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What was the Kirtland Safety Society "anti-bank"?

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.^[1] 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.^[2]

In principle, the Kirtland Safety Society 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.

The Kirtland Safety Society was reconfigured as an "anti-banking company" after it failed to receive a charter as a bank

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."^[3] 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.^[4] 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,^[5] 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."^[6]

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.^[7]

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.

What is the timeline of the Kirtland Safety Society?

Timeline of events

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.^[8]

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.^[9]

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

Was are the terms and definitions related to banking in the 1800s?

Terms and definitions

face value

the specie value marked on scrip. For a $20 note, the face value would be $20.

note

another term for scrip

redeem

to exchange scrip for specie at the bank

specie

hard currency, precious metal coins of accepted value (gold or silver)

scrip

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".^[10] 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.

What were banks like at the time that the Kirtland Safety Society was established?

Kirtland was not alone in this struggle—hundreds of frontier communities tried to set up banks in the late 1830s

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.^[11]

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.^[12]

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.^[13]

Why were properties in the name of Joseph Smith?

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.^[14]

Did Joseph Smith personally profit from the Kirtland Safety Society?

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.^[15]

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.^[16]

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 as late as 1843 worked to settle his Kirtland debts

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.^[17] 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."^[18]

R. McKay White, "The Kirtland Safety Society"

R. McKay White,  Proceedings of the 2009 FAIR Conference, (August 2009)

The Kirtland Safety Society Anti-Banking Company is an important part of our church history, having, as it did, a significant role in the Kirtland apostasy. Yet, to date, it has received much more attention from anti-Mormons, or “the other guys”, than from our own scholars and apologists. As a result, there are a large number of myths about the Safety Society that the other guys use to criticize Joseph Smith and destroy faith.

Today, I’m going to lay the episode wide open. We’ll see the myths that have sprung from the creative minds of interested parties, the facts will be laid bare, and in doing so, we’ll see why the Prophet deserves a good name.

Click here to view the complete article