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shall be effected by the bankers or by the intervention of billbrokers? and probably the new rule adopted by the Bank of England will have the effect, at least for some time to come, of throwing more business into the hands of the London joint-stock banks.
We will next advert to the practice of the re-discounting of bills, against which so much has been said in condemnation. This practice ought to be clearly distinguished from one to which its name is often most idly and improperly given. If a person obtains a loan, offering as security a parcel of bills of exchange, to an amount sufficient to cover the loan which he has obtained by discounting them, and which bills are to be returned to him if he repays the sum advanced before their maturity, but if not, the proceeds are to be received by the lender and holder of the bills as they arrive at maturity, and the offer is accepted; this is an advance upon the security of bills of exchange, but it is not a rediscount, because the borrower does not place his name on the bills, and does not make himself liable upon them. A re-discount takes place when a person who has already discounted a bill for A, takes the bill to B, and gets him to discount it again, A, as owner of the bill, placing his name upon it, for security to B in the transaction. The London joint-stock banks, it is said, never re-discount in the proper sense. One of the charges made against the bill-brokers, before the committee of last year, was founded on their excessive re-discounts. They were in the habit, it was alleged, of recklessly re-discounting bills discounted by the provincial joint-stock banks, and transmitted by them for re-discount in London, and of re-discounting them solely on the faith of the name of the provincial bank which appeared upon them, and without any regard to the names of the other parties to the bills; and the Borough Bank of Liverpool was said to have had, at the time of its suspension, no less than 2 millions worth of their discounted bills held in London-paper which they had discounted, with the discredit attaching of having very bad names on it, and which had been
1 Evid., p. 152, Q. 2245, p. 73, 88. VOL. VII. NO. XIII.
re-discounted. This practice seems to be regarded with much disfavour in the commercial community; but the grounds of objection are not at all clearly disclosed, and on principles of law it does not seem easy to discover any impropriety in it. The question has the appearance solely of one of prudence and knowledge—the elements of decision in all questions of money dealings. It is said to tend to encourage a bad class of bills ; that, however, must necessarily be a consequence of the abuse of re-discounting—it is not the object of it—it is no necessary part of the business of re-discounting. Yet, before it is abolished, something inherently vicious ought to be stated and proved in this great machine, by the working of which the superabundant capital of the agricultural districts is transferred to the centres of manufacturing, mining, and commercial enterprise. That credit may be abused by the creation of fictitious bills is, no doubt, true, but that such bills occasionally get into circulation is no new discovery; nor is it unlikely that neither brokers nor bankers should be able at all times to detect such impositions ; hence, they are sometimes deceived, and suffer loss accordingly. The estimate generally received of the amount of the bills of exchange, existing together at any given time in England, appears to be from two hundred to three hundred millions' worth; therefore, the transactions of this class being so enormous, it is not surprising if there are occasionally losses from imprudence, inadvertence, recklessness, or fraud. The subject of re-discounts by bankers seems very seldom to come before the courts, Pollard v. Ogden is, we believe, one of the last cases under this head, and may be referred to for the rights and liabilities of bankers on occasions of this kind. We will close this branch of the subject by stating that, while the inquiry before the committee of last year clearly showed that the joint-stock banks which have lately stopped payment were brought into that state by misconduct and want of integrity in the persons managing them, and not at all by reason of any defects in the principles on which the system is founded; on the other hand, there appears still to linger in some
* 2 Ell. & B., 459.
quarters an indisposition to admit the applicability of the jointstock principle to the purposes of banking. Sir G. C. Lewis (the late Chancellor of the Exchequer), and one or two of the witnesses, seem to be inclined to think the principle to be much less adapted for banking than for others of the great undertakings in which it has achieved such signal success. On this point it is curious to compare the settled opinon of the father of English political economy?—“The only trades which,” he says, “it seems possible for a joint-stock company to carry on successfully without an exclusive privilege, are those of which all the operations are capable of being reduced to what is called a routine, or to such a uniformity of method as admits of little or no variation. Of this kind is—First, the banking trade ; secondly, the trade of insurance from fire, and from sea risk, and capture in time of war; thirdly, the trade of making and maintaining a navigable cut or canal; and, fourthly, the similar trade of bringing water for the supply of a great city.”
With respect to limited liability in banking, there is not as yet any thing of a useful character to be stated, in the absence of experience. Since the passing of the late act (21 & 22 Vict., c. 91), extending the principle of limitation of liability to banking, too short a time has elapsed to have discovered evidence of its workings. We may, however, observe that
discordant opinions were given by the practical men examined before the committee of last year, as to the merits and claims to public confidence of limited liability as applied to banking.
The system of open credits, or “foreign banking," as it is termed, deserves some brief notice before we close this article, with the subjects treated in which it has some connection. This system has been much extended of late years in this country, and has led to great abuses, and much loss and disaster. On the continent such business as the following is not considered objectionable, and the persons following it are called bankers. Thus A, having his house of business in Paris, draws upon B, his
1 Wealth of Nations, 3rd Vol., 146. Edit. 1789.
agent in Hamburg (or wherever it may be), having no assets in B's hands to meet the bill when due, but on the understanding between them that the credit so opened shall be covered by the transmission of bills upon Hamburg, by obtaining the amounts of which, when due, B will be put in funds in time to enable him to provide for the bill drawn upon him. In such case, A is called, on the continent, a banker; when he draws such a bill for any one who wants a bill upon Hamburg, his profit consists in the difference between the price he pays for the bills he buys in the market to remit to the agent, and the sum which he charges on his own draft. The agency house, it will be seen, accepts solely on the faith that remittances of bills will be sent in time, so as to save it from the neces. sity of making cash advances out of its own funds. A commission is paid to them on the acceptance. Several houses in England were found in 1857, to have engaged largely in this system of open credits with houses in the north of Europe, chiefly in Sweden and Denmark; and those English houses fell in consequence of the remittances not being sent forward in due time. But these English houses were not banking establishments in our sense of the term, and there is no proof of any English bank having ever taken part in this description of business. It is material to observe that the system is not wholly new; exchange operations are as old as commerce—that is, the practice of drawing a bill upon London, and the remittance of a bill from abroad, at a lower rate of exchange than that at which the bill on London sells for, and which last meets the other when it becomes due. The difference between the two species of transactions is in the object of the latter, and the mode of remuneration of the operator. On the system, of which so many instances came to light in the failures of 1857, the acceptance is undertaken for the sake of the commission, and not with reference to any action upon the exchanges. The one transaction is looked upon by commercial men here as regular, long custom having established and sanctioned it-the other has, of late, grown up to be an abuse of
1 See Evid., pp. 112, 116, 119, 121, 130, 158.
great magnitude, until the instances of it have become so numerous as to constitute a public evil. There have been cases in which it was discovered that a certain circle of houses co-operated in this business—one remitting its neighbour's bills upon their agent in London, they, at the same time, drawing bills upon their own agents, and giving them as remittances to the other house, thus acting in a vicious circle, and raising money
in the discount market in London. This mode of action is said to have been the principal cause of most, though not all, of the commercial failures of 1857.1
We must not omit some reference to the banking crisis and commercial panic which occurred in the United States of North America, and particularly among the banks of the State of New York, in 1857. There were in that State, in the beginning of the year, sixty-three banks established in business; of these sixty-two had suspended payment by December. Discounts rose to an unprecedented height; in some extreme cases realizing 20 per cent. Securities generally were much depreciated throughout the States. The prices of produce fell. Cotton fell from 16 cents to 92 cents. What is described as a general scramble for money took place in the State of New York. The cause assigned is, that the banks above-mentioned had made such large advances, and discounted so freely, that they became alarmed at their own position; and in their struggles to strengthen that position, by curtailing their discounts and refusing the usual facilities to the merchants, and by demanding the repayment of the advances which they had made upon ships and different securities, they caused first great difficulties among the merchants, and later some failures; and this was followed by a general collapse of confidence or panic, and then by a run on the banks. Now, in New York, the system of banking is by law (with the exception of the old corporations whose charters are unexpired) uniform in this respect. Every bank is allowed to issue any amount of notes, provided it first deposits with a Government department State stocks at least to the same amount. Avoiding details, this
1 See Wealth of Nations, Vol. i. p. 465, 471.