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Eastern Money and Western Mortgages in the 1870s

Published online by Cambridge University Press:  11 June 2012

H. Peers Brewer
H. Peers Brewer
Affiliation:
Vice President, Manufacturers Hanover Trust Company
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Abstract

As the westward movement gained momentum after the Civil War, the demand for farm mortgage credit grew rapidly. At the same time, the supply of lendable funds in the East and especially in Europe, although continuing to grow, turned away from U.S. government securities and American railroad bonds. The time seemed ripe for Eastern capitalists to expand their non-bank financial services to include intermediation between lenders and borrowers. Using the United States Mortgage Company and the Mercantile Trust Company as examples, Mr. Brewer shows that the opportunity was lost due to poor organization and management, faulty communication, and most of all to an innate conservatism and mistrust of the unfamiliar that caused the companies to disapprove the bulk of the mortgage loan applications that energetic field agents brought in.

Type
Articles
Information
Business History Review , Volume 50 , Issue 3 , Autumn 1976 , pp. 356 - 380
Copyright
Copyright © The President and Fellows of Harvard College 1976

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References

1 New York Times, August 29, 1876.

2 Merriam, James F., A Yankee Financier; or, Wall Street vs. New Hampshire (New York, 1888) 6.Google Scholar

3 Sheldon R. Hopkins, Money: Where It Comes From and Where It Goes, printed with Barnum's, P. T.Dollars and Sense, or How to Get Out (New York, 1890) 483.Google Scholar

4 Cooper, James Fenimore, Home as Found (1838)Google Scholar; Dickens, Charles, Martin Chuzzlewit (1844)CrossRefGoogle Scholar;, Twain, Mark and Warner, Dudley, The Gilded Age (1873)Google Scholar.

5 No reliable figures are available on the amount of real estate debt in the West prior to 1886 (see United States Congress 52:1, House Miscellaneous Document 340, Part 23, Report on Real Estate Mortgages in the United States at the Eleventh Census: 1890, 94–6), and very few figures are available on the amount of eastern and European money flowing to the West during the nineteenth century. In 1886, state agents estimated that 35 per cent of the farmers' debt in Indiana was owed to “Eastern Capitalist,” while 50 per cent of the farmers in Kansas were mortgaged, “mostly to loan associations handling Eastern capital.” (See United States Congress 49:1, House Executive Document 378, Report of the Commissioner of Agriculture, 1886, 421, 423.) The westward flow of capital was sufficient, however, to prompt an inquiry into whether the small farmer was in danger of becoming owned by eastern capitalists (see: Mappin, W. F., “Farm Mortgages and the Small Farmers,” Political Science Quarterly, September, 1889).CrossRefGoogle Scholar

6 Any of a half dozen or so companies would be satisfactory candidates for a detailed review. The selection of Mercantile and United States Mortgage is governed simply by the fact that the directors' minute books of these companies survive.

7 Krooss, Herman E., American Economic Development (Englewood Cliffs, N. T., 1966), 74–86.Google Scholar

8 States comprising the “mid-continent” distinction in the 1870s are: Arkansas, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, Ohio, and Wisconsin.

9 United States Congress 47:2, House Miscellaneous Document, 13:3, Report on the Productions of Agriculture (10th Census), 1880, 25. United States Census, 1880, Population, 1:447–56. United States Census, 1890, Population, 1:434–6.

10 Controller of the Currency, Annual Report, December 4, 1876, 28–47. Congress excluded mortgages as a permissible national bank business because the instruments lacked liquidity in times of crisis (see Congressional Globe [James Brooks — New York], 38:1, 1939). Another view held that, unless prohibited, the deposits of national banks might be applied to monopolize western land (“National Banks and Real Estate,” Commercial and Financial Chronicle, July 12, 1873, 38–40).

11 New York State, Assembly Document Number 49 {99 Session), Superintendent of the Insurance Department, Annual Report Part II, 1876, XXXIX; New York State, Laws, 1868, Chapter 318, Section 1. An attempt to eliminate the 50-mile radius clause failed to pass in 1877 (see New York Daily Tribune, March 23, 1877).

12 New York Times, June 3, 1877; “Life Insurance and Real Estate,” Commercial and Financial Chronicle, December 14, 1878, 613–614.

13 New York State, Laws, 1868, Chapter 845, Section 1. A proposal in 1873 by the Superintendent of Banking to relax these geographical restrictions was not adopted (see New York State, Assembly Document Number 43 [96 Session], Superintendent of Banking Department, Annual Report Relative to Savings Banks, 1873, 11).

14 See for example, Massachusetts, Public Document Number 8, Annual Report of the Commissioner of Savings Banks, 1873, 6. Since there was a marked scarcity of short term instruments, the portfolio manager of this period tended to view liquidity in terms of the credit quality of the issuer and the size of the market.

15 Between 1870 and 1875, U. S. bond rates declined sharply. The yield-to-maturity, for example, on the 6 per cent bonds of 1881, declined from 4.45 per cent on December 30, 1870 to 1.49 per cent on December 31, 1875.

16 “Railroads in Default Since the Panic of 1873,” Commercial and Financial Chronicle, January 22, 1876, 75–79.

17 There were, of course, additional factors influencing the inter-regional flow of funds during the decade including: the Chicago fire of 1871, prices of farm products, resumption of gold convertability, and relative usury limits between the East and West. In general, these additional factors became less favorable for mortgage flows as the decade progressed.

18 New York Times, July 31, 1876. New York Daily Tribune, July 3, 1877. Characteristic mortgage rates in 1875 were: New York City 7 per cent; Chicago, 8.5 per cent; Iowa farm land, 10 per cent; Denver, Colorado, 12 per cent.

19 For a carefully researched account of the J. B. Watkins operation see Bogue, Allen G., Money at Interest: The Farm Mortgage on the Middle Border (Ithaca, N.Y., 1955), 77–206.Google Scholar

20 New York State, Assembly Document Number 64 (114 Session), Superintendent of the Banking Department, Annual Report Relative to Foreign Mortgage, Loan, Investment and Trust Companies, 1891, 28–34.

21 New York Times, August 12, 1876.

22 The occupations of directors — or in the case of United States Mortgage Company, of corporators — were identified through Trow's Directory of New York City, 1875–1876.

23 The number of private bills pertaining to trust companies rose from fifteen in 1869 to thirty-two in 1872 and down to thirteen in 1874. See New York State, Senate and Assembly Journals, 1869–72.

24 New York State Laws, 1871, Chapter 924, passed May 12.

25 Charter Book, By-laws and Minutes of the Directors of the United States Mortgage Company: May 12, 1871 — January 27, 1880, May 11, 1872. Hereafter: Company Board.

The surviving minute books for U. S. Mortgage are under the jurisdiction of Chemical New York Corporation, a succeeding corporation.

26 Company Board, December 31, 1871.

27 Minutes of the Proceedings of the New York Local Board of the United States Mortgage Company: February 2, 1872 — September 19, 1892, February 2, 14, 1871. Hereafter: Local Board.

28 This scale was identical to the one used by Mutual Life Insurance Company. Minutes of the Executive Committee of the New York Local Board of the United States Mortgage Company: March 26, 1872 — April 13, 1886, May 4, 1872. Hereafter: Executive Committee.

29 Local Board, February 14, 1872.

30 Ibid., March 18, 1872; Company Board, May 20, 1873.

31 Local Board, May 11, June 10, 1872; Company Board, May 20, 1873.

32 Company Board, May 20, 1873.

33 Ibid.

34 Studenski, Paul and Krooss, Herman E., Financial History of the United States (New York, 1963), 143, 183.Google Scholar Specie par payments were suspended from December 30, 1861 to January 2, 1879.

35 Local Board, August 22, 1872.

36 Ibid., December 21, 1872.

37 Company Board, January 6, 1873. The company carried an open-end foreign exchange risk on these issues (as it did on the Series A issue) since bonds were redeemable in shillings in London (4 shillings to 1 gold dollar), marks in Berlin, Frankfurt, Munich, Carlsruhe, and Stuttgart (4 marks to 1 gold dollar), and florins in Amsterdam and Vienna (florin equivalent of 4 shillings to 1 gold dollar). The Company gambled (correctly as it turned out) on the likelihood of stable foreign exchange rates during this period.

38 Company Board, May 20, 1874.

39 Executive Committee, January 18, July 22, 1873.

40 New York State, Messages from the Governors Comprising Executive Communications to the Legislature, and Other Papers Relating to Legislation, from the Organization of the First Colonial Assembly in 1683, to and including the Year 1906, C.Z. Lincoln, ed. (Albany, 1909), 6:580.

41 Company Board, May 14, 1875.

42 United States Mortgage Company (New York, 1874), 6.

43 The listing procedure was soon to become a vehicle of non-governmental regulation, with the listing document itself carrying detailed information of interest to potential investors.

44 Executive Committee, July 22, 1873.

45 Local Board, April 30, July 10, September 16, 1874; Company Board, May 20, 1874; Executive Committee, February 10, 1874.

46 Company Board, May 14, 1875.

47 New York State, Assembly Document Number 7 (97 Session), Superintendent of the Banking Department, Annual Report, December 29, 1873, 14; New York State, Assembly Document Number 2 (97 Session), Annual Message of the Governor, January 6, 1874, 8–9.

48 New York State, Senate bui number 88, Section 2 (introduced February 18, 1874). Compare with bill as passed: New York State, Laws, 1874, Chapter 324, Section 6.

49 Executive Committee, April 7, 1874; Local Board, April 10, 1874. Mercantile Trust Company also sent a delegation to Albany on this matter. See Mercantile Trust Company, Minutes of Executive Committee: February 10, 1874 — June 4, 1875, March 12, 1874.

50 State banks, of course, were also taxed by federal law on circulation. National banks, which carried similar tax rate on deposits and capital, were taxed under Section 41 of the National Bank Act of 1864.

51 Local Board, March 13, 1874.

52 Ibid., April 30, 1874.

53 Ibid., September 16, November 9, 1874.

54 U. S. Supreme Court, “Seiden v. Equitable Trust Company,” 4 Otto 419. Company Board, May 19, 1877.

55 The Company did not receive the refund for well over a year. Company Board, December 31, 1877, May 20, 1879.

56 Company Board, May 21, 1875.

57 Ibid., October 29, 1875.

58 Local Board, February 12, 1875; Executive Committee, February 24, 1875.

59 The Company did not become an aggressive or prosperous operation until the mid-1890s.

60 New York State, Laws, 1868, Chapter 806, Section 1.

61 See New York State, Laws, 1869, Chapter 185; Laws, 1870, Chapter 212; Laws, 1873, Chapter 845; and Laws, 1880, Chapter 425.

62 Commercial and Financial Chronicle, June 24, 1876, ii. The claim was somewhat overstated; actually, the Company always maintained at least a small position in the call loan market.

63 Mercantile Trust Company, Minutes of the Executive Committee; December 22, 1874, January 5, 1875. Hereafter: Mercantile. The Executive Committee minute books for the period of this study are in two volumes: February 18, 1874 — June 4, 1875; and January 5, 1875 — December 12, 1876.

The surviving minute books for Mercantile Trust Company are under the jurisdiction of Bankers Trust Company of New York, a succeeding corporation.

64 Mercantile, September 12, 1876.

65 Ibid., February 5, 1875. Although Hyde did not have the title of President or Chairman, it was generally understood that he set policy for the Company; see Buley, R. Carlyle, The Equitable Life Assurance Society of the United States (New York, 1959), 44.Google Scholar

66 Mercantile, September 12, 1876.

67 Ibid., November 5, 1875.

68 The Company did ultimately (1878) issue sterling bonds, but this was much too late to have an impact on overseas bond sales.

69 The Company was empowered by its Charter to receive deposits but, motivated by the same reluctance as United States Mortgage to deposit securities with the State Superintendent of Banking (see footnote 49 above), withdrew from the deposit market.

70 Mercantile, August 8, 1876.

71 Ibid., January 21, 1875.

72 Ibid., May 28, 1875.

73 Ibid., October 5, 1875.

74 New York State, Assembly Document Number 108 (Session 98), Superintendent of Banking, Annual Report Relative to Savings Banks, April 29, 1875, 332–333. Also Assembly Document Number 97 (Session 99), 342.

75 Mercantile, January 18, 1876.

76 Ibid., April 25, June 20, July 11, August 1, 1876.

77 Commercial and Financial Chronicle, September 2, 1876, 225.

78 Mercantile, September 12, 1876.