all the parties from legal liability. The bill clearly was accommodation paper, and Taylor used the proceeds of the loan to purchase slaves. Franklin Hardesty, president of the bank's Clinton branch, had apparently attempted unsuccessfully to negotiate a large sum of money in Mississippi bank notes that had accumulated at his branch. He even traveled to Natchez trying to exchange these notes for "such funds as would serve the Union Bank." The seven thousand dollars had "been received by the Cashier of the Branch in violation of the general usage of the Bank." Hardesty then discounted Taylor's bill and gave him the Mississippi bank notes. Taylor subsequently agreed to pay the debt even though he had been discharged but then reneged on his promise. Nevertheless, Taylor was held to be liable; under Louisiana law an unenforceable obligation is sufficient cause for a new obligation if the obligor acknowledges it and guarantees its performance. In the words of the district court judge, "He made the promise [to pay the debt] under the faith of his moral obligation."
It appears from the record that Hardesty was himself indebted to Taylor, and he was sued on a writ of garnishment. During the worst of the speculation of the 1830s, it was not uncommon for individuals to make loans from banks on the security of accommodation endorsers and then split the loan proceeds with the endorsers. Gwynn, it appears, frequently endorsed accommodation paper for Besancon, who was a Mississippi state bank commissioner. Besancon had by virtue of his office obtained almost limitless discounts from the state-chartered banks in Mississippi, which he regulated. As one deponent testified in an unrelated collection proceeding, "He [Besancon] was determined to make use of his situation as commissioner to get as much money as he wanted from the ... Banks—that the officers ... knew all about the matter—as to his endorsers he said he was determined to use them, as he was on the road to fortune they could not suffer."
The Clinton branch had other problems. The first cashier embezzled thirty thousand dollars and left the state. The sureties on his performance bond were all sued.
In the instances where relationships between accommodation endorsers and the makers of the notes were formally collateralized, the endorsers almost always obtained mortgages on slaves from those whose debts they guaranteed. Of the forty-seven mortgages recorded from 1835 to 1839, however, twenty-one were solely mortgages on acreage and town lots. Almost all the accommodations collateralized with mortgages on real estate involved paper that was discounted at the Union Bank. Most of the mortgages granted during that four-year period to secure antecedent debts, as apposed to contemporaneous loans, likewise probably involved accommodation paper secured with mortgages on real estate.
In soliciting a loan for his own account from the home office of the Union Bank at New Orleans, Henry Marston, then cashier of the Clinton branch, reminded the officers that he had mortgaged a considerable amount of property to the bank. He estimated the property to be worth fifteen thousand dollars, but the bank had lent him only six thousand dollars. He hoped the directors would "coincide with ... [him that he had] a particular claim upon the Bank for the loan." He enclosed a note for three thousand dollars "endorsed by two respectable individuals. The number of months ha[d] ... been left blank [and were] to be filled up" after the directors had reached a decision about his loan. He hoped that it would be for as long a period as the bank could indulge him, subject to annual renewals.
The extent to which men like Marston used their credit resources to float their own paper, significantly augmenting their borrowing potential, can be gleaned from a series of letters involving a promissory note negotiated by Marston in renewal of a debt owed by him to an unrelated third party. He obtained a note from James Muse and Franklin Hardesty, drawn by them and endorsed by Thomas L. Andrews, payable at the Citizens Bank, and used it to renew a note then due to a Mrs. Laurence. Mrs. Laurence previously had discounted the note at the Citizens Bank, so the bank was Marston's primary obligee. He notified the cashier that the parties "wish[ed] ... to have the renewal extended, if compatible with the rules ... of [the] institution, to six months. As October [was] ... a more convenient season to pay money than August."
Excerpted from Debt, Investment, Slaves by Richard Holcombe Kilbourne Jr.. Copyright © 1995 The University of Alabama Press. Excerpted by permission of The University of Alabama Press.
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