IMMEDIATELY after the failures of the City of Glasgow and West of England Banks, and the blow which was thereby dealt to the principle of unlimited liability, it is not to be wondered at that bank shareholders began very carefully to scrutinize their position in the light of these two great catastrophes. And although it will readily be admitted that this principle has served its object well, and has built up our banking system to its present strength, it must be confessed that it was more than human nature could reasonably be expected to endure that shareholders should quietly remain under a responsibility the extent of which they never dreamed of until it was brought so painfully before them by the ruin of the great bulk of the proprietors in these two unfortunate concerns.
It is true that such a disaster as that of the failure of the City of Glasgow Bank is unprecedented in the annals of banking; and though it may be true that such a disaster is unlikely ever to happen again, yet shareholders properly thought that it behoved them to guard against any contingency of the like nature by either selling out of unlimited companies, or by agitating that the banks with which they were connected should register under the limited liability Acts.
Nor was this an unreasonable action or an unreasonable agitation on their part, for it must be admitted that the return on their investment-to all, at least, but to shareholders of long standing, amounting, in the best bants, to no more than 4 or 5 per cent., was totally inadequate to compensate them for the risks they ran. And it was moreover properly argued, that it was but fair that the depositing public of banks should take some of the risk upon their own shoulders, in return for the convenience granted them by their bankers keeping their accounts, and giving them other privileges and facilities, whereby they were enabled to make profit.
These being the views very widely held by shareholders-and others deeply interested in the soundness and good government of our commercial affairs, public expression in many forms was given to them.
During the acute stage of the crisis, men's minds were too full of other things to give much heed to such topics, but as soon as this stage had been passed, the indiscriminate selling of unlimited bank shares which had been initiated during the crisis by panic-stricken shareholders,, was deliberately carried on by the more thoughtful of them, who were desirous of getting rid of a burden which they conceived they were not justified in sustaining. These sales, in conjunction with the expression of the well-weighed opinions of many who were entitled to speak on such a subject, necessarily forced the whole question upon public attention.
Hence, in meetings of the Social Science Association, and of banking institutes, in the daily and weekly papers, and in the Houses of Parliament, the whole subject was fully discussed. In the House of Commons many attempts were made by private members to deal with the question, but although each offered some good suggestions, and contributed valuable material to the consideration of the subject, not one could command sufficient support to render his scheme likely to meet with acceptance, and the bills one and all had to be withdrawn.
These abortive attempts at legislation were useful in their way, for they helped to keep the question before the public, and drew attention to the points in our banking system requiring reconsideration, as evidenced by the recent failures. It was evident, however, that no legislation on such an important subject could be satisfactory unless it was effected under the responsibility of the government; and accordingly the government, under the pressure of public opinion, determined to deal with the matter themselves.
In February, 1879, the Chancellor of the Exchequer, in the House of Commons, indicated the intentions of the government; but as these seemed to contemplate no more than to make the provisions of the Act of 1862 more elastic, and to give greater facilities for registering under that Act, and to amend certain technical difficulties which had cropped up under it, they were considered wholly inadequate.
Meanwhile the question was further ventilated by the introduction of other bills by private members impatient of delay, and by meetings of different classes of joint-stock banks. In this way time was gained to look at the matter from all sides, and there was thus less fear that it would be dealt with in a slipshod fashion, or under the influence of panic feeling, which might have led to drastic and heroic remedies, which might possibly have proved worse than the evils they sought to cure.
Having patiently obtained all the information it was possible to get, the Chancellor of the Exchequer on the 21st of April introduced his measure, entitled, " A Bill to amend the Law with respect to the Liability of Members of Banking and other Joint-Stock Companies, and for other purposes."
The main objects of the bill were to establish the new principle of "Reserve Liability," giving a reserved liabi-litv as regards the general debts of the company, but an unlimited liability as regards the note issues; to enact that all banks registering under the act should take the title of
" The------Reserve Liability Banking Company," or, " The
------Banking Company, Limited by Reserve;" to provide for a compulsory and independent audit; and to prescribe a uniform form of balance-sheet.
The characteristic of reserve liability, as set forth in the bill, was that the amount thereof should only be called up in case of failure, and for the purposes of the liquidation; and that it should amount to a sum equal to, or some multiple of, the nominal amount of the share in respect of which it was payable.
In addition to these objects there was another very important one, to the effect that no bank of issue should be allowed to register as a reserve liability company so long as it had any establishment as a bank in any part of the United Kingdom other than that in which the head office or principal place of issue was situate. This was the eighth clause.