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EDITORIALIZING IN THE FALL OF 1842 how three of Louisiana's largest banks had weathered the Panic of 1837, the Times of London extolled Consolidated Association of Planters ("Planters Bank"), Citizens Bank and Union Bank for "struggling on in the payment of their dividends." These lauds proved a bit premature, consequently, given that the state of Louisiana had placed Union and Citizens into liquidation that October.
In fact, many state chartered banks throughout the country had liquidated during the 1837-1843 period, leaving the US Treasury no longer able to deposit funds in the now defunct Second Bank of the United States. The Treasury was also limited as to the number of federal depository institutions extant, with only two throughout the entire South. As expected, the depression beginning in 1839 impacted planters (many in the South) who relied on banks for working capital.
The president of Citizens Bank in 1838, Edmund Jean Forstall, expressed his displeasure at that time with the lending operations of Citizens since, like several other southern banks, it had become accustomed to underwriting loans exclusively on mortgages and commercial property. Such risks only exacerbated the lending crisis that Louisiana experienced during the depression prompting Forstall-a cochairman of the state's Joint Committee of Finance-into lobbying for a state banking reform bill. Through his efforts and cooperation with others, the Banking Act of 1842 (often known as The Forstall System") improved the fiscal stability of Louisiana's banks and became the model for subsequent banking legislation at the national level.
Forstall had much experience as a banking insider many years before the passage of the 1842 act. When engaged in merchant-banking (the financing of production and/or trade in commodities) after the War of 1812, he served as the director of the Louisiana State Bank in 1818. By 1829, Governor Pierre Derbigny appointed him comptroller for the Consolidated Association of Planters of Louisiana, the first "property bank" created by the legislature for the purposes of financing sugar production.
Property banks (sometimes referred to as "planter banks") formally existed for the purpose of supplying credit to those engaged in agriculture. During the 1830s, Forstall forged a partnership with Barings Bank of London that lead to the creation of another one of Louisiana's property banks, Union Bank, co-owned by...