This section is from the "Practical Banking" book, by Albert S. Bolles.
As. correct sentiments beget correct conduct, a banker ought to apprehend correctly the objects of banking. They consist in making pecuniary gains for the stockholders, by legal operations. The business is eminently beneficial to society; but some bankers have deemed the good of society so much more worthy of regard than the private good of stockholders, that they have supposed all loans should be dispensed with direct reference to the beneficial effect of the loans on society, irrespective, in some degree, of the pecuniary interests of the dispensing bank. Such a banker will lend to builders, that houses or ships may be multiplied; to manufacturers, that useful fabrics may be increased; and to merchants, that goods may be seasonably replenished. He deems himself, ex-officio, the patron of all interests that concern his neighborhood, and regulates his loans to these interests by the urgency of their necessities, rather than by the pecuniary profits of the operations to the bank, or the ability of the bank to sustain such demands. When we perform well the direct duties of our station we need not curiously trouble ourselves to effect, indirectly, some remote duty. Results belong to Providence, and, by the natural catenation of events (a system admirably adapted to our restricted foresight), a man can usually in no way so efficiently promote the general welfare, as by vigilantly guarding the peculiar interests committed to his care. If, for instance, his bank is situated in a region dependent for its prosperity on the business of lumbering, the dealers in lumber will naturally constitute his most profitable customers: hence, in promoting his own interest out of their wants, he will, legitimately, benefit them as well as himself, and benefit them more permanently than by a vicious subordination of his interests to theirs. Men will not engage permanently in any business that is not pecuniarily beneficial to them personally; hence, a banker becomes recreant to even the manufacturing and other interests that he would protect, if he so manage his bank as to make its stockholders unwilling to continue the employment of their capital in banking. This principle, also, is illustrated by the late United States Bank, for the stupendous temporary injuries which its mismanagement inflicted on society are a smaller evil than the permanent barrier its mismanagement has probably produced against the creation of any similar institution.
The honor and pecuniary prosperity of his bank should constitute the paramount motive of every banking operation. A violation of this principle produced, in the year eighteen hundred and thirty-seven, a suspension of specie payments, which was visited on bank stockholders by a legislative prohibition of dividends, and visited on banks and bankers by a general obloquy. The banks suspended that the debtors of the bank might not suspend: or worse, the banks suspended that the debtors might be spared the pecuniary loss that would have resulted from paying their bank debts. A conduct so suicidal was probably fostered by the pernicious union, in one person, of bank director and bank debtor, a union from which our banks are never wholly exempt; nor are they always exempt from the same union, still more pernicious, in bank presidents and cashiers. With this inherent defect in the organization of our banks, we can the more readily understand why, in 1837, the banks assumed dishonor to shield their debtors, and why the dishonor was continued for some more than a year in our State, and longer in others; and would have continued longer in ours, but from a refusal of its further tolerance by the legislature.
Every suspension of specie payments might have been prevented, had the bankers performed their duty to their respective banks, by prudence in the quality of their loans, and vigor in the enforcement of payments. No proof of this can be more convincing than the successfully sustained refusal of the Union Bank of New York to unite in the specie suspension of the year eighteen hundred and thirteen. All the banks, also, of New England preserved specie payments. We admit that, had all the banks of the Union refused to suspend payments in 1813, 1819 and 1837, business would have severely suffered; but this is a consideration for the legislature, and not for the banks. They are creations of the law, and should obey their creator. In England, during its struggle with Napoleon, the Government prohibited specie payments by the Bank of England, when the suspension was deemed publicly useful. The suspension continued for twenty years, but the bank incurred thereby no disgrace, for it obeyed the law.
The subordination of the honor and interests of a bank to the avarice or necessities of its managers, or dealers of any description, is productive, not of suspensions only, but of every disaster which usually befalls banks; and unless such a subordination can be prevented by the officer who acts specially as a banker, no man who respects himself should continue in the position, when he discovers that such a subordination is in progress. The owner of a steam engine regulates his business by the capacity of his engine, but should he regulate it by the necessities of his customers, he would probably burst his boiler. A shipowner regulates his freight by the tonnage of his ship; a contrary course would sink it. So every bank possesses a definite capacity for expansion by which bank dealers can regulate their business; but, when a bank regulates its expansion by the wants of its dealers, or the persuasion of friendship, it will probably explode, or be otherwise unprofitable to its stockholders.
Banks charge for the use of money no more than the use is worth. Nothing is added for risk, and thereby money-lending differs from all other business that involves hazard. A great disproportion exists also between the amount hazarded by any loan, and the amount gained. The loan of a thousand dollars for sixty days involves the possible loss of a thousand dollars, without the possibility of a greater gain than some ten dollars. Banks, therefore, never regularly lend money, without receiving the security of more than one person who is deemed safe for the debt; and a good banker will err on the side of excessive security, rather than accept security whose sufficiency may reasonably be questioned. In the country, two endorsers are usually required on every note that is discounted; but in cities, where discounts are made for shorter periods than in the country, one endorser is more usual than two.