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have paid 11 per cent., and some have divided even up to 223 per cent., on the paid up capital. Now the common inference which you hear made, even among thinking men, in respect to such cases, is, “How can these people make profits such as to enable them to payinterest to their depositors, and also these enormous per centages to their shareholders ?” or, “ This bank gives 5 per cent. interest on its deposits, and invests them in government securities which yields 3 per cent., and pays its shareholder a dividend of 10 per cent. out of the profits. We should like to know how this is done?” Now there is nothing impossible in this, it will turn out, on the explanation being made, that the bank gives 5 per cent. interest on a part only of its deposits, such, namely, as are retained for a stated period without diminution, and are repayable on notice; on another description of deposits it may pay less than 5 per cent., and on current accounts no interest at all. Then the capital may be invested in Consols, and a proportion of the deposits and current accounts, leaving always a working reserve in the till, may be employed in discounts at 6 per cent. per annum, and in such case an established concern with a large amount of deposits may well afford to pay dividends of 10 per cent. to its shareholders. For on what is that dividend paid ? Only on the capital paid up. The fallacy, or the mistake, or misunderstanding, lies in confounding dividend and profit. A bank may divide 20 per cent. on its paid up capital, while its profits on the sum it employs may not be at half that rate per cent. per annum. Thus, suppose a bank with a capital of £600,000 paid up, divides at the rate of 20 per cent., it is manifest that, supposing the deposits to be £10,700,000, (no fabulous case, because the thing has actually occurred,') and these or the bulk of them to be employed at a profit of about one per cent. net (after allowing for interest paid to the depositors, &c.), and the capital to be invested in government securities at 3 per cent.—that would account for the dividend. Thus a business ought to be conducted on the purest banking principles (the most unobjectionable and most approved mode of making
See Logic of Banking, p. 544.
profits in banking being to invest the capital of the house in government securities, so as always to have at hand a reserve readily convertible to meet unforeseen pressures or demands, and to trade with that part of the deposits which it is safe to carry on the daily business without, chiefly by discounting good commercial bills of exchange); and yet, when the deposits are large, dividends may be safely declared and paid at very high rates of per centage on the paid-up capital of the shareholders. These considerations show how easily mistakes are made on this subject of banking; and, withal, how easily they are rectified by the application of a little calculation founded on a little knowledge of facts. Bauking, in fact, consists in borrowing from a b c, &c., and lending to ABC, &c., the money so borrowed. The regular banker does not use his capital in his daily business. He keeps that invested in securities-generally government securities, but, at all events, securities convertible at a short notice; and he keeps it so invested in order to be ready to meet contingencies, and put his mind at ease, and the minds of his customers, by having a reserve to fall back upon. As is obvious, as long as the confidence of the public remains unshaken, and, therefore, the deposits continue large, the capital never is wanted for the purposes of the bank. The bank may go on just as well without it; and, in fact, banks have been carried on for years after all the capital and all the property of the partners, and half the deposits, had been irrecoverably lost. Public confidence, the general persuasion in their stability, supplied the place of all these. Accordingly, in private banking, even when the partners are all wealthy men, it is not customary, it seems, to invest much of their property as capital in the bank business--for the reason that much capital is not required. Hence the profits of the partners in a private bank are (it is said) usually higher in proportion to their employed capital than the dividends paid to the shareholders in joint-stock banks. It is the publicity of their accounts which renders it necessary, for the sake of inspiring confidence, for the joint-stock banks to have so large a propor
· Logic of Banking, p. 645.
tion of capital called up; for, in fact, in large concerns it is found that the payments into the bank nearly balance the sun drawn out of it each day through the year. Therefore it is not necessary, in ordinary times, to keep much cash in the till——the larger demands for sums to be withdrawn from the banker's hands being almost invariably met by a draft upon London, where he keeps a reserve for such occasions, and where such reserve probably pays him interest, being employed in discounting short bills, &c. The charges which have been made against the London joint-stock banks as to the habitual state of their reserves, seems to have been disposed of by Mr. Gilbart. A proposal that was made before the committee of 1858, that those banks should be obliged by law to take no more deposits
than should be in a certain proportion of the paid-up capital :—for instance, that if the paid-up capital was £500,000, the bank should be at liberty to receive £2,500,000 or £2,000,000 of deposits—that is, 20 to 25 per cent. on the paid-up capital— does not appear to be supported on any principle, or to be called for on any grounds that are ascertained; and as the committee in their report omit to notice this point, it may be supposed not to be deserving of much consideration. It was at one time under contemplation in the Bank of England parlour to return to the proprietors a portion of the capital, as the directors did not think that to retain it was necessary for the business; and no one seems to question the prudence, or deny the skill, with which the Bank has been administered of late years. However, a move in the opposite direction, of a call up of more capital (distasteful dose as it would be to the shareholders in joint-stock banks to swallow), might possibly have such an alterative operation, as would cause them to open accounts as customers with the banks to which they belong, to a greater extent than at present, as we judge, is the case ; and so possibly this sore place might be cured, and perhaps even the other more angry imposthume, that
1 Logic of Banking, pp. 539-588. · Evid., pp. 134—137; and compare Evid., p. 138, Q. 2037, p. 387. * See Logic of Banking, p. 285,
the country joint-stock banks, to some extent at least, insist on having for correspondents in London, not their brethren of the Toison d'or—the London joint-stock banks—but the old private banking establishments. The position of the shareholders in all cases of incorporated joint-stock banks is not, it is to be remembered, that of a partner or principal in the transactions of the company; he is not the banker, but it is the incorporated body with whom he is not identified that performs the business, is the banker, and is responsible for the conduct of affairs. On the one hand, therefore, a shareholder is not liable to be sued upon the dealing, covenants, and undertakings of the company; he is only liable after judgment has been obtained against the companyhis liability being the subject of very peculiar statutory provisions. On the other hand, that the company's affairs are being arranged in bankruptcy, or under the winding-up acts, is no answer to a motion for leave to issue execution against him upon such a judgment, in the manner pointed out by the statute;* nor is it an answer that he was induced by fraud to become a shareholder, and that as soon as he discovered the fraud, &c., he had repudiated his connection with the company."
Let us next advert more fully to that which can hardly be denied to be the most striking financial phenomenon of the day. Joint-stock banking, no one needs to be told, has advanced and developed, and on the whole prospered, in a manner wholly unprecedented and unexpected. It has been calculated, and, as excellent authorities believe, accurately calculated, that in October, 1857, there was held in London by the joint-stock banks, at interest and on call, or at seven days' notice, between
1 Logic of Banking, p. 400. 2 Per Lord Wensleydale in O'Flaherty v. M‘Dowall, 6 H. Lds., 182. * Fell v. Burchett, 3 Jur. N.S., 388, Q. 13.
* Morisse v. Royal British Bank, 3 Jur. N.S., 137; and see Cleave v. Harmer, 3 Jur. N.S., 190.
5 Daniell v. Royal British Bank ; 1 H. & N., 68). See Fry v. Russell, 27 L. J., C. B., 153; Hemlinon v. Royal British Bank, 26 L.J., Q. B., 112, 114; Powis v. Harding, 26 L.J., C. B. 107.
70 and 80 millions sterling. This might be held out as giving some idea of the sums which the joint-stock banks in the aggregate throughout the country hold in deposits, were it not that the amounts specified baffle and bewilder from their vastness; but at least the figures suggest this safe inference, that the sums so held are enormous to an incomprehensible extent; whence, then, have they been provided ? No one appears to have alleged, as matter of knowledge, before the committee of last year, when the subject was several times touched upon, that the joint-stock banks have merely got transferred to their keeping accounts that were formerly kept at private banks. Mr. Gilbart is positive that such is not the case, and that few or no accounts have been withdrawn out of the hands of private bankers, to be confided to those of the companies. Indeed, it seems that the deposits with private bankers have universally increased of late years. If we are not mistaken, the great weight of authority goes to shew these sums to have been contributed by classes of persons who never before employed bankers, or invested the small sums of surplus that might from time to time be lying in their hands. If we are not mistaken, the price of consols of late years has kept a range which is unfavourable to the supposition that any large portion of these sums has been removed from government securities as an investment, and deposited as an investment, for the sake of the interest given, in these banks ; certainly the condition of the savings banks shews no.symptom of the removal having been made from thence. In the year 1857, the authorized returns shew capital deposited in savings banks, £35,108,596 against £34,946,012 in 1856. Then the fashion for investing in foreign securities has not passed away in favour of the British joint-stock banks. In September, 1857, the calculation was (as the Governor of the Bank of England told the committee of last year), that American securities were held here to the extent of eighty millions sterling 8 The truth
· Evid. of Mr. Kirkman Hodgson, M.P., Evid., p. 259, Q. 3654.
Evid., pp. 92, 93, 378, Q. 5665. 8 Evid., p. 2.