As much as we’d like to deny it, Vermont has never been immune to corruption and fraud. It’s been here since the state’s founding by a group of land speculators, including brothers Ira and Ethan Allen, who were not averse to using their positions of power for personal gain.
And once the state was founded, prominent Vermonters discovered new ways to abuse the public trust.
One of the most stunning and serpentine cases occurred in the early 1800s, when three respected citizens who were directors of a branch of the Vermont State Bank were accused of gross mismanagement.
The trio faced a state inquiry, which turned up all sorts of irregularities and illegalities. But perhaps most damning was the fact the bank was missing nearly $14,000, a huge sum at the time. Only when investigators questioned them did the directors — prosperous lawyers Daniel Chipman and Horatio Seymour, and physician John Willard — claim the bank had been robbed several years earlier of that amount, and that the obvious suspect had not only left the state, but also the country.
The story sounded far-fetched and all too convenient to investigators, who sought to have the directors repay the missing money as well as funds they had mishandled.
But then Chipman used his power as speaker of the Vermont House to try to get the judgment overturned.
Banks were still novel in Vermont at the time. Vermonters had been divided over whether to form an official state bank in the early 1800s, but had little choice. After the United States created a national bank in 1791, states started creating their own banks. Soon, notes from out-of-state banks, which acted as a kind of currency, began circulating in Vermont.
These notes had advantages over the common barter system, in which people swapped goods and labor. Barter transactions often required complex negotiations. How much time spent haying is a bushel of potatoes worth, after all? Depends on how much you hate haying. Paying with notes, which were paper surrogates for gold or silver held by the issuing banks, was much simpler.
Paper money also had disadvantages, principally that notes sometimes came from distant banks of unknown solvency. So once you had accepted payment in paper, you had to find a way to get some value for it.
You could, of course, swap it with someone else for goods or services, but the problem was finding a person willing to make the exchange. The issuing bank might go bankrupt before the holder could convert the paper into hard money, so because of their riskiness, notes usually traded at a discount. The farther notes were from the issuing bank, the less they were worth.
Newspapers even printed tables showing the exchange rate for promissory notes issued by various banks.
Enter the state bank
In 1806, the Vermont Legislature created a state bank with branches in Burlington and Westminster. (The Westminster branch was soon replaced by one in Woodstock.) To ensure the banks remained solvent and the currency kept its value, lawmakers required banks to raise capital in gold, silver and copper coins worth $25,000 before issuing any currency.
On the assumption that only a portion of the paper notes would be redeemed at any one time, banks could issue notes worth a total of three times the value of the hard currency held in their vaults.
The editor of Windsor’s Vermont Journal newspaper believed bank directors needed to have some skin in the game. Without a personal stake in the bank, he wrote, they “will lend bills as caprice and prejudice may dictate” and “lend to needy dependents and favorites.” The editor proved prescient, as some branch directors quickly grew reckless.
But the state bank, which added a branch in Middlebury, had other pressing problems. The state economy was in shambles due to an American embargo against trade with Britain, launched by President Jefferson in response to British military aggression. And directors of the various Vermont State Bank branches had quickly issued more paper currency than they could justify with the hard cash on hand.
So when people tried to redeem notes for coins, the banks tried to discount the value of the currency being redeemed and delay transactions as long as possible. People understandably lost faith in the branches and their notes.
The Vermont House formed a committee to investigate. It found that the branches in Burlington, Westminster and Woodstock all had made many bad loans, and that their books contained significant irregularities. Still, they all produced a profit.
The same couldn’t be said of Middlebury. Directors Chipman, Seymour and Willard all had a stake in having a branch in their town — it bolstered the local economy — but they had no financial stake in it. When investigators examined the branch’s books, they found them difficult to decipher, but they were able to determine that the bank had given out numerous unsecured loans, engaged in illegal banking practices, and failed to collect thousands of dollars in interest on loans.
Furthermore, investigators discovered that the directors decided not to use their considerable powers to collect debts. They could have seized property or had the debtors imprisoned. Instead, they regularly sued the debtors, with lawyers Chipman and Seymour racking up significant legal fees in the process. Worst of all, the bank simply couldn’t account for a $13,750 shortfall.
A political ploy
The House committee recommended that Chipman, Seymour and Willard face lawsuits. Instead, the directors suggested, the Legislature could appoint a board to review the charges and make a ruling, which the directors agreed to accept. A review board, they argued, would be cheaper, more thorough and speedier than a bunch of lawsuits. Lawmakers agreed, and appointed the justices of the Vermont Supreme Court to serve as the board.
When the review board asked about the missing money, the directors offered an interesting explanation: Several years earlier, they claimed, a local merchant, Joshua Henshaw, had stolen it. Late one day in June 1809, the bank’s cashier had left the building for what he thought would be a brief errand, so he bolted only one of two locks on the door.
However, he didn’t return until the next morning, and found both bolts locked. When a blacksmith let him into the bank, the cashier found his key to the other lock on the counter where he had left it — suggesting that the cashier couldn’t have been the thief and that someone else had entered the building.
Historian Kenneth Degree, who years ago wrote a detailed account of the Middlebury bank’s troubles in Vermont History, the journal of the Vermont Historical Society, poked numerous holes in the directors’ claims. The cashier said he failed to bolt both locks only this one time. How coincidental that this was the night Henshaw chose to strike!
Moreover, Degree noted, Henshaw was a convenient scapegoat. He had fled Middlebury just ahead of creditors and resettled in Montreal, where he couldn’t easily be interviewed.
But if he had stolen the money, Degree asked, why hadn’t Henshaw simply repaid his debts? Even more curious: If the directors suspected Henshaw, why was there a notation in the bank’s accounts that they had hired him the following year to install a safe?
The justices weren’t impressed with the directors’ defense, finding that they owed the state nearly $23,000. They were lucky not to face a criminal trial.
The case should have ended there, as the directors had agreed, but Chipman, who represented Middlebury in the Legislature, managed to get himself elected speaker of the House. In that office, he received the justices’ report, but decided that still another review was in order.
Not wanting to bias the committee, of course, Chipman asked another House member to appoint its members. In less than two weeks, this latest committee, composed of Chipman’s colleagues, decided the directors were responsible for only $1,200 lost due to the bank’s mismanagement.
The committee relied on new evidence to find the directors not responsible for the nearly $14,000 that was missing. This new evidence relied on the word of 14-year old Udney Penniman, who testified that Henshaw’s son had told him he had found a box in a cupboard in his home containing between $13,000 and $14,000.
Why would Penniman make up such a story? Perhaps, Degree suggested, because Penniman’s father, Jabez, was overdue repaying a loan from the Middlebury bank. So why would the House committee members believe the story? Could it be because it conveniently got their boss, and two other prominent Vermonters, off the hook?
The banking scandal failed to derail the careers of Chipman and Seymour. Chipman was soon elected to Congress, and after his congressional career, he returned to Vermont to help create the state Senate. (Up to that point, Vermont’s legislative branch had only a single chamber.)
Seymour remained a wealthy lawyer, and was eventually elected to the U.S. Senate.
Only Willard struggled after the scandal. He still owed nearly $3,000 of a loan he had secured from the bank. Having already given up his medical practice, he was unemployed, with little way to earn back the money.
Consequently, his wife, Emma, a former teacher, had to return to work. She soon founded the Troy Female Seminary in New York State (now the Emma Willard School) and became a pioneer in girls’ education.
So at least one good thing came out of Vermont’s sordid banking affair.
