Chapter XXVII: Georgia Repudiation Bonds (2)

The State of Georgia gold 7 per cent. quarterly interest bonds
were placed by the Governor of Georgia in my firm’s hands as
additional collateral against the advances made to the State,
with full instructions to sell same and credit avails.
Application was made by request of Governor Bullock to have this
issue of bonds placed on the regular list of the New York Stock
Exchange, and after a full investigation by that body, they were
admitted. A portion of these gold bonds were sold in this
country and the balance in Europe. When the Georgia Bond
Committee came here 77,000 of these bonds were in Europe in the
banker’s hands there for sale, and my New York firm held 25,000,
all others received having been sold. These 102 bonds were
reported to this committee as unsold at that time, but soon
thereafter, and before the Act of repudiation was passed by the
Georgia Legislature, these 102 bonds were sold and reported as
sold, and I think the price was 97½, and the State’s account was
credited with the avails, and the proper authorities of the
State were duly notified thereof. Up to the time of sale of
these 102 bonds our standing order to sell continued and was
never revoked; because, however, these 102,000 had been reported
to the Georgia Bond Committee when in this city as being on hand
at that time, they were repudiated, together with the other
bonds which we were supposed to still hold. The New York Stock
Exchange was called upon by the Treasurer of the State of
Georgia to order struck from the list these 102 bonds, and the
Exchange was compelled to be governed thereby, as official
notice had been received of their repudiation. The following
were the numbers of these bonds * * * * You will perceive that
the numbers are not consecutive, thus showing that they were not
the last of the bonds placed in our hands. The low numbers were
received first and the highest numbers last, in the deliveries
made to us by Governor Bullock. Under this statement of facts,
which I am prepared to prove, I insist that these 102,000 bonds
are as binding upon the State of Georgia as any of those which
are now recognized. My fellow members of the Stock Exchange who
have made investigation fully confirm this opinion. A large
number of the coupons of these bonds were paid by the State on
these 102,000 bonds, thus showing the State’s recognition of
them at one time. My firm repeatedly called upon the officials
of the State of Georgia to pay the balance due, but we could get
no response. After waiting patiently a very long time, we called
in eminent counsel for advice in this matter, and under said
advice the Governor and Treasurer of the State of Georgia were
notified in the regular legal form that if the said indebtedness
was not paid on or before a specified date the collateral in our
hands, each item being specified, belonging to the State, would
be sold at public auction at the Merchants’ Exchange Rooms, 111
Broadway, at 12 o’clock, by A. H. Muller & Sons, auctioneers.
This notice of said sale, together with list of securities, was
inserted in the newspapers; the sale took place, and the 800,000
Currency and other bonds were disposed of to the highest
bidders, and the State’s account credited with the avails. All
these securities should be considered, therefore, as having
passed out of my firm’s possession and in the hands of other
holders for value. The State of Georgia in this matter is
certainly amenable to New York laws, and the entire business was
conducted in accordance with said law. Governor Bullock’s
successors did all they could to depreciate the securities
issued by their predecessors, and are responsible for the low
prices which the State of Georgia bonds afterward sold for, as
during Governor Bullock’s administration the State 7s were at
about par and the first mortgage Brunswick & Albany bonds,
guaranteed by the State, sold at 90 and upwards. As an evidence
of the high credit which my firm had worked up for the State, we
bought out the first million issued of Brunswick & Albany First
bonds guaranteed by the State of Georgia, in the Berlin and
Frankfort markets at 104, and there were seven millions of bids
therefor, and the one million had to be distributed _pro rata_
amongst the said bidders. In testimony of the correctness of
this statement, I refer you to Mr. Budge, the head active
partner of Hallgarten & Co., and Mr. Schiff the head active
partner of Kuhn, Loeb & Co., of this city, who were interested
with me, and through these two gentlemen the bonds were sold.
After this great success, I ask you, or any fair-minded man, was
not my firm entitled to continue to advance upon Brunswick &
Albany first mortgage bonds endorsed by Georgia? and as the 275
Cartersville & Van Wert bonds, endorsed by the State of Georgia,
were offered to my firm shortly after this signal success as
collateral, were they not also equally justified in advancing
167,000 upon them? and _in that_ way, and in that alone, these
securities came into our hands. I most positively assert that my
firm never had any other pecuniary interests but as herewith set
forth in these two enterprises. At the time of the repudiation
of the State, my firm held

750,000 Brunswick & Albany first mortgage bonds,
endorsed by State of Georgia.

275,000 Cartersville & Van Wert first mortgage bonds,
endorsed by State of Georgia.

587,000 State of Georgia Gold 7s.

350,000 Brunswick & Albany first mortgage bonds.

400,000 Coupons cashed by us on the State of Georgia
securities, but a legal claim
against the State.

800,000 State of Georgia Currency 7s.

——

3,162,000

Also, a judgment of 525,000 obtained in favor of Henry Clews &
Co. in the State courts of Georgia against the Brunswick &
Albany Railroad Company, being an amount due my firm over and
above all securities in our hands. My firm also obtained in the
United States District Court of Georgia a judgment to secure our
advances of 167,000 to the Cartersville & Van Wert Company.
Neither of these judgments have ever been satisfied.

This leaves out entirely the 102,000 Georgia 7s (quarterlies),
as well as many other scattering lots of different issues of
the State of Georgia securities. The past due bonds referred
to by Mr. Hammond were being hawked about, both here and in
London, for the purpose of forcing their payment, and the
holders threatened to use them to interfere with the sale of
the gold 7s which we were about to bring out in this and
foreign markets. I mentioned this matter to Governor Bullock
when on a visit here. He then directed me to buy up such of
these bonds which were in troublesome hands, and as they were
a demand claim against funds then in the State Treasury, all
you have to do, he said, is to charge up the amount which you
paid for said bonds to the State’s account and retain in your
hands the bonds as collateral, and when the State is flush
enough I’ll see that you are paid direct from the Treasury.
These past due bonds belonged to us, and were taken up by our
money and not the State’s; the 98,000 which were cancelled,
which Mr. Hammond refers to, were so cancelled by error, which
I am fully prepared at any time to prove. The depreciation in
Georgia State bonds which Mr. Hammond refers to did not exist
during Governor Bullock’s administration, but was brought
about by his successors in office, as they did all they
possibly could to depreciate the bonds of the State authorized
and issued by the previous Legislature.

I have the honor to remain,

Your obedient servant,

HENRY CLEWS.

* * * * *

GEORGIA SECURITIES AND NEW YORK SAVINGS BANKS.

The efforts that are being made to place Georgia securities in
the savings banks of New York ought to be resisted for two very
good reasons: First, such investment would be contrary to the
law of the State; second, even if it were legal it would be
imprudent and unsafe.

As to the authority of our savings banks to invest in these
securities, it is understood that the opinion of the
Attorney-General has been asked. On this point there is not much
room for question. Savings banks are prohibited by law from
investing in the stocks or bonds of any State that has within
ten years defaulted in the payment of any part of the principal
or interest of its debt. By a constitutional amendment adopted
in 1877, Georgia ratified previous acts of the Legislature
repudiating more than eight millions of its obligations. The
excuse given for this proceeding was that the State’s
obligations had not been lawfully contracted, and therefore were
not binding. On this ground it is claimed that Georgia
securities do not fall within the prohibition put by the law
upon the savings banks of New York. There would be some force in
this view if Georgia were sustained by any judicial decision
holding the bonds invalid. But it took advantage of that
principal which protects a State against suit by a citizen. It
decided the question by its own arbitrary edict It gave its
victimized creditors no voice in the matter. In the absence of
judicial support or warrant, its action can be regarded only as
a repudiation.

But if there were no legal obstacle in the way, prudence alone
should deter any savings institution from investing in the bonds
of a State that has so recently broken its faith and repudiated
its obligations. The managers of a savings bank hold an
exceptional trust. These institutions are the depositories of
the earnings of the poor. The first consideration in their
management is safety. With that end in view the law imposes the
most stringent regulations on their supervision and the
disposition of their funds. Their investments are properly
restricted to the safest and most unquestionable securities.
There is neither authority nor excuse for taking any risk. Let
individuals, if they wish, invest in Georgia bonds. That is
their own business. But the managers of a savings bank cannot
run any such risk without failing in their duty to thousands of
poor depositors.—_N. Y. Herald, July 17, 1885._

* * * * *

THE ATTORNEY-GENERAL’S DECISION.

The decision of the Attorney-General, as was expected, wisely prohibited the savings banks of this State from risking any of the hard earnings of their large number of depositors in such an uncertain security as Georgia bonds.

The Bank Superintendent, Willis S. Paine, referring in his report of March, 1886, to this decision, says:

“For some time there has been a determined effort to have the
bonds issued by the State of Georgia accepted as a lawful
investment for savings banks of this State. My predecessor in
office declined to recognize their legal right to invest in
bonds of the State mentioned. Late in 1885 the State issued a
considerable amount of bonds, which were offered to the savings
banks on terms advantageous to them, and there was a desire on
the part of some of the banks to purchase the bonds. The matter
was by me referred to the Attorney-General to determine whether
the State had defaulted. Several hearings were had, at which the
various interests involved were represented by eminent counsel.
The conclusions reached by the Attorney-General were based upon
a consideration of the facts and circumstances relating to the
issue by the State of Georgia of its guarantee of $1,500,000 of
bonds of the Brunswick and Albany railroad, which he holds are
in default of interest, the principal not yet being due. He
reaches the conclusion that at least in the case of the bonds
issued or indorsed in aid of the Brunswick and Albany railroad
it has defaulted, and this brings the case within the
prohibition of the statute of New York regulating investments by
trustees of savings banks. He therefore concludes that the
savings banks of New York may not lawfully invest their deposits
in the bonds of the State of Georgia.”

* * * * *

GEORGIA’S NEW ISSUE.

An attempt was made last summer to have several millions of the new issue of Georgia bonds listed on the Stock Exchange in a second hand style, through the instrumentality of Mr. Fred. Wolf, who was presumably an innocent holder of these bonds. On this occasion I addressed to the Governing Committee the following protest:

June 22, 1886.

_To the Governing Committee of the N. Y. Stock Exchange_:

DEAR SIRS:—I have just been informed, whether correctly or not,
that, not the State of Georgia, but a person by the name of Mr.
Fred. Wolf, of this city, has applied to your Committee to list
$3,300,000 State of Georgia 4½ per cent. bonds, and sets forth
that said bonds are to take up those of the State maturing in
February, April and July. I am advised that the bonds which
matured, during the two months first named, long since past,
have already been taken up by the State, so there remains but
those which mature on the 1st of July next outstanding of the
class of bonds referred to. At the time I was instrumental in
defeating the State of Georgia from removing a very necessary
restriction imposed by a New York State law from lodging these
same bonds upon the savings banks, the officials of the State of
Georgia exulted over the fact that the said defeat in no way
injured the State of Georgia, as the bonds had already been
disposed of at a satisfactory price to the State, and therefore
no longer belonged to them; thus showing that the State of
Georgia does not make the application for the admission of these
bonds to the Exchange, but clearly shows that they are in
possession of the avails of these said bonds to provide for; not
only those that had matured but those that are due on the 1st of
July next, consequently it takes away the necessity of the State
having the application now made favorably acted upon by your
Committee. Mr. Wolf, therefore, makes the application in his own
behalf, doubtless to enable him to extricate himself from his
own speculative venture in these so-called securities, which he
was in hopes when he took them of turning over to certain saving
banks who, by the Attorney-General’s opinion, were precluded
from buying these identical bonds, which misfortune, from the
statements made by the officials of the State of Georgia, falls
not upon them but the party who has bought the bonds. As the
original plan of lodging these bonds in the savings banks was a
failure and the poor people’s money on deposit there was saved
from wreck thereby, it is now sought to land them upon others,
providing the New York Stock Exchange can be secured to give
character to them by listing them as is now attempted. My firm
represents two seats on the New York Stock Exchange and has
large interest there and I protest against the proposition to
list these Georgia bonds for regular dealings at the Exchange,
as the State of Georgia is not only in default in payment of her
bonds, both principal and interest, and long since past due, but
besides has repudiated eight millions of her bonded debt which
were issued for value received under the great seal of the
commonwealth, properly signed, legally issued and in the hands
of innocent parties who have acquired vested rights therein,
and, therefore, are the victims of a gigantic robbery by the
repudiation of said bonds. It is but fair to assume that a State
which undertakes to blot out by a legislative act, without being
willing to submit any questions at issue to the judiciary—who
alone have the right to decide upon such questions—find _that_
to be so simple a method of paying debts will not unlikely be
tempted to repeat repudiation often in the future. These bonds
now attempted to be foisted on the public cannot, by any
possibility, be expected to have any greater permanency of value
than those that have already received the shameful fate of being
reduced by repudiation to the value of brown paper. I foresee,
therefore, that if the N. Y. Stock Exchange lists this new issue
of bonds, that by fictitious methods quotations may be obtained,
and in all probability the members of the N. Y. Stock Exchange
be induced to deal in them and suffer the cruel loss that has
already been my fate. The State of Georgia, with interest to
date, owes me and my old firm at least five million dollars;
therefore, I have a right, owing to my large interests in the
Stock Exchange, to urge that the application to list these new
Georgia bonds be denied, for I fear that should it be otherwise,
many of the members whose seats are in part security for
transactions, may be tempted to deal in these so-called
“securities” and suffer great loss if not ruin thereby, for when
the time of repudiation takes place the security in their seats
at the Exchange may be made valueless through said loss to
honest creditors. When the State of Georgia wipes out the
disgraceful blot of repudiation which now stains the escutcheon
of the commonwealth, she will then be entitled to have the
facility which the New York Stock Exchange has the power of
granting, to aid her in restoring her credit to rank alongside
others. She will then be entitled to credit on a 3 per cent.
basis similar to the States of New York, Massachusetts, Maryland
and many others, _but not before_.

Respectfully yours,

HENRY CLEWS.

* * * * *

SHALL REPUDIATION BE RECOGNIZED

NEW YORK, June 25, 1886.

_To the Governing Committee of the N. Y. Stock Exchange_:

DEAR SIR:—I send you an exact copy, published in the _Graphic_
newspaper under date of June 15th, 1886, of a bond issued by the
State of Georgia, which you will perceive is an out-and-out
State bond and represents an issue of 1,800 bonds of $1,000
each. The act of authorization of the State was passed upon by
the eminent legal firm of Evarts, Southmayd & Choate, also by
the late Judge Emott as being in conformity with law and in
every respect a regular and legally issued bond of that State.
The innocent holders of these bonds are the following:

The Broadway National $200,000
Bank

The Metropolitan Savings 100,000
Bank

The Brooklyn Trust Co 100,000

Russell Sage 200,000

Henry Clews & Co 486,000

The Union Trust Co 100,000

Ezra A. Boody 200,000

Richard Irvin & Co 133,000

The Commercial Warehouse 200,000
Co. about

The balance is in small lots scattered in numerous hands. None
of these bonds was disposed of for less than 90 cents in money.
The Broadway Bank loaned $160,000 upon theirs, taking them as
collateral. Some other institutions held them as collateral
against advances similar to that of the Broadway Bank. The whole
of this issue was repudiated by the State.

The State of Georgia also notified the Exchange that a large
number of bonds known as Quarterly Gold Georgia Bonds were also
repudiated. The numbers of these bonds were scattered in amongst
an issue of two and one-half millions of that class of bonds,
all of which were long previously admitted to dealings at the N.
Y. Stock Exchange. The N. Y. Stock Exchange having received
notice from the State that they had been repudiated, ordered
them stricken from the list. These bonds are all in the hands of
innocent, _bona fide_ holders, who paid in the neighborhood of
par for them in all instances and the avails therefor were
received by the State.

Those not repudiated of these issues have since and are now
daily quoted at the N. Y. Stock Exchange, the price being at the
present time nominally about 112.

I have only noted a part of the bonds repudiated by the State of
Georgia, so that you may be convinced of the fact that the bonds
are out-and-out State bonds and just as good an obligation
issued under the great seal of the commonwealth of Georgia and
as absolutely binding upon the State as the new bonds which are
now attempted to be listed; and should the latter be listed, the
chances are that they will share the same fate as those noted.

If a State can issue such obligations, and wipe them out by an
act of repudiation with impunity, and the Stock Exchange ignore
such shameful conduct, there will then be no safety in buying
bonds issued by any State, as it is thereby made to appear that
there is no stain left upon her escutcheon, the evidence of
which is that the N. Y. Stock Exchange has backed them up in
their action. Under the Constitution which gives sovereign
rights to States a citizen holding these repudiated obligations
cannot sue a State, therefore there is no redress for a great
wrong done.

I shall be glad to appear before your Committee and give you all
the evidence in the case before you decide upon the application
now before you to admit $3,300,000 Georgia 4½ per cent. bonds.

Very respectfully yours,

HENRY CLEWS.

* * * * *

A REMINDER TO SENATOR EVARTS.

In connection with this Georgia bond affair, even at the expense of stringing the subject out to a considerable length, I cannot omit the following communication to Senator Evarts on the subject:

NEW YORK, April 13, 1886.

_Hon. William M. Evarts, Washington, D. C._:

DEAR SIR—It is quite generally understood, from information
lately received here from Washington, that there is soon to be
sprung upon Congress a bill providing for large appropriations
for the improvement of rivers and harbors and other so-called
public improvements in the South. There is a feeling of strong
opposition in financial circles in this city against the justice
of the General Government making such appropriations to many of
the Southern States at the present time. This opposition is
based upon the fact that the State of New York contributes by
taxation about one-fifth of all the revenue raised in this
country which provides for the expenses incurred in carrying on
the Government, so that whatever moneys are spent for the
so-called public improvements, at least one-fifth of the amount
is extracted from the pockets of the citizens of this State,
through taxation; and as many of our citizens have been so
villainously victimized by the repudiation of the Southern
States, especially by the State of Georgia, it is but just and
fair to these victims, therefore, that no appropriations of
money for the purposes named should pass Congress for the
benefit of any State which is at present under repudiation. It
is eminently proper that Congress should take a stand against
this, as the very people who have been so robbed are to pay the
cost. A large number of them have been ruined, as a penalty for
believing in the honor and good faith of Southern States, and
while such claims remain unpaid, it certainly does appear harsh
that these citizens should be taxed by the General Government
and compelled to contribute to funds to be appropriated for the
benefit of States now in default of both principal and interest
for bonds issued by them under proper legislative authority and
bearing the great seal of the commonwealth. The money paid for
these bonds by confiding people has gone into public
improvements in those States. If the Government desires to make
appropriations, they should be made to the holders of these
bonds, and the share to the various States be in their own bonds
in place of money. The States thereby would take the place of
the present holders. When repudiated bonds are all extinguished
it will be time for the Government to begin the appropriation of
money direct. No greater public improvement for the South, as
well as for the credit of the entire country, would equal the
removal from the various States of the blot of repudiation which
now stains their escutcheons, and reflects most injuriously upon
the credit of the General Government itself.

Yours very respectfully,

HENRY CLEWS.

* * * * *

ANOTHER STRONG PROTEST.

September 2, 1886.

_James D. Smith, President of the Stock Exchange_:

DEAR SIR—I beg to hand you herewith a memorial in relation to
the new issue of Georgia bonds, signed by a number of the
largest and most important firms and corporations in this city,
most of whom are connected by membership with the Stock
Exchange, and all of whom, like myself, are victims of the State
of Georgia’s repudiation.

I understand that the subject of admitting this new issue of
these bonds is to come up for consideration at the next regular
meeting of your committee. Will you do me the favor of
presenting this petition at said meeting? Hoping this matter
will receive your favorable consideration and influence, I have
the honor to remain,

Yours very respectfully,

HENRY CLEWS.

_To the Governing Committee of the New York Stock Exchange_:

We, the undersigned, holders of repudiated bonds of the State of
Georgia, have learned that an application has been made for
listing upon your Exchange new issues of bonds of that State.

We respectfully urge upon you that so long as the name of
Georgia remains dishonored by repudiation, you should stamp upon
such application your absolute disapproval, and thus maintain
the well known and uncompromising hostility which the New York
Stock Exchange has always shown against bad faith and dishonest
practice.

August 24, 1886.

RICHARD IRVIN & CO.,
MORTON, BLISS & CO.,
JAS. B. JOHNSTON,
S. W. MILBANK,
HENRY CLEWS & CO.,
HALLGARTEN & CO.,
FULTON BANK OF BROOKLYN, By J. A. NEXSEN, Cashier,
WALTER S. JOHNSTON, Receiver Maine National Bank,
MORRIS K. JESUP,
JAMES R. JESUP,
DREXEL, MORGAN & CO.,
FOSTER & THOMSON,
NATIONAL BROADWAY BANK, By F. A. PALMER, Prest.,
L. VON HOFFMAN & CO.,
RUSSELL SAGE,
C. F. TIMPSON & CO.,
HERMAN R. LE ROY,
SAMUEL RAYNOR & CO.,
THE N. Y. WAREHOUSE & SECURITY CO., By S. C. KNAPP,
Secretary,
COMMERCIAL WAREHOUSE CO., J. F. NAVARRO, Prest.

The petition of these gentlemen was granted, and true to its honorable record, the Governing Committee of the Stock Exchange refused to have anything to do with the bonds of the repudiating State of Georgia.

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