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large proportion of widows, servants, policemen, clergyifii, and other persons in no way conversant with the business of banking, who are in consequence wholly incompetent to exercise any supervision, or form any opinion of the direction in which things are going. For the great body of shareholders in jointstock banks, the shares form a. tempting investment; without the trouble of trade or business of any kind, this capital yields double or treble the return in the shape of dividend. There is, it is true, the risk of unlimited liability in most cases; but practically, this class of proprietors enjoy all the benefits of a
limited liability; they may, if the worst comes, lose the whole
sum invested, but beyond that they are safe ; a claim against the bank will never, they can depend upon it, be enforced upon one of them. But the fact of the liability of the shareholders in the bulk being unlimited, no doubt, not only tends to invite this class of persons, of whom we are speaking, to buy shares, trusting to the available responsibility of the other and wealthier members of the body, but it operates to create a general impression of indefinite wealth in the bank, and so induces depositors to trust it more readily, and moreover to abstain from examining into the character of the business transacted, even when the means exist For doing this effectually.‘ In fact, from the common want of knowledge on this subject, most persons, even among educated classes, find some difliculty in forming a correct judgment as to the mode in which the administration of a bank is carried on. The Union Bank of Glasgow has paid 8 per cent. annual dividend for a considerable time past, and now pays nine per cent., which the proprietors do not consider a high rate of dividend; they would be frightened, it is said, if too high a rate were paid them, just as prudent persons about to insure their lives are scared from the offices whose rate of premium is unusually low. But, then, what is too high a rate of dividend to be safe to receive‘? Some joint-stock banks in England
have paid 11 per cent., and some have divided even up to 221» 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 theirdepositors, 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 repayablc 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 he 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 t/ze 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 £l0,700,000, (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.—t/rat would account for the dividend. Thus a business ought to be conducted on the purest banking principles (themost 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. Banking, in fact, consists in borrowing from a b c, &c., and lending to A B C, &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—f'or 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
1 Logic of Banking, p. 545.
tion of capital called up; for, in fact, in large concerns it is found that the payments into the bank nearly balance the sum 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 ba-nker’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 0f 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 identified2 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 company— his 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. J oint-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.
’ Per Lord Wensleydale in O’Flaherty 12. M‘Dowall, 6 H. Lds., 182.
' F ell v. Burchett, 3 J ur. N.S., 388, Q. 13.
' Morisse v. Royal British Bank, 3 J ur. N.S., 137 ; and see Cleave v. Harmer, 3 J ur. N.S., 190.
' Daniell 11. Royal British Bank ; 1 H. & N., 681. See Fry 12. Russell, 27 L. J., C. 13., 153 ; Hemliuon 2’. Royal British Bank, 26 L. J., Q. B., 112, 114; Powis v. Harding, 26 L.J., C.B, 107.