Bank of Indiana - Operation

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 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 exchange. 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 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, 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, 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, but it did contain a small amount of gold. It increased its gold holding significantly after the 1848 California Gold Rush 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, 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 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, 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 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.