November 25, 1925, was a disastrous day in Yavapai County. Four banks suddenly and permanently closed their doors, and people’s deposits were frozen and unavailable—a mere month before Christmas!
The Prescott State Bank (PSB), as well as its affiliates in Humboldt and Jerome, and the Commercial Trust and Savings Co. (CT&S) located in Prescott, were closed by AT Hammonds, State Superintendent of Banks. He “gave ‘frozen paper’ as the cause,” the Tucson Citizen explained. Frozen paper refers to loans and assets that cannot be converted into cash.
Before deposits were insured by the federal government, when a bank failed, people would generally only end up with pennies on the dollar, and payments to them were few and far between.
The officers and stockholders of these failed institutions included some of the richest and most prominent citizens in the county. RN Fredericks was President of both the Prescott State Bank and the Bank of Jerome and the chief stockholder of both. His son-in-law, Paul Deming, was the cashier at the Bank of Jerome, which the superintendent of banks declared was “in bad condition, and there [was] little or no hope of effecting any plan whereby it may be saved,” the Arizona Daily Star revealed.
Mayor Morris Goldwater was Vice-President of the PSB, and President of the CT&S, and also had sizable stock holdings.
When it came to retrieving their money, depositors were put into one of two classes: “preferred” and regular. “Preferred claims” were first in line to get their money back and were guaranteed to receive 100% of their funds. Everyone else would get a portion of what was left, depending on the size of their accounts.
The only ones guaranteed to be “preferred claims” were deposits by the federal and state governments. Even counties and towns had no guarantee of getting their money back without a court order.
However, the Yavapai County supervisors went to court and were granted preferred status with its deposits, receiving all of its money, about $325,000, which included $100,000 in an insurance claim paid by the Maryland Casualty Co.
Grace Chapman, county recorder, succeeded in retrieving nearly $300 that was deposited by her office. Alex Jones, clerk of the county court, was able to regain the court’s $1153 in deposits.
The city of Prescott had on deposit $175,816 (about $3.25 million today). The city attempted to claim that three of its deposits should be ruled as preferred claims. The case was transferred to Pima County, and the court ruled that only $32,000 could be preferred claims. As a result, the city had to borrow money to complete some paving and irrigation projects that the council had already passed. Despite this whopping shortfall, city fathers voted to keep the tax rate the same, knowing that their citizens were also badly harmed.
For those who did not have preferred claims, the first payment to depositors of the PSB (called “dividends”) wasn’t made for nearly six months and was only a quarter of each balance due.
Noting the terrible burden the failures caused the citizens of Prescott, the Arizona Power Co. voluntarily reduced its rates from 4 to 8 cents a kilowatt hour in the city. During peak cooking times, the power company reduced its rate to the lowest in the state. “We are reducing the rates to take some of the burden from our residents. Our company did not lose any money in the recent closing of the Prescott State, and in lowering our rates we hope to be able to take a fraction [of] the loss from those who did suffer,” the Coconino Sun announced.
There were several other significant victims. The Lone Star Baptist church held a drive to obtain funds to finish their new building. People gave liberally, and since it was deposited into the PSB, the funds were no longer available.
At this time, every veteran who suffered from tuberculosis was sent to Whipple. (This was the reason for the construction of all the white buildings seen today. It was at that time, the fourth largest hospital in the country.) Many of these vets had accounts at the PSB, and the potential loss for them alone was around $100,000 (about $1.85 million today). The state executive committee of the American Legion pledged to do whatever it could to help the vets, although there really was little they could do.
Many businesses tried to get their deposits listed as preferred, but almost all of them lost. One case brought by Bashford-Burmister, showed that they loaned PSB $12,500 in liberty bonds to the bank in 1919 so it could secure the same amount from the state treasurer and the bonds were not returned. This case would go all the way to the Arizona Supreme Court, and in 1930, the court ruled against them, and the bonds were put up for auction with the proceeds going to the state.
Another set of victims were individuals and businesses who paid their taxes through the PSB, but the bank never sent the money to the state treasury. At first, the court ruled that the taxpayers should get their payments back, but in 1932, this was overturned by the Arizona Supreme Court, and people had to pay the money again. “Taxpayers who pay their taxes with checks do so at their own risk,” the Tucson Citizen lamented.
Several businesses tried to get their deposits under preferred status, arguing that the bank took the deposits unlawfully, knowing that it was already insolvent. One of these was the Ford Motor Co. which was out $4519 (over $83,000 today). None of these businesses succeeded.
The local Masons lodge attempted this same argument in court, as Fredericks, the Mason’s Treasurer as well as the President of the PSB, deposited $27,256 (worth over a half-million today) into his bank less than a week before it was closed. They also lost.
On April 22, 1926, it was reported that more than half of the funds on hand were already cited as preferred claims. $225,507.99 was claimed as preferred, while the bank had roughly only $400,000 for payment to all the rest of the depositors.
Months after the disaster, criminal cases against each of the banks’ officers were brought. A whopping 105 witnesses were brought to testify before a Grand Jury. Two indictments were returned against the man who closed the banks, AT Hammonds, the state superintendent of banks. He was charged with violating section 19 of the State Banking Code by not closing the banks sooner. The Jury declared ”that had the Bank of Jerome been properly examined and not merely paid casual visits, it never could have lost approximately $100,000 [about $1.85 million today],” the Arizona Republican reported.
“It has been freely declared here that the closing should have been done a long time before November 25,” the Coconino Sun declared. “We have heard estimates ranging all the way from two months to ten years as the period during which it operated without due regard to safety.”
Then the stockholders of the banks were called to task. The law required “double liability” for them should the banks fail. This meant that they would have to pay twice the amount of the par value of the stock they owned, which was added to the assets and divided by the depositors. This was especially hard for RN Fredericks, who owned the most stock by far.
On March 25, the state banking department brought suit against Fredericks, who held 289 shares of stock in the PSB alone. The double liability was set at $100 per share: Fredericks was required to pay $28,900 for stock in the PSB, and $16,000 for his stock in the Commercial Trust, totaling $44,900 (or over $831,000 today). Homer Wood, who was appointed Special Deputy in charge of handling the banks’ liquidation, attached all the property Fredericks owned, except one parcel that was given a homestead exemption. He also garnished 7000 shares of stock that Fredericks owned in local companies. His home at 202 S Pleasant St. was sold to the Ernest A. Love American Legion Post, which still owns it to this day.
Over 20 stockholders of the Prescott State Bank “were notified by registered mail of a petition to enforce the double liability clause of the banking law,” the Republican detailed. These payments would add $100,000 in cash to the assets (about $1.85 million today)..
Wood issued warrants for the arrest of several officials of the PSB and its allied banks.“One of the warrants was for Paul H Deming, the cashier at the Bank of Jerome, and the son-in-law of its President, RN Fredericks. “The court actions follow several weeks of investigation of the affairs of the banks. Charges involving falsification of bank records are among those on which the warrants are based,” the Arizona Republican reported. “Numerous loans of alleged injudicious character [were] scrutinized by state bank authorities.”
Five defendants, consisting of RN Fredericks, Prescott’s mayor, Morris Goldwater, Paul H Deming, and TG Norris, asked for a change of venue. Public sentiment was against the defendants, as “many of the residents…[were] of the opinion they should be jailed without trial,” the Arizona Republican wrote. The prosecution believed that the charges with the best chance of bringing a conviction were the four charges of embezzlement totaling $41,878 ( or about $775,000 today) against Paul Deming.
However, he was acquitted after the jury was out for less than half an hour. A second trial accused him of taking deposits when he knew the bank was insolvent. He also beat this charge and moved to Pasadena, CA.
In fact, none of the indictments led to convictions. The remaining trials against Deming, Fredericks, Mayor Goldwater, and TG Norris were all postponed indefinitely.
Prescott was in desperate need of replacement banks. After nearly eight months, the Prescott Branch of the Valley Bank opened on July 19, 1926. Another new bank, the First National Bank of Prescott, hurried its opening from August 1 to the third week of July. First National was renting the old PSB building. The Valley Bank branch was located in the Robinson building, where a plate-glass front and a vault were installed.
The failures uncovered some promissory notes that changed the ownership of at least two large ranches. Joseph Stevens of Williamson Valley had to liquidate his holdings, and he ended up spending his last days in the Pioneers’ Home. His son, Harry “Bud” Stevens, was the first defendant charged with murder ever brought in the current county courthouse in 1918.
True Crime story of the murder of Robert Miller by Harry "Bud" Stephens in 1918. This "trial of the century" was also the first murder case heard in the current Yavapai County Courthouse.
Harry Knight’s Triangle HC ranch in Camp Wood was sold for $30,000 to pay off his promissory note to the PSB.
Final payments were made in January 1937, 11 years, 1 month, and 12 days after the failure. In the end, depositors of the Prescott State Bank received 58.05% of their balances, while the Commercial Trust & Savings was able to pay 83.25% The Bank of Jerome, which was in the worst shape, paid around 45%.
The failures were particularly difficult for RN Fredericks, both financially and physically. After having nearly all of his property liquidated, he moved to Pasadena to live with his daughter and son-in-law, Paul Deming. There, he suffered a series of strokes and finally passed in October of 1927.
Today, deposits into financial institutions like banks, credit unions, and savings and loans are guaranteed and protected by the federal government.
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SOURCES:
Tucson Citizen, 11/23/1925; Pg. 13, Col. 5.
Arizona Daily Star, 11/27/1925; Pg. 8, Col. 4.
Arizona Republican, 1/19/1925; Pg. 5, Col. 3.
Arizona Daily Star, 11/26/1925; Pg. 3, Col. 5.
Williams News, 12/18/1925; Pg. 4, Col. 4.
Arizona Daily Star, 1/1/1926; Pg. 2, Col. 4.
Arizona Republican, 2/20/1926; Pg. 12, Col. 2.
Arizona Daily Star, 4/22/1926; Pg. 1, Col. 2.
Arizona Republican, 4/23/1926; Pg. 6, Cols. 7-8.
Arizona Republican, 4/2/1926; Pg. 7, Col. 5.
Arizona Daily Star, 11/21/1926; Pg. 3, Col. 6.
Prescott Evening Courier, 1/5/1926; Pg. 1, Col. 2.
Arizona Republican, 7/23/1926; Pg. 15, Col. 4.
Coconino Sun, 3/5/1926; Pg. 6, Col. 1.
Arizona Republican, 11/21/1930; Pg. 7, Col. 2.
Prescott Evening Courier, 4/7/1926; Pg. 1, Col. 3.
Coconino Sun, 3/26/1926; Pg. 10, Col. 7.
Coconino Sun, 4/9/1926; Pg. 7, Col. 7.
Arizona Republican, 4/23/1926; Pg. 12, Col. 2.
Arizona Republican, 5/8/1926; Pg. 1, Col. 1.
Arizona Republican, 1/9/1926; Pg. 6, Cols. 2-3.
Coconino Sun, 1/15/1926; Pg. 4, Col. 6.
Arizona Republican, 1/30/1926; Pg. 2, Col. 4.
Arizona Republican, 3/26/1926; Pg. 6, Col. 2.
Arizona Republican, 5/25/1930; Pg. 25, Col. 3.
Arizona Daily Star, 10/29/1926; Pg. 7, Col. 5.
Winslow Daily Mail, 11/19/1926; Pg. 4, Col. 6.
Coconino Sun, 1/14/1927; Pg. 9, Col. 7.
Winslow Daily Mail, 5/7/1926; Pg. 5, Col. 2.
Arizona Republican, 10/2/1926; Pg. 1, Cols. 1-2.
Coconino Sun, 10/8/1926; Pg. 1, Col. 3.
Williams News, 10/15/1926; Pg. 8, Col. 2.
Arizona Republican, 2/20/1926; Pg. 12, Col. 2.
Arizona Republican, 1/8/1937; Pg. 12, Col. 7.
Arizona Republican, 12/30/1928; Sec. 11, Pg. 10, Cols.1-3.
Arizona Republican, 6/28/1930; Pg. 5, Col. 2.
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