On Feb. 7, 1784, Gov. John Hancock signed a state charter for the president and directors of The Massachusetts Bank. The 
bank’s purpose was to mainly serve wealthy merchants, but not the general public. A century later, on April 30, 1865, it became the Massachusetts National Bank of Boston as it gave up its state charter and joined the national banking system.
Capt. John Blackwell made the first attempt at creating a bank in the American colonies when he proposed a local bank in Massachusetts. It would issue banknotes for loans backed by private land. Unfortunately, the bank never functioned because the governor invalidated land titles.
The Manufactory House
The Massachusetts Bank
Commercial banking began in Massachusetts when Hancock signed the charter for the Massachusetts Bank. Previously, the Congress of the Confederation (which had replaced the Continental Congress) had chartered the Bank of North America on May 26, 1781 as a commercial bank for Philadelphia.
Thus, the Massachusetts Bank, located in Boston, became the second privately-owned commercial bank in the United States. It was also the first in New England. The Bank of New York, although it opened on June 9, 1784, did not receive a state charter until 1791.
John Hancock
Before banks emerged in those port cities, trading arrangements of private merchants centered on the Bank of England. Realizing that there would be a need for a New England bank after the Revolutionary War, six wealthy merchants, backed by William Phillips, secured a bank charter that would “be of great public utility.”
The Massachusetts Bank charter empowered the stockholders to govern the corporation, which had the authority to appoint officials and establish rules. The bank, however, had various restrictions. It could not compete in trade and commerce with the merchants, and it had limits on its size through restrictive financial holdings (i.e., property, goods and money). The charter omitted any requirement for the bank to have state investment, a debt limit (imposed in 1792) or renewal of its charter. In 1812 the state Legislature did set its expiration date for the end of 1831 (with periodic renewals thereafter).
James Bowdoin
The Massachusetts Bank opened for business on July 5, 1784 in the Manufactory House near Boston Common. Gov. James Bowdoin became the first president assisted by a cashier, teller, sub-teller, accountant and porter. The bank initially was opened for business six days a week for five hours.
Competition
When it opened, the Massachusetts Bank announced it had $300,000 in “capital” – investment by the stockholders that could be used to handle any losses. Initial deposits by both wealthy individuals and government entities carried no interest payments.
The principal function of the bank was the creation of loans for wealthy businessmen, which became the main source of profit. Borrowers received them through the issuance of notes printed by the bank. Originally given in British currency, the banknotes became available in various dollar denominations after the Coinage Act of 1792. Unlike modern bank practice, the bank issued short-term (i.e., 30 or 60 days) “discount loans.” Thus, the principal with no interest is paid at maturity (e.g., with a 5 percent discount on a $100 loan, the borrower received only $95). Various securities pledged by borrowers (collateral) protected the loans issued by the bank. When banknotes were presented to the bank for redemption, they could be converted into specie (i.e., gold or silver).
The bank enjoyed a monopoly for its first eight years, but its profitability finally attracted a competitor. Union Bank, incorporated in 1792, had as a requirement for its operation that 20 percent of its loans had to go to farmers. The Massachusetts Bank shunned farmers because they often lacked adequate collateral. In addition, the bank had to loan the state money at fixed interest rates. As the population of Boston more than doubled from 18,320 in 1790 to 43, 298 in 1820, four more competitors emerged: Boston Bank (1803), State Bank (1811), New England Bank (1813) and Manufacturers and Mechanics Bank (1814).
Regulation
As the number of banks expanded in Boston and throughout Massachusetts in the early decades of the 19th century, state regulations similarly increased. Beginning in 1799, unincorporated banks could not issue banknotes, which effectively prohibited their operation. In 1803 Massachusetts became the first state to require semi-annual financial reports to the governor and his council, which had to be sworn to as of 1805. In 1812 the state government imposed its first tax of one percent on bank capital. On February 28, 1829 a comprehensive banking law required all banks to have 50 percent of their capital paid in specie before opening for business. Uniform limitations were also placed on note and debt issuance. By 1838 a board of bank commissioners could officially conduct bank examinations (replaced by a bank commissioner in 1851).
An early banknote
The Massachusetts Bank continued its conservative lending policy in the decades up to the Civil War. Even as it made some loans to manufacturing, transportation and other firms, its Boston rivals prospered with more and riskier loans to these borrowers. Thus, the Massachusetts Bank ranked about seventh in size among its peers from 1845 until the Civil War.
The Massachusetts Bank Goes National
Finding it insufficient to finance the Civil War through tax revenues, the U.S. Congress passed the National Banking Acts of 1863 and 1864. The intent was to have private national banks buy U.S. bonds to help finance the war. In addition, the national banks would issue their own notes, backed by U.S. bonds, in an effort to replace notes already issued by about 1,600 state banks.
On March 22, 1865 the Massachusetts Bank voted to join the national banking system, a move precipitated by a federal law of March 3, 1865 to heavily tax state bank notes. On April 30, 1865 the bank became known as the Massachusetts National Bank of Boston. With a national bank charter for 20 years, the bank entered the next chapter in its evolution.
Edward T. Howe, Ph.D., is Professor of Economics, Emeritus, at Siena College near Albany, N.Y.
