August 6, 2009

McKay White: The Kirtland Safety Society

Pursuing a PhD in economics at University of Alberta.

The following are my personal notes of the presentations. They are incomplete and likely contain mistakes, omissions and especially spelling errors. FAIR is going to provide full transcripts and recordings, and I encourage checking them out. A transcript of this paper is available from FAIR here.

There are a large number of myths about the Society that tend to denigrate the Prophet. Sampson, Wimmer, Adams, Partridge, Hill, Rooker, Wimmer are all scholars whose work McKay drew upon. Still some substantial holes to be discussed. Why the bank to begin with? What was JS's role? The issue of legality and possible causes of failure need to be treated comprehensively in one work. As a lawyer and economist, McKay will explode the criticisms regarding the society and put the issues to rest. Cannot be an excuse for antagonism to the Church.

Jan 12, 1838. JS and Rigdon fled Kirtland in the middle of the night, their bags bursting with gold and silver. They escaped capture etc. Fleeing from a Wildcat Bank. What is a Wildcat bank?  JS's was not too close to one. He built his bank near the temple and his house, so it wasn;t hard to find.

Myth 2: Society was Illegal.
The charter was denied, but the plates they made to print money were changed to be an anti-bank. According to 1816 act, it was illegal. They were prosecuted and convicted, but they chose to flee the state. Doesn;t this prove it was illegal? No. It could have been appealed. The court that convicted them got it wrong. Newly discovered material shows it. Painseville Republican paper from 1837 notes that the 1816 act is not enforced, also, the law has long since become obsolete and inoperative. It was not republished by the Legislature. So it wasn;t enforced then. Other organizations operated as banks at the same time without charter. Insurance companies, savings institutions, ohio railroad company, Granville Alexandrian which even paid bank taxes. None of them were prosecuted. Why?

Myth 3: Proves JS is a false prophet because he said the institution would stand til time immemorial.
This revelation has never been seen, except for Warren Parrish who claims he heard it from Joseph. But JS did have a revelation about the SS. He left it in June 1837 because of dishonesty on the part of other officers. He said unless the institution was operated on righteous principles it would not stand.

Myth 4: Joseph Smith stole the money
Beware presentism. Money has a significant role in our society, but why is 20 dollars worth 20 dollars? Without money we would be in a barter economy. You can't buy and sell, you can only trade on good for another. Ancient Summarians decided a "piece" or specie could be determined to have value and be used for trade. Some people were in favor of specie and nothing else. One reason the bank was denied to Orson Hyde. With specie your economy can grow only so fast as you mine the specie. If there is a shortage you are back to barter ecomomy etc. Consider a farmer living outside Kirtland. He goes to Whitney store, work out the cost, but doesn't have specie. Farmer signs prommissory note agree to pay in 30 days. Will be selling some grai nin 25 days. But then that buyer doesn;t have enough specie. So he signs a promissory note agreeing to pay owner of note. The farmer tries to pay with his note, but Whitney needs specie. Cash flow problem. Banks solved the problem by issuing bank notes. Bank has a certain amount of specie and circulates other notes. There was a money shortage in Kirtland and it needed a bank.

-Population was booming.
-Produced cattle, sheep, ash, tannery, wheat, brick, etc.
-Enjoyed wide trade via Ohio canal.

Kirtland had inflation problem, also the bulging population required more money. Prices rose in general for goods.

People had noticed the money shortage and didn't like it. They welcomed increase in money supply from the KSS. (According to news accounts)

But did JS use the KSS as money making scheme? Because he was wrecklessly in ebt. Wanted to print worthless notes and then use them to pay off debts.

Facts: JS assets were more than sufficient to meet debts but were longterm, mostly land. He needed short-term, needed to change assets. His obligations were fairly made, received legit loans. Most debts had co-signers. JS was secondarily liable. Paid honest debts. When left Kirtland he left an agent to settle all outstanding claims.

But JS wantede to print a lot of money to get himself rich, right?

Facts: JS was the second-largest shareholder, thus stood to lose more than all but one person if failed. Paid more per share than 85% of the shareholders. He would thus lose the most. If he was in it for the money he would have bailed at first sign of trouble. Instead, he increased his subscription to help it succeed even though it was tanking. Took out 3 personal loans to give added liquidity to it. Sold personal property for 5,000 to give more help. So he lost a lot of money from the KSS. This was not a get-rich-quick scheme.

But maybe that was just bad investment sense. He really intended to scam people but was bad at it. The KSS was infeasible. No honest person would have tried it, right?

Look at the situation from perspective of frontier America in 1837. Starting a bank in this manner was not unheard of at all. Financial sector of US was in infancy. Wasn't education on it, etc. No one starting a bank at the time in Kirtland would have had more info than JS and SR had available. What they did was common.

In a good economy like Kirtland was, a bank looked like a good idea. Market pressures were creating a demand for such services. Had significant assets, though most was land, but that was the same as other banks at the time. Didn't have commodities or stock market, no other real long term assets.


Myth: JS bungled it. Printed more and more until it collapsed.

Facts: Under JS management, printed about 100,000 in notes. Reserve: 21,000. Thus a reserve ratio of 21%.

Royal Bank of Canada: Reserve ratio of 3%. True, banks are different. 3% back then wouldn't have been reasonable, but 21% would not have been too unreasonable.

Why did it fail?

1. 1837 banking panic and depression. Began in Eastern states May 1837 and moved west. Had effect in Kirtland but the troubles there started in January. So that cannot be the cause.

2. Didn't have a charter. But there were other successful things going in the same way.

Two causes:

1. Bank run, a goold old fashioned bank run. Antagonists began collecting notes when it began runnin,g then took it in to redeem for specie. If the KSS redeemed then otes all of the reserves would be drained and it would fail and the money would be worthless. If KSS refused to redeem, confidence would deteriorate though it could go on for a time. So they refused to redeem on specie. Notes started trading at steep discount. A dollar became 50 cents. Enemies set out to make it fail.

2. Warrne Parrish. Officer of KSS, had been faithful member. Zion's Camp, 1st Quorum of 70, had been JS scribe. JS started noticing money missing ehen only Parrish had access. Evidence seemed clear it was in his trunk, but befroe JS warrant to search, it disappeared. Heber C. Kimball reported that Parrish admitted taking 20,000 dollars. Embezzlement. He could have basically wiped out the assets of the society.

Like the recent bank colapses, ours recently were only saved because of injecting money.

Parrish tried to take over the Kirtland temple with the group etc. etc.

Nothing to cover up, hide, or be embarrassed about. It wasn;t a wildcat bank because everyone knew where it was. It was also legal despite conviction. Only revelation he had about the society was fulfilled: it would fail if not governed righteously. It was hinest endeavor for which JS sacrified to helkp succeed. JS and SR were prudent in their choices, it failed due to the bank run and the theft.

Q: Did they fill boxes with sand and add specie to make it lok full?

A: JS bought a small safe for it where all specie was kept. Those who claim there were boxes filled with things and gold coins as props don't have good evidence, and such boxes could not have been placed in the safe. Why ween't those claims made at the time, rather than later?


ed said...

I've read Hill-Rooker-Wimmer, but there is one thing I don't understand.

After the initial notes were issued, how did they get into circulation?

It seems to me that whoever received these notes, (possibly in return for a deposit of specie in some fraction of their face value), and was able to "spend" them by using them as payment to some trusting soul, was the beneficiary of the scheme.

Some of the notes may have then passed around as payment one or more additional times, but quickly confidence was lost and nobody would accept the notes as payment (at least not at face value), nor could they be redeemed. Whoever was left holding the note was a loser in the scheme.

Is that the right way to think about it?

Kevin said...

I've heard that many of the stockholders bought shares on margin (somewhere around 10% to 50%), then used the stock at face value as collateral for loans, causing an economic bubble that burst as the panic of 1837 began to build.

Had not heard the Warren Parrish embezzlement charge before.

Thanks for the notes, very interesting.

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