IN the year 1708, a clause was inserted in the charter of the Bank of England, prohibiting the establishment of any other bank having more than six partners. This clause prevented the formation of any other joint-stock bank; and, as the increasing wealth and commerce of the nation occasioned a demand for banks, a great number, each having no more than six partners, rose into existence, as they were successively required by the wants of the country. The charter of the Bank of England had no reference to Scotland, which, at the period of the grant of the charter, was a separate kingdom. Hence, with the increasing wealth of Scotland, joint-stock banking companies were formed; and at present they conduct nearly the whole of the banking business of that country. But with every renewal of the charter of the Bank of England, this clause was retained, and hence has arisen the difference which subsists between the Scotch and the English systems of banking. In the year 1826, an Act of Parliament was passed to permit the formation of banks having more than six partners, at a greater distance than sixty-five miles from London; with a provision, however, that such banks should not make their notes payable in London, nor draw bills upon London for a less amount than £50. By an Act passed in 1833, these banks have the privilege of drawing bills on their London agents, either on demand or otherwise, and for sums less than £50.
The advocates of joint-stock banks allege that they possess the following advantages over private banks: -
1. Joint-stock banks possess greater security than privat banks.
Security is of the first importance to a bank. One branch of the business of a banker is to take charge of money committed to his care. But who will entrust money to a banker who is not known to be, or, at least, supposed to be rich? And if a banker be rich, but afterwards, by mismanagement or misfortune, become poor, and fail, what dreadful misery is inflicted upon those who have money in his hands! How many respectable individuals may be suddenly bereft of their whole dependence! How many industrious tradesmen may become bankrupts! What distrust, what inconvenience, what interruption of business is occasioned, even to those who can bear the loss! But by a joint-stock bank all these evils are avoided. Another branch of the business of a bank is to remit money from one part of the country to another; but who will trust them with money to remit when they may fail before they have executed their trust? Banks, too, issue their own notes, and thus supply the circulating medium of the country. Here wealth and security are more necessary than ever. In the former cases, the creditors of the banker may have had some opportunity of judging of his safety, and would probably make previous inquiries upon the subject. But when the notes of a banker have become the circulating medium of a neighbourhood, they are readily taken without any inquiries about his solvency. And, indeed, in some cases, if the notes were suspected, they could not be refused. If a tradesman will not deliver goods to his customers for such notes as they offer him, they will take the notes to some other tradesman. Men who receive wages must receive them in such notes as the master chooses to pay. Since, then, each banker supplies the circulating medium of a large district, and the notes are thus circulated among all classes, some of whom have not the option of refusing them, nor the ability to judge of their value, it is of the utmost importance that banks should be established on those principles which will prevent their failure.
That a bank having a great number of partners should be more secure than a bank consisting of only a few partners, seems a very obvious proposition; and it has received abundant confirmation from the numerous failures that have occurred among the bankers in England, and the few failures that have occurred in Scotland. This is a fact that demonstrates the superior security of joint-stock banks. If a bank of this kind has a charter, it must previously possess a large fund, which forms a guarantee for the punctual payment of its notes or deposits. If the bank has no charter, then every individual shareholder is answerable for all the debts of the bank to the whole extent of his property, as fully as though he had incurred those debts himself.l In either case the security is greater than can be offered by any one individual, or by any four or five individuals, however respectable they may be.
2. A joint-stock bank is less liable to runs.
A run is a sudden and general demand for the payment of notes or deposits. It is not sufficient that a banker be safe: it is also necessary that he should be believed to be safe. He derives the larger portion of his gains from the confidence which is placed in him by others. The misfortunes of others may cause him to be suspected. But no banker has always in his coffers all the sums necessary to pay all the claims that may be made upon him. If he were to do this, from what quarter would he obtain his profits? What, then, is he to do in case of a run? He must at all events obtain money to meet the demands made upon him; for if he once suspend his payments, all his credit is destroyed, and his business is broken up. Hence he may be -compelled to borrow money at a high rate of interest, or to sell stocks or estates below their value, and to incur great expense, in order that the money may arrive in time to meet the demand. But the effects of a run are not confined to the banker himself. One run is over, but another may come. He will be anxious to be better provided next time. He will be more cautious. He will call in the money he has lent. He will lend no more. He will discount fewer bills. Those tradesmen and others who have been accustomed to obtain from the banker facilities for carrying on their business, can obtain them no longer. Some have depended on these facilities, and will now fail; others will circumscribe their business; labourers will be thrown out of work, and trade will be obstructed and depressed.
1 This was written previous to the passing of the Companies Acts. Almost all the joint-stock banks are now registered with limited liability.
Such are the effects of a run when the banker is solvent, and the run is met with promptitude. But the banker may be good, and yet the run may cause him to stop payment. In this case, though the banker may ultimately pay the whole of his debts, yet this stoppage will produce for a while the same effects as though he were insolvent. But it is possible that he might have been solvent before the run, and have been rendered insolvent by the run. The sacrifices he may have been compelled to make for the purpose of raising the money in time to meet the demand, may have absorbed the whole of his property.
Now, what is it that causes a run? It is merely an apprehension that the banker cannot discharge the whole of his obligations, and hence each creditor tries to be first.
that he may secure the full amount of his own claim. But no apprehension of this kind can exist in reference to a joint stock bank. Everybody knows that all the partners are liable for the debts of the bank to the full extent of their property; and each creditor, feeling assured that even should the bank fail his property is secure, abstains from engaging in a run whereby he can gain no advantage.1
3. Another advantage which joint-stock banks are alleged to possess, consists in the prudence of their management.
A joint-stock bank is managed by a board of directors, men of character and ability, who are chosen to fill the office from their superior knowledge of mercantile and banking business. The united knowledge and wisdom of a number of individuals must be greater than that of two or three individuals. They are not so liable to be imposed upon by false representations, to be deluded by false reasonings, or to be biassed by personal attachments. As among many persons there is sure to be a difference of opinion on almost every question brought before them, it is certain that no measure will be adopted without having first received a full discussion.
On the other hand the management of a private bank is too frequently intrusted to one or two of the partners; men who cannot be expected to act with the caution and prudence of an elected body, answerable for their conduct to the great body of proprietors; men, too, who have their prejudices to indulge, their friends to please, and their partialities to gratify. Not so with the directors of a joint-stock bank, where the follies of an individual would be checked, and his deficiencies would be supplied by his colleagues. It often happens, too, that the partners of a private bank are engaged in some branch of manufactures or commerce; and in this case the bank will be made subordinate to the trading concern. The banking merchant or manufacturer will extend his business, or engage in speculation, under the consciousness of being able to make good his purchases. The trading concern will have an account at the bank, and will always be overdrawn. The money which ought to be employed by the bank in discounting bills for their customers, will be absorbed by the trade of the partners. If the trading concern fails, the bank too must fail: the one involves the ruin of the other. Perhaps, indeed, the bank, by supplying money in the first instance for the parties to speculate with, may have been the cause of the ruin. Even when the partners of a private bank are not themselves engaged in any other employment, the bank often becomes connected with some large manufacturing or commercial establishments. Such establishments are useful to the bank, by enabling them to circulate a considerable amount of their notes. Hence the bank is induced to make large advances to them. Afterwards a further advance is necessary. A run upon the bank compels them to call in the money they have advanced. The money cannot suddenly be replaced. Hence all the parties become bankrupts. From all these evils joint-stock banks are alleged to be free.
1 Although the liability of the partners of joint-stock hanks is in most cases limited to the nominal amount of their shares, yet the adoption of a reserved liability has, as explained in a later chapter, contributed to the maintenance of a feeling of security among depositors. Many of the leading joint-stock banks have now reserved a proportion of the uncalled balance of their shares, so that it can only be called up in the case of the liquidation of the company. There is hardly a joint-stock hank with its capital fully paid.
Whatever the opinion, whether for or against, that may be entertained respecting joint-stock banks, the fact is undeniable that competition is, in most cases, good for the public. And hence, perhaps, the best system of banking is, when private banks and joint-stock hanks are intermingled with each other. The rivalry of the private banks may induce the public banks to act with promptness and liberality: while the rivalry of the public banks may induce the private banks to guard against any measure that might shake their credit, and tend to weaken the public confidence in their stability.1
' The reader is advised to turn to Section XXXVII for an account of the more recent development of joint-stock banking.