Other People's Money by Sharon Ann Murphy

Author:Sharon Ann Murphy [Murphy, Sharon Ann]
Language: eng
Format: epub
Published: 2017-11-14T16:00:00+00:00

Plantation Banks and the Mortgaging of Slaves

In the cash-starved regions of the Southwest, plantation banks emerged in the late-1820s and 1830s as a means of tapping into the region’s wealth in land and slaves. Traditionally, commercial bank charters required a specific amount of paid-in capital from their shareholders in order to begin operations and would only provide short-term loans—even for mortgages. In contrast, the charters of plantation banks required no paid-in capital to begin operations; the reserves of the bank were based entirely on borrowed money. Investors mortgaged a portion of their land and slaves in return for bank shares. But this still left the bank with no specie reserves for the issuance of banknotes or loans. Initially, these banks tried to sell bonds to raise the needed specie, but investors were wary of investing in mortgaged-backed bonds without any further security. The state governments instead stepped in to enable the bank to raise specie. The state itself would issue bonds, giving these bonds to the bank in exchange for collateral—the long-term mortgages on those plantations and slaves. The bank would then sell these state bonds to investors in the Northeast or overseas, who paid for the bonds in gold and silver. This specie would enable the bank to begin issuing banknotes and extending loans on a fractional reserve basis. The investors had more confidence in the bonds since they were guaranteed by the state—and ultimately the taxpayers. The state had confidence in the bank’s ability to pay the interest and principal on the bonds, since they were backed by the valuable land and slaves of the region’s booming cotton economy. Like public banks, these plantation banks were financed through the sale of state bonds; yet unlike public banks, the shareholders were private citizens who had mortgaged their land and slaves in exchange for shares.

The state of Louisiana pioneered the incorporation of plantation banks in 1828, and the model was soon duplicated throughout the region: in Alabama, Arkansas, Florida, Mississippi, and Tennessee. In so doing, slaveholders were able to tap into their slave capital in a unique way. Although slaveholders had used their slaves as collateral for loans going back to colonial times, in most cases these were credit arrangements with local merchants or brokers. Since most early bank loans were either discounts on commercial paper or short-term extensions of credit related to trade, banking institutions only rarely accepted slaves directly as collateral. In contrast, the plantation banks allowed for the expansion of the money supply now to be explicitly linked to the value of the slave system.

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