Mormonism and church finances/Kirtland Safety Society
|Joseph Smith, Jr.|
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Critics attack Joseph Smith over the Kirtland Safety Society (KSS) on multiple grounds:
- they claim the KSS was a "wildcat bank"
- they claim that the bank was illegal, and that the Church broke the law by founding it
- they claim it was a money-making scheme for Joseph
- they claim its failure proves Joseph was not a prophet
The Kirtland Safety Society was an unwise venture that was probably illegal, though legal counsel was divided on that matter at the time. The intent of Church leaders does not seem to have been to break the law, but to solve a vexing problem which thousands of others also faced. The failure of the bank was not due to mismanagement or a desire to enrich individuals, but due to the relatively fragile nature of the time’s financial infrastructure, and the economic conditions of 1837. The lack of a charter was the KSS's biggest weakness and the most ill-advised decision connected with it. Arguably, even had the bank possessed a charter, the outcome would have been little different, save that the Church leaders would have suffered fewer legal problems and harassment.
The Kirtland Safety Society is an excellent example of why Latter-day Saints do not put their trust in men, but in God. It also demonstrates that the Saints will continue to support fallible men as prophets of God.
- Boxes filled with sand—
Critics claim that Joseph Smith misled investors in the Kirtland Safety Society by collecting boxes full of sand with money placed on top, in order to make it appear that the bank had more hard money than it did. (Link)
- False charges against Warren Parrish—
Critics claim that Joseph Smith lied about Warren Parrish, falsely charging him with financial misconduct, and trying to shift the blame. (Link)
- Good as gold—
Critics make light of Joseph Smith's claim that Kirtland Safety Society notes would be "as good as gold." (Link)
- Warren Parrish and Kirtland Safety Society "revelation"—
Fawn Brodie claimed that "The bank was said to have been established by a revelation from God...." (Link)
After presenting a timeline of events associated with the KSS, this article will discuss:
- vocabulary often used in discussions of banks and banking
- the reason for the formation of the KSS
- the status of banks in the 1830s frontier
- the way in which the KSS functioned
The criticisms will then be addressed.
Timeline of KSS
- 27 March 1836
- Kirtland Temple dedication
- August 1836
- Oliver Cowdery investigates the production of bank notes, so consideration of a bank underway by this date.
- 2 November 1836
- The Kirtland Safety Society Bank’s constitution is drafted. Sidney Rigdon made president; Joseph Smith made cashier.
- 1 January 1837
- Oliver Cowdery arrives with printing plates for bank notes; Orson Hyde reports that the state legislature will not grant them a charter. Their inability to receive a charter leads them to form a joint-stock company, the Kirtland Safety Society Anti-Banking Company (KSS).
- 2 January 1837
- KSS opens for business.
- 6 January 1837
- Notes from the KSS begin circulating
- 23 January 1837
- The KSS announces it can redeem notes with land, but was unable to redeem its notes in specie (gold)
- 1 February 1837
- KSS notes circulating at only 12.5 cents per dollar face value
- 10 February 1837
- A second attempt is made to get a bank charter; some non-Mormons are part of this application, including Joseph Smith’s lawyer and Samuel Medary, a future governor of two states.
- April 1837
- Joseph Smith twice warns the Saints that the KSS will fail if the members do not accept the notes as payment for goods and services
- May 1837
- All banks in Ohio suspend specie payment as a banking panic spreads west from New York.
- 8 June 1837
- Joseph Smith resigns from KSS, as he is convinced the bank is not viable
- June 1837
- LDS newspaper Messenger and Advocate reports that Kirtland land prices have increased 800% during the past year alone.
- July 1837
- Extant note for $100 with Warren Parrish's signature.
- August 1837
- Joseph Smith denounces the new leadership of the KSS, since Parrish, at least, was continuing to issue new scrip even though the bank was failing.
- 27 September 1837
- Joseph and Sidney Rigdon go to visit Missouri; in their absence, the Kirtland Church is rent by strife and apostasy
- October 1837
- Joseph and Sidney found guilty at trial of illegal banking and issuing unauthorized bank paper currency (a civil, not criminal offense). They are fined $1,000 each, and appeal.
- November 1837
- Final failure of the KSS. Joseph is left with debts of $100,000; he has goods and land, but these are unable to be converted into ready cash
- 22 December 1837
- Brigham Young flees Kirtland for Missouri, convinced that his life is in danger from apostates because of his staunch defense of Joseph Smith
- 12 January 1838
- Joseph Smith, having returned to Kirtland, leaves with Sidney Rigdon to escape the risk of prison and mob action
Terms and Definitions
- face value
- the specie value marked on scrip. For a $20 note, the face value would be $20.
- another term for scrip
- to exchange scrip for specie at the bank
- hard currency, precious metal coins of accepted value (gold or silver)
- paper money, issued by a bank. An example of KSS scrip can be seen here.
- suspension of payment
- an indication by a bank that, until further notice, it can no longer redeem its scrip with the face value of specie.
- wildcat bank
- a bank established as a money-making scam. "A wildcat bank was one in which the managers of the bank made a deliberate effort to evade paying off notes by making the place of redemption inaccessible to those trying to trade notes for specie" (Partridge, 451). Thus, the bank kept the specie, and the note holder was left with worthless paper which no one would honor, since it could not be redeemed (the bank being located "where the wildcats are"). Such banks usually collapsed quite quickly when it became clear that their notes were not easily redeemed.
Why form a bank?
In the early days of the Church, the finances of Joseph Smith and the institutional Church were enmeshed. This was not unusual, as the idea of religious groups functioning as corporations and holding property was frowned on in Jacksonian America.
In 1836, the Church was centered at Kirtland, and was undergoing substantial growth. The Saints were constructing the Kirtland temple, at considerable cost, as well as financing property and business acquisitions, the immigration of poor members to Ohio, and missionary work.
To finance this explosive growth, loans were sought. Joseph Smith and the Church had extensive loans; some loans were for Joseph, some for Kirtland, and some for the Church. In some instances, Joseph was the only borrower, in other cases he was one among many who were liable for a given debt.
Banks do not loan money to those they consider poor risks, and so to his contemporaries, Joseph clearly appeared to have the ability to meet his obligations. The amount of the loans seems to have been less than the total value of the lands, businesses, and goods which Joseph and the Church owned. However, these assets were difficult to liquefy—the loans were often short-term (from a few weeks to around 180 days) and so cash flow problems beset Joseph continually.
What were banks like at the time?
This sort of situation is difficult for a modern reader to appreciate: we have easy world-wide banking, debit cards, credit cards, mortgages, and lines of credit. Kirtland was not alone in this struggle—hundreds of frontier communities tried to set up banks in the late 1830s.
As one author remarked:
- The founders of the Kirtland Bank would have avoided their distress if national and state leaders had allowed financial markets to grow in an orderly manner. One medium-sized, twenty-year mortgage would have solved most of the financial problems faced by these founders.
The Saints were land rich but cash poor. Credit was scarce on the frontier, and even specie was in short supply. The Saints could not easily convert their considerable land wealth into cash to pay for purchases. (One cannot, for example, pay someone 1/10 of an acre of land for a barrel of nails!)
There were no national banks, and many Democrats were strongly anti-bank. Those on the frontier needed help desperately to keep their economies moving:
- The attitude was, essentially, that "the East won't finance us and if they do, they will kill us with interest." The conclusion that frontier communities should finance themselves, whatever their hard equity, was not unique to Kirtland. Added to the economic condition of the western frontier was the Mormon impulse favoring self-sufficiency.
The failure of the Kirtland bank was not unusual, especially for rural banks—fully half of the banks formed in the 1830s had failed by 1845. This was due in large part to the economic realities of the time:
- Most economic historians do not believe that banks at that time were usually operated by unprincipled men for selfish ends. More typically, it is the consensus that the instability of bank credit was inherent in the structure of the banking system and involved factors beyond the control of individual banks. The main flaw in state banking in the 1830s was that it was predominantly a rural institution and had little liquidity or shift-ability. In the large cities of the East, loans could be liquidated—that is, turned into cash quickly—by simply calling for payment, but this could not be done in the outlying areas...Thus the reckless and inexperienced management of many state banks was combined with a scarcity of productive commercial loans to create a state banking system with grave weaknesses. As a consequence, most state banks fulfilled their functions at the expense of constant bank failures, violent business fluctuations, and enormous losses to noteholders and depositors.
How did the KSS work?
Given that banking was in its infancy, the Saints were not sophisticated in their understanding of how a bank worked. Even Brigham Young, an astute businessman, was confused. Brigham deposited a note with his mark on it. He was shocked to receive the same note in payment from someone else a few days later! It seems that Brigham thought that the bank kept his note for him, and did not allow it to circulate. He thought of a 'bank' as something more like a safe deposit box—one puts their valuables in, and the bank keeps those same valuables safe, does not lend them out, and returns the exact same items back when asked. Brigham did not understand that a bank keeps a record of money deposited, but uses the funds deposited to make loans and investments, and to pay other creditors.
In principle, the KSS was to use land and specie to back its notes. The notes would then circulate and function as “money,” which would allow the cash-strapped Kirtland economy to function.
After failing to receive a charter for a bank, the KSS was hastily reconfigured as "a joint stock association, with limited power to issues notes" called the "Kirtland Safety Society Anti-Banking Company." This so-called "quasi-bank" style of operation permitted a commercial enterprise to effectively function as a bank without a bank charter. Other such quasi-banks were already organized in Ohio before the KSS, and even after the bank failures of 1837 (when Joseph Smith and others were prosecuted for operating an illegal bank), Ohio did little to act against other quasi-banks until 1873. Significantly, though, the KSS also had no corporate charter that could be "interpreted loosely" to allow for banking activities, and some authors regard this as the single biggest reason for its failure, although others have argued that the KSS was not unique, since "[t]here were other unauthorized banks in Ohio during this period and some encouragement was received from anti-Democratic newspapers to establish such institutions."
On 2 January 1837, Joseph also obtained a loan of $3,000 from the Bank of Geauga, a clear sign that non-Mormon bankers did not regard Joseph has over-extended or carrying too much debt.
There is no evidence that the KSS was a “wildcat bank.” It was located in Kirtland, a large and thriving town in Ohio. The bank did not decline to exchange scrip for specie. In fact, this willingness to honor its notes created trouble for the bank early on, since they had insufficient funds to honor their notes after only about two weeks.
Starting operations without a charter was clearly an unwise decision. It is doubtful that Joseph and associates had time to receive detailed legal advice between the time their first charter application was denied and the beginning of banking operations, but the documents creating the KSS clearly bear the marks of being drafted by legal counsel. There are also marked differences between the documents prepared for a bank with a charter, and for the subsequent "anti-banking society," suggesting that Church leaders did not simply "rewrite" the original legal documents:
- Joseph Smith, Sidney Rigdon and others directly involved were closely counseled by lawyers on the creation of the bank. The two organizing documents, of 2 November 1836, and 2 January 1837, respectively, are unlikely products of a lay hand. Quite plainly, they were drawn by counsel. Moreover, the differences between the two documents indicate legal craftsmanship, even more strongly than the style and content of the documents themselves. The organization of the Society, its form and legality, were matters upon which Joseph Smith obviously had close legal counsel and assistance. It is our conclusion that the legal advice he received was incorrect, or at best poor. It seems likely that Benjamin Bissell was the lawyer who counseled Joseph Smith concerning the bank, and who drew the organizing documents in both versions. It was Bissell who had been implicitly repealed by the Ohio legislature in 1824, and who unsuccessfully defended Joseph Smith and Sidney Rigdon in the litigation contesting the legality of the bank.
While the legal advice they received was probably poor, this is a professional failing on the lawyer's part. Furthermore, there was considerable debate as to whether the anti-banking laws were even constitutional.
A second charter application was made with the support of Joseph Smith’s non-LDS lawyer, Benjamin Bissell, and other non-Mormons. The bank’s supporters probably hoped that they could eventually get a charter when the political circumstances were more favorable, and the support of legal and political personalities probably encouraged them in their course of action.
Clearly, Joseph and his supporters did not simply set out to be reckless; they had both political and legal perspectives which gave them cause for optimism.
However, even with a charter, the bank would not have survived the financial crisis of 1837:
- Even with a charter the Kirtland bank likely would have failed during the economic turmoil of 1837. At best a charter would have allowed the bank to survive a few months longer to close without raising a flurry of law suits and apostasy and to be known by posterity as a simple business failure rather than as a shady venture. It is also clear that with or without the bank the economic turmoil that began in 1837 would have wrecked the Mormon community in Kirtland because of its highly levered position and the extremely short term nature of its debts…painful as it was the bank affair probably did little to alter the course of Mormon history.
In short, the KSS was found by a jury to be an illegal bank. The leaders of the Church made a sincere effort to solve the pressing financial problems which beset them, and were probably hasty and somewhat naïve about the undertaking. There does not seem to have been a willful effort to deceive or extort. And, the legal issues are not entirely clear, even in retrospect:
- The question whether the activities of the Society in 1837 were indeed unlawful under Ohio law requires considerable and fairly sophisticated legal analysis. Although we are now satisfied that the activities of the Society did indeed violate the proscriptions of the 1816 Ohio Statute, that conclusion is not entirely free from doubt, even with the benefit of hindsight. It must have been much less clear in 1837, when Joseph Smith was faced with a decision as to how to proceed in the face of the refusal of the Ohio Legislature to grant a charter.
In any case, the financial crisis of 1837 likely could not have been averted even if all the legalities had been observed.
Joseph did not profit personally from the bank, and withdrew his support before the failure. Joseph probably suffered more legal repercussions than anyone from the event. There is no evidence that Joseph was “getting rich,” or attempting to do so, from the bank. He paid more for his stock in the bank than 85% of the subscribers, and he put more of his own money into the bank than anyone else, save one person.
In June 1837, Kirtland land values had increased by 800% in just one year, so the idea of backing the bank with land does not seem unreasonable.
Furthermore, the bank's weakness became a drain on Joseph, and he expended considerable resources trying to save it—including obtaining three new loans—which only worsened his position in the end.
Joseph was left with debts of $100,000. He had that value in goods and land, but it was difficult to convert these to cash. (Ironically, it was this very issue which had led to the bank's formation in the first place.)
Joseph fled for fear of his life, but also left creditors behind. Admirably, even as late as 1843, he continued to work to settle his Kirtland debts, even though he was far away in Nauvoo and effectively beyond the reach of his creditors. In a 23 June 1874 speech, Brigham Young indicated that "some of his [Joseph's] debts had to be settled afterwards; and I am thankful to say that they were settled up."
Joseph falsely blamed others?
Not a prophet?
Joseph did not record or claim a revelation on the formation of the Kirtland Safety Society. It seems, rather, to have been his attempt to solve a complex and serious problem that probably had no good solution given the financial tools available to him. His anxiety to solve the Church’s financial problems led to difficulty, but Joseph was not alone: hundreds of thousands of frontier settlers had to resort to similar tactics:
- Erroneous banking policies caused financial services to expand much more slowly than the growth in real economic activities retarded the growth process and forced people to create illegal mediums of exchange to substitute for inefficient barter.
Joseph insisted that a prophet was only a prophet when he was acting as such. The Kirtland Bank episode is a good example of fallible men doing their best to solve an intractable problem. (Joseph also emphasized that there was no expectation of success if members did not follow his counsel--which they did not.)
Brigham Young described an incident from his own life that speaks to the KSS period:
- I can tell the people that once in my life I felt a want of confidence in brother Joseph Smith, soon after I became acquainted with him. It was not concerning religious matters-it was not about his revelations-but it was in relation to his financiering-to his managing the temporal affairs which he undertook. A feeling came over me that Joseph was not right in his financial management, though I presume the feeling did not last sixty seconds, and perhaps not thirty...
- Though I admitted in my feelings and knew all the time that Joseph was a human being and subject to err, still it was none of my business to look after his faults. I repented of my unbelief, and that too, very suddenly; I repented about as quickly as I committed the error. It was not for me to question whether Joseph was dictated by the Lord at all times and under all circumstances or not...
- Had I not thoroughly understood this and believed it, I much doubt whether I should ever have embraced what is called "Mormonism." He was called of God; God dictated him, and if He had a mind to leave him to himself and let him commit an error, that was no business of mine. And it was not for me to question it, if the Lord was disposed to let Joseph lead the people astray, for He had called him and instructed him to gather Israel and restore the Priesthood and kingdom to them.
- That was my faith, and it is my faith still… it is taught to the people now continually, to have implicit confidence in our leaders to be sure that we live so that Christ is within us a living fountain, that we may have the Holy Ghost within us to actuate, dictate, and direct us every hour and moment of our lives. How are we going to obtain implicit confidence in all the words and doings of Joseph? By one principle alone, that is, to live so that the voice of the Spirit will testify to us all the time that he is the servant of the Most High...
Thus, Brigham did not deny the error, or insist that it could not happen. But, he did not allow himself to be distracted by it.
- [note] Dale W. Adams, "Chartering the Kirtland Bank," Brigham Young University Studies 23 no. 4 (Fall 1983), 477–478. PDF link
- [note] ?, "?," Latter Day Saints' Messenger and Advocate 3 no. 9 (June 1837), 521.
- [note] See Marvin S. Hill, Keith C. Rooker and Larry T. Wimmer, "The Kirtland Economy Revisited: A Market Critique of Sectarian Economics," Brigham Young University Studies 17 no. 4 (Summer 1977), 389–471. PDF link
- [note] Adams, 481–482.
- [note] Edwin Brown Firmage and Richard Collin Mangrum, Zion in the Courts : a Legal History of the Church of Jesus Christ of Latter-day Saints, 1830–1900 (Urbana and Chicago: University of Illinois Press, 1988), 54–58. ISBN 0252069803. ISBN 0252069803.
- [note] Scott H. Partridge, "The Failure of the Kirtland Safety Society," Brigham Young University Studies 12 no. 4 (Summer 1972), 446–447. PDF link
- [note] Andrew Jenson, Historical Record (Salt Lake City: Andrew Jenson, 1888), 5:433.
- [note] See Adams, 475–476.
- [note] Hill, Rooker, & Wimmer, 433–434.
- [note] Adams, 454.
- [note] Hill, Rooker, & Wimmer 435; citing C.C. Huntington, "A History of Banking and Currency in Ohio Before the Civil War," Ohio Historical Quarterly 24 (1915): 366-367.
- [note] Adams, 474–475; see also Hill, Rooker, & Wimmer, 434–435.
- [note] Partridge, 439
- [note] Adams, 475.
- [note] Hill, Rooker, & Wimmer, 457.
- [note] Hill, Rooker, & Wimmer, 457.
- [note] Adams, 480.
- [note] Hill, Rooker, & Wimmer, 441.
- [note] Hill, Rooker, & Wimmer, 456.
- [note] Hill, Rooker, & Wimmer, 432.
- [note] Hill, Rooker, & Wimmer, 458.
- [note] Brigham Young, Journal of Discourses 18:242. See also discussion in Leland Homer Gentry, "A History of the Latter-Day Saints in Northern Missouri from 1836 to 1839," (Unpublished PhD thesis, Brigham Young University, 1965), 196. (Hard copy available from UMI Dissertation Express; order number 6509857.)
- [note] Adams, 481.
- [note] Brigham Young, "He That Loveth Not His Brother...," (29 March 1857) Journal of Discourses 4:297-297.