LOAN banks are banks formed for the purpose of ad-vancing loans upon articles of merchandise. Some are carried on for the purposes of gain, others from motives of charity.
The Bank of England was empowered by its charter to carry on the business of a loan bank. The following is the twenty-sixth section of the Act: - "Provided that nothing herein contained shall in anywise be construed to hinder the said corporation from dealing in bills of exchange, or in buying or selling of bullion, gold or silver, or in selling any goods, wares, or merchandise whatever, which shall really and bond fide be left or deposited with the said corporation for money lent or advanced thereon, and which shall not be redeemed at the time agreed on, or within three months after, or from selling such goods as shall or may be the produce of lands purchased by said corporation." In pursuance of the privilege granted by this clause, the directors gave public notice that they would lend money at four per cent., on "plate, lead, tin, copper, steel, and iron."
The Bank of Scotland was also authorized to act as a loan bank. The following is one clause of the Act by which it was established in 1695: - "And it is further hereby statute and ordained, that it shall be lawful for the said governor and company to lend, upon real or personal security, any sum or sums, and to receive annual rent for the same, at six per cent., as shall be ordinary for the time: as also that if the person borrowing, as said is, shall not make payment at the term agreed upon with the company, that it shall be lawful for the governor and company to sell and dispose of the security or pledge by a public roup, for the most that can be got, for payment to them of the principal annual rents and reasonable charges, and returning the overplus to the person who gave the said security or pledge."
The Royal Bank of Scotland was also empowered by its charter, "to lend to any person or persons, bodies politic or corporate, such sum and sums of money as they should think fit, at any interest not exceeding lawful interest, on real or personal security, and particularly on pledges of any kind whatsoever, of any goods, wares, merchandises, or other effects whatsoever, in such way and manner as to the said company should seem proper and convenient."
"The Hibernian Joint-Stock Loan Company," usually called the Hibernian Bank, was formed in 1825, "for the purpose of purchasing and selling annuities, and all public and other securities, real and personal, in Ireland, and to advance money and make loans thereof, on the security of such real and personal security, at legal interest, and on the security of merchandise and manufactured goods." This company, however, has never carried on the business of a loan bank, but has confined its transactions to the business of a commercial bank. It has not the power of issuing notes, but it is a bank of discount and of deposit.
Capital advanced, by way of loan, on the securities of merchandise, would produce the same effects as if advanced in the discounting of bills. If a party borrows £100 on the security of his merchandise, it is the same as though he had sold his merchandise for a £100 bill, and got it discounted with the banker. By obtaining this advance he is enabled to hold over this merchandise for a better market, and avoids a sacrifice which, otherwise, he might be induced to make, in order to raise the money for urgent purposes.
Every advance of money by a banker, let it be made in what way soever, is in fact a loan. To discount a £100 bill that has three months to run, is much the same as to lend that amount for three months. The difference is, that the banker has two or more securities instead of one - the time of repayment is fixed; and the interest on the whole sum is paid at the time it is advanced. But let one trader draw bills upon his customers, and take them to the bank for discount - let another trader give his customers three months' credit without drawing bills, and borrow of the banker the amount of the goods sold; it is obvious that in each case the traders receive the same accommodation, and the effect on commerce will be the same. The bill is merely a transfer of the debt from the drawer to the banker, with the drawer's guarantee. Cash credits are loans - the amount of the loan varies every day, but the maximum is fixed. If a trader who has a cash credit for £500 has always £300 drawn out, it is nearly the same thing as though he had a loan for £300. The advantage to him is, that he can draw exactly such a sum as he may need - that he can replace it whenever he pleases, and in such portions as he may find convenient; and he pays interest only for the sum drawn out. It is unnecessary to say that overdrawn accounts, mortgages, and all advances of money on pledges or securities of any kind are loans.
It is contrary to all sound principles of banking for a banker to advance money in the form of permanent loans, or as they are called, dead loans. In the first place, those dead loans do not create any banking capital - and, secondly, they cannot be suddenly called up. For a banker to lend out his banking capital in the way of permanent loan is obviously imprudent, as he knows not how soon that capital may be taken out of his hands; and it is almost equally imprudent to advance his real capital in that way, as the real capital ought to be kept in a disposable form, so that it may be rendered available in case of any sudden contraction of the banking capital. The investing of money in the public funds is not strictly an operation of banking. It does not increase the banking capital. Yet it is necessary that a banker should lay out some portion of his capital in this way, because he can so easily realize the money in case a run should be made upon his bank. The portion thus invested is probably less productive than any other part of his capital, except the sums kept in his till to meet occasional demands. Sometimes, however, a rise in the funds will be the means of affording him a considerable profit.
The second class of loan banks arose from motives of charity.
These institutions were first established in the fifteenth century, for the purpose of checking the extortions of usurers, by lending money to the poor upon pledges, and without charging interest.1 They were originally supported by voluntary contributions; but as these were found insufficient to support the necessary expenses, it became necessary that the borrowers should be charged interest for the loans. These banks were at first distinguished by being called montes pietatis. It appears that the word, mont, or mount, was at an early period applied to any pecuniary fund, and it is probable that the promoters of this system added "pietatis" to give it an air of religion, and thus to procure larger subscriptions. A bank of this
1 See Beckmann's "History of Ancient Institutions." kind was formed at Perugia in the year 1464; another at Rome in 1539; one at Naples, which was considered the greatest in Europe, in the following year, and it took the name of banco del poveri - the bank of the poor. These institutions were opposed in France. An attempt was made to introduce them under Louis XIII. in 1626, but the managers were threatened with punishment, and the undertaking was relinquished. The Mont de Piete, at Paris, was established in the year 1777; and so largely has the public taken advantage of the accommodation this afforded, that it has been known to have in its possession forty casks filled with gold watches.
These banks were not only called Mounts of Piety, but they were also called Lombards, from the name of the original bankers, or money-lenders. A loan-bank, or a Lombard, was established in Russia in 1772,1 to prevent the usury and the oppression to which the poor were exposed, and the profit was given to the foundling hospital of St. Petersburg. The "Lombard" lent on gold and silver three-fourths of the value, on other metals it lent one-half the value, and on jewels as much as the circumstances of the times would allow, the estimate being made by sworn appraisers. The rate of interest was established throughout the empire, in 1786, at five per cent. At the Lombard, one year's interest is taken in advance. Pledges that are forfeited are publicly sold; and if they produce more than the loan, the interest, and the charges, the overplus is given to the owners.
In 1695, Sir Francis Brewster published his Essay on Trade and Navigation, "printed for T. Cockerell, at the Three Legs, in the Poultry, over against the Stocks-market." He has a section upon "Banks and Lumbers."* He recommends that in every shire a bank should be erected by Act of Parliament; and he states that it would be "the most effectual way for suppressing highwaymen; for that no man need travel with more than pocket-money for his expenses, when he may have bank tickets to any part of the kingdom where he goes." He afterwards observes, "that lumbers for poor artizans and others is an appendix to banks, and may by funds out of them in each county be supplied so as that the poor men have money to carry on their trade and employment on the pawns that may be so easy, and with the advantage of selling in public sales what they leave in pledge. And that what they borrow should be of more advantage and easy to them than if the money were lent them gratis, and may be of great use in the employment, and encouraging the manufactures of the nation, which are much discouraged by the necessities and hardships that are put upon the poor."
1 Oddy, on European Commerce. 2 Lumbers, i. e. Lombards.
Loan banks for charitable purposes, have, for a considerable time past, existed in Ireland. A voluntary association of this kind was established in the year 1756. This society was incorporated in 1780, under the title of "The Charitable Musical Society." They had their meetings at St. Ann's vestry-room, Dublin, on the first and second Tuesday in every month, for the purpose of lending money, interest free, to indigent tradesmen, in sums of not less than two pounds to any one person at one time, which sums are to be repaid at sixpence in the pound, weekly.
The Meath Charitable Loan Society was established in 1807. The committee of managers lent sums, not under five, and not exceeding twenty pounds, free of interest, to be repaid by weekly instalments of 1s. 6d. for £5; 3s. for £10; 6s. for £20. Donations of £10 and upwards being vested in government securities, the interest only to be applicable to the fund, or thrown into the floating capital, at the option of the donor.
It seems highly desirable that in England also charitable loan banks should be taken under the protection of the legislature. These institutions might be organized in the same manner as savings' banks. In most parts of England there are probably some persons of affluence who would become personally bound for the repayment of such sums as the government might be disposed go advance; or, in other parts, the necessary funds might be raised by private donations. The funds might be employed in such a way as the committee might deem best adapted to promote the object of the institution. The loans might be made either in money, in raw produce, or in implements of labour. These might be recovered, if necessary, by summary process. The state would thus become the Bank of the Poor. It would sustain the same relation to the humbler classes which ordinary banks sustain to the commercial classes. It would be an intermediate party between the borrowers and the lenders. It could borrow, by means of savings' banks, from those who had money to lend; and lend, by means of loan banks, to those who wished to borrow.