Presuming that banks are to commence with a moderate amount of capital, and to increase that amount as the business increases, the question is suggested, what is the best way of increasing the capital? The English banks have followed two ways of doing this: one, by a further issue of shares; and the other, by further calls upon the existing shareholders. The capital of all the joint-stock banks in England is divided into certain portions, called shares; each proprietor holds a certain number of these shares, and pays a certain sum upon them. If he wishes to transfer a portion of his capital he cannot transfer a half share or a quarter share, but must transfer a whole share, or a certain number of shares. Thus, if the capital of a bank be £500,000, it may be divided into 5,000 shares of £100 each, or 50,000 shares of £10 each, and a certain proportion of the amount of each share will be paid up; and this proportion is called the real or the paid-up capital. Thus, if one-tenth of the above capital corresponding increase of capital, since that period, it may now be regarded as quite untenable. Were the view of the proper proportion of capital to liabilities here propounded generally adopted, bank dividends, at the present average rates of profit, would in many cases entirely vanish, and in no case would the return be at all commensurate with the risk. As a matter of fact the capital of no bank in the kingdom bears anything like so high a relation to its liabilities as the proportion here considered proper.
Some persons have objected altogether to a nominal capital; but their objections have been directed more to the misrepresentations that may attend it, than to the thing itself. They say, "a bank announces that it has a capital of £500,000, whereas few shares are issued, and but a small sum is paid on each share; hence people are misled, and the bank acquires a confidence which it does not deserve." The objection here is against representing the nominal capital to be paid-up capital; it does not bear upon the principle of a nominal capital. In fact, we are misled by words. What is called nominal capital is nothing more than a further sum, which the directors have the power of calling up. If this sum had not been called capital, it would not be objected to, as it could lead to no misapprehension. But the inquiry simply is, ought the directors to have the power of calling upon the shareholders for a further amount of capital beyond that already paid up? Were they not to have the power, the bank would at its commencement probably have too large a capital, and after its business had advanced would have too small a capital. And if the bank by any unforeseen occurrence became involved, and should have occasion for further sums to extricate itself from its difficulties, it could not make any further call upon its shareholders, although a very small advance might prevent its utter ruin. In case of a very large capital, such as two or three millions, a nominal capital may not be necessary, as so large a sum is likely to be in all cases amply sufficient. But in banks of a second class, it will always be best to give the directors the power of making further calls upon the shareholders.
1 The Colonial chartered banks are an exception to this rule. The capital of such banks has invariably been raised by shares (not stock), with usually a liability thereon of double the amount.
The second way of increasing the capital of a bank, is by the issue of new shares. The whole amount of shares to be issued is fixed in the first instance, and the bank commences as soon as a certain proportion has been issued. If the bank was not allowed to commence business until the whole of the shares were taken, a small amount would be fixed upon, and the bank would be proportionably weaker. But by beginning with a small number of shares you have capital enough for your business, and you acquire more as you proceed. Many persons will join a bank after it is established who would not take shares at the commencement. Some shares are therefore reserved for persons of this description; and as the shares are more valuable when the success of the undertaking is no longer doubtful, they are often given out at a premium, and always a greater degree of caution is exercised as to the persons to whom they are distributed.
Some members of the parliamentary committee of 1836 appear to have an objection to shares of a small amount; they apprehend that these shares are taken by an inferior class of persons; and hence the body of proprietors are less respectable. But it would appear from the returns, that the general effect of small shares is, that each shareholder takes a greater number. Thus in the banks of
£100 shares each proprietor has taken upon an average twenty-eight shares, on which he has paid the sum of £444. IN the banks of 20 shares, each proprietor has taken forty-three shares, and paid £359. In the banks of £10 shares, each proprietor has taken fifty-two shares, and paid £400. While in the only bank of £5 shares, each proprietor has taken 117 shares, and paid £585. It appears to me that the chief objection to which small shares are liable is, that they do not admit of a large amount of nominal capital. The banks of £5 and £10 shares have usually the whole capital paid up, and hence in case of necessity the directors have no power to call for a further amount.
II. Joint-stock banks are governed by a board of directors.
"The directors are chosen from among the shareholders at a general meeting - the pecuniary qualification being that they hold a stipulated number of shares in the company.
"There are several points of view in which a man becomes eligible as a director of a bank, independent of his qualification as the holder of the required number of shares. Indeed, his qualification as a shareholder, merely, must not be taken into the account.
"1. He ought, in the first place, to be a man enjoying public confidence. Unless he is a man whom the community contemplate as deserving of their confidence and esteem, it is not presumable he can be of much service to the bank, either by his influence or character. The public are not likely to deposit their money in an establishment where they cannot place the fullest reliance upon the directors; and, for the same reason, parties of respectability will not readily be induced to open accounts with the bank.