The New England banks had been chartered by the several states in which they existed, but very shortly came to feel a much higher degree of community of interest and to recognize a much stronger necessity for co-operative action than did the banks of any other section. This led to the development of a certain degree of uniformity in the banking laws of the New England states. As a result, there was a large territory through which a sound and safe state bank currency existed and which formed a striking contrast to the conflicting and largely unsound systems found in other portions of the United States.

The main outlines of this so-called "New England system" were as follows: Banks were allowed to issue notes as they pleased, without any special security behind the note other than the general assets of the institution. As a rule, however, they were forbidden to issue an amount of notes greater than 100 or 125 per cent of the amount of their capital. The capital itself had to be actually paid up within a reasonable length of time, and in some states the stockholders were required to be liable in case of loss to an amount equal to the amount of the capital, or in some cases to a greater amount. In Massachusetts the banks were not allowed to incur liabilities beyond a specified amount, and there was a more or less careful inspection and examination of accounts by state officials. The denominations of the bank notes were quite generally regulated so as to prevent the issuing of too many small notes. In this way a fairly satisfactory degree of state control was secured, and the business of banking was placed upon a very substantial basis. So sound was the situation that the New England banks were able to maintain specie payments in 1814, when the other banks of the country suspended. They got into trouble in the panic of 1837, but were much less affected than were the banks elsewhere, returning to specie payments and sound methods considerably earlier.

One great element in the success of the New England banks was found in a plan which was not required of the banks by any law, but was the result of voluntary co-operation on their part. This was the so-called "Suffolk system of redemption." The banks had found it hard to maintain constant and steady redemption of notes, and observed that the sounder institutions suffered from the practices of those that were willing to go as far as they could in evading prompt redemption and in resorting to more or less questionable methods. The result was a desire to enforce prompt redemption of notes, and this was accomplished by the so-called "Suffolk system."

Under this system, the New England banks joined in establishing a redemption office in Boston, which was carried on by the Suffolk Bank. This bank was incorporated in Boston in 1818, and a substantial number of the New England banks joined in a plan whereby they made a permanent deposit of $2,000 each with the Suffolk Bank, and in addition such sum as was needed for the current redemption of notes. At first the country banks were unwilling to join the system, because they found that their notes gained a wider circulation when they were at a slight discount, since in the latter case they displaced the notes of the Boston banks, which were naturally held by the people who received them and who presented for redemption the depreciated country notes, these being paid out in the course of ordinary business.

The essential work of the Suffolk Bank, therefore, was to retire all the country notes it could get hold of and then send them home promptly for redemption. When the system had got fairly started, it was strong enough to retire the notes of large numbers of banks and thus compel immediate redemption, thereby greatly limiting the circulation of the banks that put these notes out. The country banks were finally obliged to yield and to make the required deposit with the Suffolk Bank, which thereafter redeemed their notes at par when presented, charged them up to the banks that had issued them, and sent them home whenever desired.

This system was tantamount to the establishment of a clearing house for note issues and practically offset the notes of one bank against those of another in making settlements. Consequently it was not long before the circulation of all the banks became much less redundant than it had been. Occasionally a bank, irritated by the limitation upon its circulation, withdrew from the system, but in such cases it usually found that its notes fell into discredit and were received only in the immediate locality where it was situated. The Suffolk Bank system thus furnished a striking object lesson of the good effects of prompt redemption of bank notes, and this was exceedingly influential in later banking legislation.