LITTLE ROCK — The recent spate of bank failures reminds me that for much of its early existence Arkansas was plagued by debt due to the failure of its early banking system. Much of this debt involved out-ofstate investors, perhaps the strangest case involving the Smithsonian Institution in Washington, DC.
Englishman James Smithson in 1829 gave $500,000 to the U.S. to create a museum or similar institution "for the increase & diffusion of knowledge among men." Not to rush the story, but the bequest was invested in Arkansas banks and promptly lost to graft, poor management and a national recession.
Early Arkansas was cash-strapped. The 1836 state constitution authorized the state to charter two banks. The Real Estate Bank was to provide credit to farmers and planters, while the simply named State Bank was to underwrite the capital needs of merchants and businessmen. The state invested in these banks, but did not bother to implement strict oversight.
To fund the Real Estate Bank the state sold $1.5 million in bonds. Arkansas' U.S.
senator, Ambrose H. Sevier, convinced the Treasury Department to invest almost all the Smithson gift in the Arkansas Real Estate Bank. Only Massachusetts Congressman John Quincy Adams, a former U.S. president, rose to oppose the investment in frontier banks.
Sevier is recognized as one of the most able leaders in antebellum Arkansas. He came to Arkansas Territory in 1820 to join his cousins, Henry Wharton Conway, James Sevier Conway, and Elias Nelson Conway. These men quickly rose to control territorial politics, becoming known as The Dynasty. Sevier further solidified his political and economic standing in 1827 by marrying Juliette E. Johnson, the daughter of Arkansas Judge Benjamin Johnson and the niece of a U.S. senator. Though only 25 years of age, Sevier assumed control of The Dynasty in 1827 when Congressional delegate Henry Conway was killed in a duel. Soon he was in Congress, and in 1837 he was elected to the U.S. Senate.
The author of a book on the Smithson imbroglio refers to "Don Ambrose" as a "godfather of a powerful Arkansas political 'family.'" Though she refers to Sevier as "a backwoods ruffian," she admits "he was also a canny politician and a powerful advocate for his state in Washington." He also served as chairman of the U.S. Senate Foreign Relations Committee, the same committee that was chaired a century later by another Arkansan, J. W. Fulbright. He was a leading Jacksonian Democrat of his day.
The Arkansas Real Estate Bank opened in Little Rock just before Christmas, 1838, with branches at Washington in Hempstead County, Columbia in ChicotCounty, Helena and Van Buren.
The main problem with the Real Estate Bank was that it accepted land as collateral. Arkansas was full of men who were "land rich," but cash poor, and their loans defaulted just when a national depression caused real estate prices to plummet.
Meanwhile, the State Bank opened its headquarters in Little Rock, with branches at Batesville, Fayetteville and Arkansas Post. Neither bank was well managed, and corruption tarred both institutions. As conditions worsened, both banks issued their own paper money. By the time of its closure, the State Bank alone had some $750,000 in paper currency in circulation, though it was usually discounted by as much as 75 percent-when merchants would accept it at all.
Despite heroic last-minute efforts, some of which were probably illegal, the state's banking system was declared insolvent in 1843. This left a bitter taste in the mouths of many Arkansans, and the banking fiasco would haunt the state for generations.
The first reaction came swiftly. In 1844 the legislature voted to amend the state constitution to outlaw banks altogether, which became the first constitutional amendment in state history. It would take the coming of Reconstruction following the Civil War before Arkansas was again home to banks. An even longer lasting legacy was the legal and political fight over bonds sold by the Real Estate Bank and later known as the Holford bonds.
The fact that we have a Smithsonian Institution today is due as much to Congressman John Quincy Adams as to James Smithson. Adams never gave up on his attempts to disclose the betrayal of Smithson's bequest. In 1841 Congress adopted Adams' legislation to replenish the Smithson fund. Adams later wrote in his diary that the Treasury Department agent to whom he spoke "turned up his eyes at the swindling speculation of the Senator from Arkansas . . . ."
Banking, it is historically safe to say, did not have an auspicious beginning in Arkansas.
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Tom Dillard is head of the special collections department at the University of Arkansas Libraries in Fayetteville. Email: tdillar@uark.edu. An earlier version of this column was published July 18, 2004.
Editorial, Pages 76 on 08/23/2009