Anatomy of a Bank Failure

One of the more celebrated bank failures in pre-Civil War America involved the Cochituate Bank of Boston, Massachusetts, in 1854. The bank was authorized by the state legislature in 1849 and proceeded to raise capital and get its affairs organized. Its first board of directors was elected on July 20, 1849. The bank leased a basement room in the United States Hotel on Beach Street in Boston at the end of August to serve as its first office. In September, one of the directors resigned, which caused the bank to delay its opening until early November. For some time, the financial institution conducted a fairly normal business. It declared a 3-percent dividend to shareholders, payable April 1, 1850, and avoiding any newsmaking events in 1851.

Rumors of Insolvency 

In 1852 the bank paid a 4-percent dividend to shareholders on April 5, about two weeks after the first rumors of insolvency surfaced on March 24. The Boston Evening Transcript confidently stated that 

“The rumor which has been current today affecting the solvency of the Cochituate Bank, growing out of the erroneous statement in the ‘Journal’ of this morning, of an injunction having been put upon the bank is entirely without foundation. There is no Bank in the state whose safety is more manifest than by its present condition and the report of the Bank Commissioners. We understand that a difficulty of a private character has arisen between one of the Directors and one of the Bank Commissioners which has given rise to the unfounded report to which we have alluded.”

In short, everything was fine. However, it would not be long before the newspaper probably wished it had not written this glowing defense of the bank.

Suspended Operations

The only noteworthy event in 1853 was the bank’s move to a new building in November. The situation changed rather dramatically the following year. On April 15, 1854, due to reported losses its president suffered, the bank experienced a bank run during which it redeemed all notes presented for payment until 1 p.m. It then refused further redemptions, prompting the State Bank Commissioners to obtain a temporary restraining order and suspend operations. The Boston Evening Transcript reassured readers that note holders would be foolish to unload their bank notes at a discount. The bank’s shareholders, under state law, were responsible for redeeming any outstanding notes that remained after the liquidation process was complete. 

A Risky Assumption

This recommendation, of course, made the rather risky assumption that the stockholders would have the means to do so. On April 18, the State Supreme Judicial Court assigned two bankers and one of the bank commissioners to serve as temporary receivers and essentially oversee operations in a conservatorship role. On June 5, 1854, the courts made the restraining order permanent and placed the bank in formal receivership. 

The bank’s creditors went through a rather long and arduous process of filing claims. The deadline for filing such claims was August 1, 1854. On August 4, the receivers proposed a 50-percent payment on claims made before the deadline. The courts delayed the final determination and ultimately decided, rather unconventionally for the time, that all creditors would share the proceeds of the liquidation on a prorated basis (traditionally, note holders had priority over depositors and other creditors). When all the dust had settled, any claims presented after April 1, 1856, were barred by the courts from receiving any compensation. Those presented in accordance with the rules set forth received a 50-percent payment, in addition to a second 10-percent payment. They likely also received a final distribution of around 15 percent for a total recovery of 75 cents on the dollar. It also appears that there was likely a substantial, and probably fraudulent, overissue of notes that received nothing, as evidenced by the large number of surviving notes.

Valuable Denominations

Today, notes from this bank are readily available. The lower-denomination notes come in a number of varieties based on the denominational protectors that were printed in various colors and fonts. Only the $50s and $100s are somewhat scarce, with the very scarce $500s and $1,000s bordering on rare. As you can appreciate, these high-value notes would have been registered with the receivers by noteholders as part of the bank’s claims process when it was winding up operations.

A version of this article appears in the December 2024 issue of The Numismatist (money.org)