m ''^v:; "/ ^>:''' . M :^'f':'^:^^^^^ THE UNIVERSITY OF ILLINOIS LIBRARY 3SZ ^675 ^Mv^l^'i'-i^v.'' ' % i ^ ^ / i/ y_ i y -t^i^^e- if-f£^?r^ ^v< /' C'/^a'^.^^.-^,^^y ^^,^/^^- /v ..-^C^y£^*^- /^ X'^T j>/^ //i^ XT, =^^. /^c/y ^i^a^j, ^^. 7 AN EXAMINATION OF THE PRINCIPLES OF AN IMPMOVED SYSTEM OF BANKING, THE MEANS OF CARRYING IT INTO EFFECT. By T. JOPLIN. LONDON: PRINTED BY W. J. RUFFY, 29, BUDGE ROW. 1831. M.30 AN EXAMINATION, ifec. Some steps were taken during last session of Parliament, to effect a reform in our banking system, by promoting the establishment of Joint Stock Banks. These were, however, suspended by the dissolution of Parliament, and the agitating events which have since occurred, to be again revived at the proper opportunity. This oppor- tunity appears to be now approaching, and the following observations are intended to recall attention to the subject, and to suggest, for the consideration of the leading, influ- ential, and intelligent parties who take an interest in the question, those means which appear to the writer the best adapted for accomplishing their object. These observations may be divided into three heads : 1st. Preliminary Observations. — Containing a short statement of the steps which have been taken — the dispo- sition of Government in favor of these establishments — the disposition of the public to form them — the principles on which they ought to be founded — and the proper mode of proceeding. 2nd. The Plan upon which a Bank to accomplish the objects in view would be best constructed in reference to these principles. 3rd. The manner in which the Capital of such Bank would be best raised. 359361 Preliminary Observations. Steps wJdch have been ta7ce?i, andjuvorahle disposHion of Ministers. — In 1826, immediately after the panic, an act was passed, with the consent of the Bank of England, to enable Joint Stock Banks to be formed, having their establishments for business at not less than sixty-five miles from London. The panic, which did not extend to Scot- landj had clearly proved, independent of other testimony, the superiority of the joint stock system of that country, over the private banking system of this ; and the Govern- ment obtained from the Bank a relaxation of its monopoly, in regard to those parts of England which were situated beyond the distance above mentioned. This concession, however, was accompanied by some inconvenient condi- tions ; and one, in particular, which has proved nearly fatal to it; namely — that all the subscribers to these banks should be liable in their whole property for their engage- ments. This condition is, no doubt, as regards banks with large capitals, a mere bugbear; but it has had, notwith- standing, the effect of detering persons of large property from placing themselves at the head of these undertakings, without whom they cannot be set on foot. Not more than eleven banks have consequently been formed, and these, in general, on a very limited scale, although they have all succeeded, and some in a very extraordinary degree. Since, however, this act was passed, public attention has become much more alive to the subject than before ; and it is now the general conviction of intelligent men, not only that our present system has entailed, at different times, the greatest possible evils upon the country ; but that the in- troduction of Joint Stock Banks, at the present moment, would be a great source of relief to it. The difficulties under which the country at present labours, call loudly upon leading and influential men to exeri themselves for their removal, by promoting any, and every measure calculated to have that effect, and it being admitted that an improvement in the banking system could not fail of having a very beneficial influence, it has become little short of a duty in public men to exert themselves in promoting it. During last session of Parliament, conse- quently the following noblemen and gentlemen were in- duced to form themselves into a committee for that purpose. The Most Noble the Man^uis of Bute The Right Hon. the Earl of Darnley Lord Viscount Althorp, M.P, W. R. Cartwright, Esq. M. P. Sir R. Hill, Bart. M.P. W. Hannixg, Esq. T. JoPLiN, Esq. Sir E. Knatchbull, Bart, M.P. Sir T. B. Lethbridge, Bart M.P, The Hon. H. T. Liddell , M.P. Francis Lawley, Esq. M.P. T. P. Macqueen, Esq. M.P. W. C. MACKINNON, Esq F R.S Sir H. Parnell, Bart. M.P. G. R. Robinson, Esq. M.P. T. S. Rice, Esq. M.P. Charles Tennyso?^. Esq. MP. W. W. Whitmore, Esq. M P. An improvement in our banking system by the esta- blishment of Joint Stock Banks, must, of course, be effected by the practical formation of such banks through the instrumentality of the public. But in order to this it was thought desirable to obtain, if possible, the removal of the impediments above mentioned, which had been imposed by the Bank of England ; and the following noblemen and gen- tlemen waited upon the Duke of Wellington and the Chan- cellor of the Exchequer, to explain their views on the subject, and obtain for them, the sanction and support of the late Government. The Earl of Darnley Lord Althorp Sir 'i\ B. Lethbridge Mr, Rice Sir E. Knatchbull Mr. Tennyson Sir H. Parnell Mr. JoPLiN. It is very well known that the Bank of England will offer no impediments to tlie objects of the Connnittec. But as it was to be consulted, and the subject was probably, in some degree, new to the Duke of Wellington, he did not give those gentlemen any pledge, but promised his best attention to it. From the declarations, however, of Mr. Peel and Mr. Herries in Parliament, as well as from other sources of information, there could be no doubt of the ministry being desirous of seeing the banking system improved, and of their supporting any practical means for that- purpose. But it evidently was a subject which, for some reason or other, they were in no hurry to deal with, though when called upon to do so, either by the promised motion of Mr. Hus- kisson, the intended operations of the committee in forming a bank, or the expiration of the Bank of England charter, there can be no question that they would have dealt with it properly ; and now they are out of office, and, of course, more at liberty to act according to their individual opinions, they will generally, there can be little doubt, give their best support to the proposed improvements. It is not to be supposed, that any ministry will be as free to act in office as out of it ; but on this subject the majority of the present ministers are so pledged, by their declarations in Pax'liament and otherwise, that no fear need be entertained of their not giving their best support to this reform, as well as to the others to which they are pledged. Besides which, ministers are desirous to affi^rd all the relief in their power to the existing distress. Now the abolition of sinecures, the reduction of salaries, and the consequent repeal of taxes, are, in themselves, most desira- ble, more especially to those by whom the taxes are paid ; but they can hardly be beneficial to the working and produc- tive classes, the demand for whose labour and industry may be increased by extravagance, but can hardly be so by eco- nomy. Reform in Parliament, likewise, however desirable in itself, can obviously be of no service in giving employ- ment to labour. Hence, notwithstanding the importance of these measures, on other grounds, and even admitting that, by some process not strikingly obvious to the common sense, they may be calculated to affiard relief, yet it would be clear delusion to rely upon them alone for that purpose. The establishment of Joint Stock Banks, however, more especially in the agricultural districts, would be a means of disseminating capital where it is much required, and of giving employment to labour, now pining for want of the means of setting it to work. No one measure, indeed, will afford all the relief desired ; but the establishment of such banks holds out the most reasonable prospect of benefit of any which has been proposed ; and last session sentiments not dissimilar to these were broached in Parliament by different members of the present cabinet, but more espe- cially by Lord Goderich, who considered an improvement in the banking system the best measure of relief that could be adopted ; there can, therefore, be little doubt that every facility will be given towards carrying it into effect. It is, indeed, proposed to investigate the subject of banking previous to the renewal of the charter of the Bank of England, by means of a committee ; and the ef- fect of this enquiry will, doubtless, amongst other things, be, to throw the trade of banking open with regard to the metropolis, as well as the country. It must, however, be admitted, that reform is less necessary in London than in the country ; that its banks are generally both wealthy and well managed ; that they, likewise, do not issue notes, and have the Bank of England at hand to support them in case of difficulty. Whereas the country banks, on the con- trary, are frequently neither wealthy nor well-managed ; that they do issue notes ; that they have no public bank at hand to support them ; that they in consequence require more credit, while they enjoy less ; that they are more sub- ject to panics, and that failures are more frequent with them, and more fatal when they occur ; that reform in the coimtry is, in consequence, more imperatively requii-ed ; while it is by a reform in the country alone that relief is to be afforded to the existing distress. This reform, how- ever, does not exclusively depend upon ministers. They can only assist it ; and having shown that their assistance may be depended upon, the next point to consider is the disposition of the public to form these banks. Of the disposition of the public to Jbrm these hanks.-— The disposition of the public to subscribe to any under- taking, depends upon the safety and success likely to attend it. Many people say that banking in the country is not worth pursuing ; and that Joint Stock Banks would not afford a suitable return for the capital invested in them. This opinion, though contradicted by experience, is still adhered to, and it is necessary to examine it. It must be admitted that banking is not what it has 8 been ; that the amount of profit is less, and that in many places, the present bankers find their trade hardly worth pursuing. But this refers exclusively to private banking. It is an error to suppose it a rule for joint stock banks. Private bankers more especially in agricultural districts, are obliged to invest the chief part of their deposits in London, where they cannot obtain a remunerating interest, in order to be prepared against runs or panics. Money, at present, can only be employed advantageously in the country, and they dare not so employ it : except in dis- counting bills, which are immediately convertible into cash through their London agents. But in agricultural dis- tricts few of these are to be had, and they can neither accommodate the country, nor benefit themselves. They drain the money from the country where it is wanted, and send it up to London, where it is not, and gain nothing by so doing. Now joint stock banks, not being afraid of panics, can lend their money in the country with advan- tage boUi to themselves and the pubhc, and frequently, in Scotland, transact a great business, where a private bank could not exist. For instance, there is a branch of an Edinburgh bank, in the little village of Coldstream, on the borders of Northumberland, which does more business than is transacted in any town of that extensive county, with the exception of Newcastle and Shields, although it has several other towns, which would afford probably ten times the business of Coldstream to establishments on the same system. Public banks, in short, can make a profit where private banks can make none, and the one is no rule for the other. But independent of this, if we value a thing at what it will bring —and this is the value we have at present to con- sider ; joint stock banking is better now than it ever was, and offers greater inducements to embark in it. It is true that the profits of banking, even with joint stock banks, are less ; but the value of money has fallen in a still greater degree, and it will be found tliat the shares in the old joint stock banks, the managers of which make the same complaints of the badness of trade, are higher now than in the best times of banking. The following is an account of the price of the stock, and of the dividends of the Bank of Scotland, since the year 1810. 9 Dividend upon paid up Price of the Stock per cent. Capital. on paid up Capital." In 1811 7i per cent 169 16 1812 7i — 169 11 1813 7i — 165 19 1814 7) — 171 1815 7^ — 167 8 1816 7i 8^— 167 8 1817 8a 9i— 201 4 1818 91 — and a bonus of 20 percent. 255 14 1819 9i — 243 1820 9 i — 239 10 182191 — 237 4 1822 9i — 247 13 1823 9^8 — 233 10 1824 8 — 242 1 1825 8 — and a bonus of 20 per cent. 262 1826 8 — 229 19 1827 6 — 209 8 1828 6 — 207 12 1829 6 — 207 12 3 1880 6 — 205 5 8 The Bank of Scotland, it must be observed, never pays its dividends out of any fund but profits legitimately de- rived from banking : that is, from the interest made by lending the money cither to the Government or the public on the one hand, which it has deposited with it on the other, by the interest made from the circulation of its notes, &c. But during the war, the Bank, from the high rate of interest obtained, was induced to invest largely in Govern- ment securities. From the sale of these, a great profit was realized on the return of peace, which the Bank divided, by giving its shareholders the two bonusses of twenty per cent, above mentioned ; and the dividends now paid, are derived from the interest and profits of banking annually made, the same as during the war. A. similar scale of the prices and dividends of some of * The j)rice of the stock, given in the stock lists, is the i)rice of the £100 share, upon which £83 6s. 8d. only has been paid ; but this table gives the price or value of the .£100 of paid up c.ipital, calculated from the price per share. B 10 the other Scotch banks, that were governed by the same principles, would show the same results. It is conse- quently obvious that the trade of banking is better now than ever it was: to those at least, who propose to form new establishments ; for taking the shares at par, they have a prospect of their rising twenty per cent, higher, than if the trade was similar now in all respects to what it was in 1811, about the time when it was considered to be in its most golden age. The fact is, that however uncertain and dangerous pri- vate banking may be, and however uninviting to monied men at the present moment, the business, with public banks properly constituted, is a safe and a steady one, and the public are wilhng, when a bank is once established, to invest their money in its shares at a low rate of interest ; and this renders it profitable to establish them Taking the average of the great public banks, the following table shews that they do not yield their shareholders so much as three and a half per cent, interest. Price per £100 of Capital. Dividend. Bank of England £217 8 percent. Bank of Ireland 232 9 per cent. British Linen Company 249 8 percent. National Bank of Scotland... 137^ 5 per cent. Bank of Scotland 206 6 per cent. Royal ditto 208 6 percent. Commercial ditto 181 6 per cent. Provincial Bank of Ireland.. 112 4 per cent. i?1542 for J'52; or less than 3| per cent.* Thus if a public bank only divides four per cent., its shareholders are in a better situation than they were : they can dispose of their shares at some premium ; and with a prospect of improvement, will not be discontented. But with a dividend of five per cent, they would be very much pleased ; for their shares, in that case, would be at thirty * These prices are taken from Wetenhall's List, 28th Sept. 1830 ; since then the agitation of the Union Question produced a panic amongst the English Shareholders of the Provincial Bank of Ireland, and the price of the shai-es of tliat Company experienced a fall, from which they have in a some degree recovered. 11 or forty per cent, premium. Now no private hanker would be satisfied to incur the labour, the hazard, and the anxiety connected with his trade for such an interest ! It is, therefore, obvious that public banks, can not only make more profit than private banks, but can do with infinitely less ; and there is no doubt that banking is transacted upon more liberal terms for the public in Scotland, than in Eng- land ; and that it is a much better trade for the banker in the latter country than in the former. It could not, therefore, have been a matter of doubt, that these banks would succeed in England, even if the fact had not been most satisfactorily determined by actual experiment. All of the eleven banks which have been formed are doing well, and the shares of hardly any of them are at less than HO per cent, premium. But those of the four first esta- blished, which have been in operation two or three years, have since sold, as is well known, at the following premiums. Norwich 50 per cent. Huddersfield 50 per cent. Bradford 75 per cent. Lancaster , 100 per cent. The shares of these banks, it must be observed, were taken, in the first instance, with difficulty, and bore no premium until some time after they were formed. This success appeared to many to be too great to be real ; and, considenng that private banking was so bad, they imagined it an exception, rather than a rule. But it is obviously not greater than might have been anticipated, when we take into account : first, the advantages, which their superior credit gives them over private Banks, in making the most of their business, — secondly, the compa- ratively superior profits of banking in England, — and, lastly the low rate of interest at which the public will invest their money in them when successful. Hence there can not be a doubt of their being a good medium for the profitable investment of capital ; and as might have been ariticipated, the public, are very anxious to subscribe to them. The two last established had four times more ilemand for shares than they could sujiply. The reason xvhy more Joint Stock Banks have not been formed. — It aj)pcars notwithstanding that only eleven have 12 been formed. Although the pubhc arc rearly to subscribe to them, they will, in general, only do so, when they see them originating with persons of property, prudence, and respecta- bility. These parties, however, are prevented from sup- porting them for two reasons. First, their paid-up capitals are too small : not more, with one or two exceptions, than from thirty to fifty thousand pounds ; and this, prudent people do not think a sufficient guarantee against the possible risks of banking. In the next place they are, in general, personally intimate with the existing bankers, and do not like to oppose them. The want of proper practical men to form and conduct them, is also a bar to their formation in many places, where the other difficulties might be over- come. Indeed the responsibility of the shareholders, which, with such small capitals, is not altogether a nominal con- sideration, seems to be altogether overlooked by the public, when these banks are properly started ; and this latter ap- pears to be the chief difficulty to be overcome. It is thus obvious, first, that every encouragement will be given to the promotion of these banks by the present ministers ; and, secondly, that the public are ready to sub- scribe to them ; and we shall next proceed to consider the general principles upon which they ought to be constructed. Metropolitan Banks the most desirable in every respect. — Experience, however, both in Scotland and Ireland, has pointed out that whatever difficulties exist in effecting the reform required, they would be best overcome by means of Metropolitan Institutions. There are local Joint Stock Banks in the principal provincial towns of Scotland, similar to those which have been formed in England. But they were seldom instituted until the chartered banks had first established branches in these towns ; and it was not before the Provincial Bank of Ireland, (a London company) had established their branches in Ireland, that any Local Joint Stock Banks were formed, or any other steps taken, prac- tically to improve the banking system of that country. There is also little doubt, that the same means must be taken to improve the banking system of England, in order to do so in any reasonable time. It is to be hoped, however, that Metropolitan institutions would not improve the system merely by stimulating the formation of local banks, but also by superseding the necessity for them. Joint Stock Banks, such as have been 13 already formed, though a great improvement upon tiic pre- sent system, are of the very^worst description of such esta- bhshments. They depend for their credit, not upon their capitals, but upon the personal responsibility and property of their shareholders. Against ultimate loss the public, with such banks, are generally safe. Rut two or three of this de- scription have stopped payment, in Scotland, greatly to the inconvenience of the public, and to the ruin of many per- sons of small property holding shares. Banking, on a great scale^ and under a proper system, is a safe business. But the checks in small banks are not sufficiently complete; and no one can think that from twenty to fifty thousand pounds, the amount of the capitals, with two or three ex- ceptions of the banks already formed, will form a proper guarantee against every contingency of fraud or misfortune which a bank may possibly suffer. Neither do these banks in times of difficulty sustain public credit with the same effect as larger establishments. The smallness of their capitals begets timidity in the directors, and they are fre- quently induced to withdraw their advances, at the very time when public banks are depended upon for relieving it : by which, of course, the pressure is increased instead of being diminished. Hence though these banks would be a great improve- ment upon the existing system, it is hardly desirable that they should become very general. It would be much better that the banking business of the country should be con- ducted by metropolitan establishments possessing such large capitals, as would remove them far above the dangers and difficulties inevitably connected even with public banks of an inferior description. There is also another important view of the value of metropolitan establishments, if on a sufficiently large scale. They would not only be safe, and free from the effects of panics, but they would be a means of checking those fluc- tuations in the currency, which give rise to them. Local banks, remote from the metropolis, and unconnected with each other, have neither the knowledge, nor the power to regulate their issues by any other rule than their immediate local interests. Hence they arc frequently found, simulta- neously, enlarging them, when the state of the exchanges jxjints out that a severe, perhaps a violent re-action, nuist be the inevitable consequence. But metropolitan con) pa- 14 nics would both have the knowledge, and, frojn the num- ber of their branches, the power necessary, to check these undue fluctuations, if not totally to prevent them. This last view of the importance of such institutions, is more particularly entertained by the committee ; and the fol- lowing expression of their opinions on the subject, drawn up by the present intelligent Secretary to the Treasury, was handed by them to the late Government. " That the establishment of Joint Stock Banks, under a proper system of control and responsibility, appears to this meeting, deserving of the consideration and encouragement of the government, the legislature, and the public. " That a system of banking, bringing under the review of a central board in London the issues of paper money in the country, appears to this meeting calculated to lead to such prudent regulations, as may apply the check derived from the state of the foreign exchanges, to the amount of the currency in circulation. " That a system of London management and subscrip- tion, applied to the direction of country banking, appears to this meeting well calculated, at once to afford a profitable employment for capital where it is superabundant, and to give relief where local circumstances may have limited the amount and facilities of banking accommodation.' In order to give effect to these views, it will be obvious that any establishment which may be proposed, ought to be on an extensive scale, and have numerous branches. There are upwards of four hundred towns in England possessing private banks. In all of these branches of Joint Stock Banks might be formed with advantage, and, pro- bably, in half of them, independent establishments, of a greater or less magnitude. Nor is it in the largest towns, where private banking exists in the greatest perfection, that improvement is most required, — where " local circumstances will be found to have limited the amount and facilities of banking accommodation." Neither is it found that in large towns Joint Stock Banks are more profitable, than in smaller ones with a corresponding capital. The expe- rience of the banks already formed show, that small banks in small places, yield as high a per centage on the capital embarked, as large banks in large places. The shares of 15 the l)ank at Lancaster, a small place with hardly any trade, sold at one hundred per cent, premium, while the shares of the Manchester bank, in the same space of time after it was established, did not reach more than thirty per cent. The object, therefore, of any institution which it may be proposed to form, must be to embrace the small as well as the large towns. The proper steps to be taken. — To promote the forma- tion of such an establishment, is consequently the object of the parties before referred to ; and the best means of doing so is the next point to be considered. In the first place, the promise of a charter, or act of parliament, to limit the liability of the shareholders, should be obtained from Ministers ; and this there can be little doubt of their giving. To obtain some such understanding from the Duke of Wellington, was the principal object of the deputation before mentioned, of which the present Chancellor of the Exchequer was one ; and probably there is not an individual in Parliament less likely to have applied to the Duke of Wellington, for that which he ought not to have granted, or which, in the Duke*'s situation, he would have any hesitation in granting himself. Indeed the granting of a limited liability to such esta- bhshments, is now not only conceded as expedient, in order to promote an important improvement, which cannot with safety, much less with justice to the country, be delayed, but the principle is admitted to be the soundest as ap- plicable to such institutions. The stipulation, that the part- ners in these banks shall be personally responsible for their engagement, has the effect of seducing the public into forming banks with insufficient capitals, and of preventing persons of large property, and high character, as before mentioned, from becoming connected with them. Whereas charters, or acts of parliament, to limit the liability of the shareholders to the amount of their shares, would only be given to banks with large capitals, formed by per- sons of undoubted and well-known respectability; and while they would confer no monopoly, could never lead to any but the formation of good banks. Hence the existing law permits the worst, and prevents the best description of joint stock banks from being formed. And even as regards private banks, tiie system of per- sonal responsibility leads to nothing but (kreplion: for 16 no one knows, in any authentic manner, whether they have property or not, and the public are frequently deceived. The law, however, and not the Ixvnkers, are to blame for this, as banks could not before 1826 be formed on any other principle. But if, by law, the credit of every bank was made to rest not upon personal responsibility, but upon paid-up capital alone, the public never could be deceived ; or at least they only could be so with their eyes open, a thing which sometimes occurs with individuals, but rarely with a multitude, in matters of business. To effect, however, so great a change as to do away with all personal responsibility in private, as well as public banking, except by the gradual progress of competition, would probably be unjust to the existing banks, while it would, undoubtedly, be dangerous to the public ; for expe- rience has shewn that the only safe course, with the present establishments, unsupported as they now are, is to let them alone. Even the discussions relative to them in 1826, proved to be highly injurious. After the stability of the system has been improved by the establishment of public banks, calculated, as in Scotland, not only to maintain their own credit, but the credit of the private banks which sur- round them, laws for their better government may be made with more safety. To what extent these discussions may be again revived, or how far they may be safely carried by the proposed com- mittee on the banking question, it is difficult to say. The general object of committees, more especially on subjects of this nature, is to examine and illustrate some views or prin- ciples with reference to their practical application by par- liament, which are entertained by certain intelhgent parties, who have given their attention to the subject, but which are not understood generally. When, however, the public mind is made up upon any point, which has been previ- ously investigated, and all the facts respecting it known, further inquiry becomes useless ; and as it cannot be in- ferred, that the proposed committee will attempt to impugn the public decision relative to Joint Stock Banks, it may not perhaps be disposed to waste further time in establishing it. London, as well as the country, will doubtless be thrown open to these companies, and those facilities be granted, in order to encourage their establishment, which it was a general subject of regret had, for a contrary pur- 17 pose, been denied by tlie Bank of England. The eliief question for the consideration of the committee will pro- bably be, whether the circulation of London ought to be thrown open to competition, as well as the ordinary business of banking, the same as in the country. This, however, is a question upon which differences of opinion are enter- tained, and upon which, probably, no hasty resolution will be taken. '^ But with reference to the establishment it is proposed to form, it may not be improper to observe, that these are matters in which it is less immediately interested, than many supjjose. The citizens of London, who have not reflected much upon the subject, are apt to think, as a matter of course, that the London business of any bank established in London, must be more important to it than any it can obtain in the country. In this, however, they are in error. The business of public banks is chiefly with the middling classes ; and where there are private banks of great credit, the best accounts are kept with them. This is the case in Edinburgh, and is still more likely to be so in London, where a banker is required as a friend and referee, as much as for any other purpose, which a public bank could not become. In the country also, the general knowledge which every director has of the credit of indi- viduals, renders it comparatively easy for a board to manage transactions with its customers. But in London the direc- tors can have little, or no such knowledge, and the difficulty of management will, in consequence, be infinitely greater. Those confidential explanations, in short, which private bankers will receive, and act upon, could never either be made to a board, or influence its conduct ; and there can be little doubt that the ordinary banking business of London will continue to be chiefly transacted by private banks, as long as they are permitted to exist. At this moment the Bank of England, alter the form of opening an account is once gone through, will transact the business of any house for nothing. It docs not allow an account to be over drawn ; but it will receive the cash, and pay the cheques of any house, without recjuiring a balance to be kept in its hands by way of remuneration, ;is is the case with j)rivate bankers, and it will discoiuit at as low a rate of interest. ^^■^ private bankers arc preferred. Now no public bank coidd do business for less than nothing; and the probability is, that c 18 the chief business of London will continue in its present channels. At the same time there will, in all probability, still be a business for public banks worth cultivating, although it will never exclusively afford employment for a great capital. The great establishments of London, will be all country banks, to which their London busi- ness will be a secondary object. Neither would throw- ing open the circulation of London to competition, make any material difference. Those banks would obtain it, who have the most numerous transactions with the public in paying and receiving; and the circulation would chiefly fall either into the hands of the private banks, oi* esta- blishments, which they would form amongst themselves, to keep the profit in their own hands. The interests of any establishment which may be formed, and that of the public are, in short, strictly in unison. The most money will be made with the least diffi- culty, by an establishment properly constituted, having branches in those places where competition is the weakest, and where, though a profitable business is to be obtained, " local circumstances have limited the amount and facili- ties of banking accommodation." To an establishment for this purpose, as has been seen, -few impediments present themselves. The best part of England is already open to it ; and the present Ministers will, on every account, it is obvious, be desirous to pro- mote its formation. In order to this, however, steps must be taken to justify their support, at least in their col- lective capacity of a government. As individuals, they will, of course, not be debarred from pursuing any steps, not in opposition to the Government, which the public good and their own consistency may appear to demand from them. Now the usual course in all such cases is the proper one, whether the object be difficult or easy of attainment. When a rail-road, canal, or any public undertaking is pro- posed, for which an act of parliament is necessary, a company is formed to carry it into effect. Without this the applica- tion would not be entertained. A subscription to cover the preliminary expences is raised, and a committee ap- pointed to obtain the act required. To this opposition is generally anticipated, and frequently encountered to a great extent; but if the object be one of much utility, seldom 19 with success. Supported by public opini(Mi, and representing a body of shareholders, the zeal and activity of the com- mittee, who have to render a public account of their pro- ceedings, generally increases with the difficulty, and a de- gree of labour is frequently undertaken by individuals with pleasure, to which they would not have pledged themselves beforehand for any consideration. Besides a division of labour takes })lace, and great efforts are often produced, without calling upon any one member of the committee for an undue sacrifice of personal attention. No individual is depended upon ; nor any one called upon to do what costs hiui any great effort; and yet the united effect is irre- sistible. The Provincial Bank of Ireland was established in this manner. A company was formed in the first instance, when it was found that an act of parliament was necessary before it could be established. To this there was much opposition by the Bank of Ireland, and many difficulties, which were eventually overcome. Not, however, without much expence and trouble, which could not have been undertaken, except on behalf of a body of persons ready to commence banking in Ireland. Without a constituency, in short, a committee is a mere rope of sand, with nothing to bind it together; and even in parliament, the efforts of the committee, had it been disposed to take any steps of its own, would be feeble, and comparatively inefficient, for want of the stimulus of a practical object, to which the attention of Parliament might be directed, and to which the public were looking forward with expectation and interest. Whether, liowever, there be great opposition or no opposition, it amounts to the same thing. No formal appli- cation can be made for a charter without a body of persons ready to act upon it ; and one of the first steps, conse- quently, to be taken, is to open a subscription for the capital, which there is not the least doubt can be easily raised. Ti e success of the banks which have been formed have predisposed the public in their favor; and it is the general oj^inion, that such an undertaking would be readily subscribed to, and that the present is a very favourable lime to bring it forward. In issuing a Prospectus for this purpose, it will not be necessary to go into details ; but it may be well, in the nican time, to form some idea of the plan which it may be 20 most advantageous to adopt, and this leads us to the second head of this enquiry. THE PRINCIPLES UPON WHICH A BANK TO ACCOM- PLISH THE OBJECTS IN VIEW WOULD BE BEST CONSTRUCTED. Now in adopting a plan, we must not make an implicit, but an intelligent use of the experience derived from exist- ing institutions. We must not adopt their plans without analizing them, and seeing how far they are likely to suit us. We must ascertain how far they may be accommodated to local circumstances, not existing with us ; and whether, which is the great point for us to consider, they will admit of the branch system being carried to the extent we re- quire. And if not, whether improvements may not be suggested, by which a greater extension of it might be ren- dered practicable. Experience is our only safe guide, but it is very apt to mislead if not properly made use of. The Scotch and Irish Systems of Branches not adapted to England. — There are two modes of conducting branch establishments at present in use, namely, that of the Scotch banks, and that of the Provincial Bank of Ireland. The metropolitan Scotch banks have branches in all the towns, and many of the villages of Scotland, where they do business upon the same principles as at the parent esta- blishment, viz. borrowing money at interest, and lending it to any extent upon good security. These branches are con- ducted by agents under the direction and controul of the parent bank. But the power of lending money is a dan- gerous one in the hands of many persons ; and the Scotch banks not only pay their agents a fixed salary, that they may not be tempted to do improper business for the sake of a commission ; but they make them answerable for the bad debts they may contract, and find large security that this may not be merely a nominal obligation. This, it might be presumed, would be an effectual check against imprudent advances. But it is not so in all cases ; and they find it necessary to possess, from week to week, a clear view of their transactions, and to exercise an immediate directing controul over them besides. For this purpose the Directors have such returns sent them, as enables them to keep dupli- cate books, by which they know at once the state of every nian's account, and they also require to be referred to by the 21 agents before any loans are granted above a certani sum. In addition to this, they continually send inspectors to ex- amine into the transaction on the spot ; and some of them have every bill discounted sent up to Edinburgh, to be over- looked. All this, it must be likewise observed, is found neces- sary in a country thinl3' populated, where individual credit is easily appreciated, and where the connection of Edinburgh, the seat of these banks, with all parts of the country, is so intimate, that the personal character and credit of every man of any business in the kingdom is either intimately known, or easily ascertained. Now in England, it must be observed, in the first place, that prudent men could not be had for agents who would guarantee the debts, or who, if they did, could find security as in Scotland, where personal confidence is more generally entertained, and mutual assistance more easily afforded ; and in the next, that there is not the same power of as- certaining the safety of their proceedings. The country is more populous and less united, and the character and transactions of people less known to each other. It may, therefore, be very much doubted whether the system of simple agency would answer in England at all. It has not been found to answer in the case of private banks, very fow of whom have any agencies. The Bank of England has, indeed^ adopted it. But it does not transact business on the system which it is proposed to introduce. The di- rectors limit their advances to the discounting of bills upon London, the character of which they can in some degree ap- preciate from their own knowledge, and which arc sent up to London for examination each day as they are discounted. Tliis gives the bank a tolerable good check over its agents. But it is a system neither suited to the bank nor the country : for while it affords no accommodation to the public, that could not be elsewhere obtained, it yields no profit to the bank. It is, indeed, only by doing business for httle or no profit, that it gets any business to do. If, however, we assume that agencies, with the Scotch system of business, could be adopted in England, they still could not be so to any extent. One board of directors can c)nly go through a given (juantity of business; and overlooking, controuling, and directing, the transactions in detail, of twenty or thirty agencies, with each a considerable business, would be as 22 many, if not more, than they could manage. Some of the Scotch banks, uideed, have more than that number. But many of them are in villages and places where very little business is done ; and where the agent, with any prudence, could hardly get wrong, at least with the strong motives he has to keep right. These, consequently, give little trouble. The business of one large town would be as great, and require more attention, than thirty such agencies. The Royal I3ank of Scotland has only one branch, namely, in Glasgow, where it does a very extensive business ; and I know of no other reason why it has not more, than that it finds this one as much as it can manage. In short, a system of mere agency, it is probable, would not answer, except upon a limited scale, in any other country but Scotland ; and in forming the Provincial Bank of Ireland, — an establishment with its head office and seat of direction in London, while its branches are in the chief provincial towns of Ireland, it was thought necessary to improve upon it. With each agent was, therefore, asso- ciated a local board of directors, consisting of the most intelligent and respectable commercial people of the place. The advantages of this system are,first,that a complete check is placed upon the agent, with respect to the cash, which is regularly inspected by the local board ; and next, that the local knowledge of men of respectability and expe- rience is obtained, in determining the prudence of advances. Such minute details as are furnished by the Scotch branches, as well as duplicate accounts, are consequently unneces- sary ; and more confidence can, of course, be placed in the safety of the transactions of each branch. Notwithstanding this, it is still requisite that all advances, above a particular sum, should be referred to London, and that the general operations of each branch should be reviewed and directed by the London board. The local directors are highly respectable, and as much to be trusted without controul as other directors ; but not being interested in the success of their own management in particular, or responsible for it to the shareholders, those who are responsible, must be made acquainted with it, and consulted about it. Besides which, each branch being only a part of a large establish- ment, the local directors have not the knowledge neces- sary to enable them to determine the prudence of advances with reference to the state of the company's funds. Thus a constant system of references to London, and attention by the London board to the details of each branch becomes necessary, and requires much time and consideration. The London board consequently, though it has only fifteen branches, sits every day, and finds its time fully occupied. Hence it will be obvious, that though this system, assuming that it might be extended farther than the Provincial Bank has found it necessary, it could not be carried to any thing like the extent required. There is also another objection to both the Scotch and Provincial Bank of Ireland branches ; which is, that they could not stand the competition of local joint stock banks. These having a body of local shareholders, and a board of directors, responsible for their success, would be ma- naged with more zeal and interest, and gain a preference. The Scotch banks find that although their superior credit and resources give them an advantage in some respects, yet a well-managed local bank will frequently prove too much for them, and obtain the best business of the place. This is still more likely to occur in England; and it might be with certainty calculated upon, that the agencies of a Lon- don establishment, would eventually generate local compe- tition, which would take their best customers from them ; and that in the end they would prove to be nothing but the pioneers of a local and an inferior system, and this would neither be desirable for the London establishments, nor yet for the country. These systems an exception rather than a rule. — It is therefore obvious, that we must endeavour to improve ujx)n tliese systems. We must have branches that can be more easily managed, and whose business cannot be so easily taken from them. Nor will this be a matter of much dil- culty. The agency system is by no means the most ap- proved ; and the practice of the Scotch banks is rather an exception than a rule. The usual mode with those who have establishments at a distance, where a discretionary power must be exercised, is to have them conducted by partners. People of greater responsibility, and more entitled to confidence, can be had for partners than for agents ; and it is likewise found by experience, that even good agents make still better part- ners ; that more confidence can be reposed in them in one character than in the other; and that to engage all their 24 powers of mind, as well as their time and attention in your service, you must give them an interest in their own exer- tions, To manage, therefore, a business at a distance by agents, though sometimes done, is, as before observed, rather an exception than a rule. This is also more parti- cularly the case with banking in England, where manage- ment by agents is not found to answer, while management by partners is. A country banker, with different esta- blishments, has always a managing partner in each. Each establishment is a separate bank, and the managing partner is, in general, only concerned in the bank he manages. Take Messrs. Gurney, of Norwich, for example, who are well-known for the success and extent to which they have carried country banking. They have a great many dif- ferent banks, all of which are managed by partners ; and these, if not a branch of the family, are generally persons of business, of property, and of prudence, selected on the spot. Now it is not necessary to propose that a public bank shall enter into partnership with individuals ; but a public partnership may l>e formed, and that too, with the same advantages over a private partnership, that a public bank has over a private one. The plan for this purpose is remarkably simple. THE PLAN PHOPOSED. Let each branch be a separate bank. luet it have a body of local shareholders, who shall take, we shall say. one-half the profits, and one-half the risks of the concern. Let it be managed by a local board of directors, chosen by the local shareholders, subject to the review and controul of the London board. This is nothing more than Messrs. Gurneys' 'principle applied to public banking; and their principle of' manage- ment will have equally to he adopted. Their acting- partner of course exerts himself to extend the business of the bank, and render it profitable. In this his interest is their security for his zeal. But they will have proper accounts furnished them at stated periods, and occasionally visit the bank themselves, in order to know how far they can depend upon his integrity and discretion. Should the 25 bank be prudently conducted, and yield a satisfactory profit, their object is attained, and they will seldom interfere with the nicTnagement ; and at all times their interference will be the exception, and not the rule. But should it not be well conducted, they, no doubt, will interfere eflPectually, and either improve the management, or get rid of the acting partner who does not answer their purpose, and endeavour to obtain another who will ; or otherwise, if the establishment will riot pay, give it up. This is precisely the plan to be pursued by a joint stock bank, upon the plan proposed. The London directors will receive proper returns, and occasionally send inspec- tors to examine the books, and report upon the state of each bank ; and they will reserve to themselves the power of interfering in whatever manner they may find necessary, or think useful. But so long as a bank is well managed and successful, they will have no motives for interfering, and have little or no trouble with it. The branches zvill be zoell managed. —That they will, in general, be well managed may also be safely inferred. In the first place, the directors will be chosen, as is uniformly the case, for their known j^rudence, property, and respec- tability ; and as it has been found by experience that boards of directors so constituted, generally manage well, it may be inferred that they will equally do so in this case. But they will also liave stronger motives for good manage- ment than ordinary. They will not only have an interest in the bank themselves, and annually have to report the result of their management to a meeting of their constituents, which are the usual motives, but they will have to give a more detailed account, to more competent judges, of what good management consists in, which will, of course, render them still more particular. They also, it must be recollected, will be shareholders in their own establishment only, and in consequence will have mucJi stronger reasons for being anxious to succeed, than even the London directors. The London company will have a great many branches ; and if they are successful, upon the average, it will answer their purpose. They, therefore, need not be so anxious about the success of any one in particular: the good will {)ay for the bad. But not so the local directors. Their ocal constituents will have no such means of compensation, and must im.mcdiately suffer and feel, in the loss of capital 26 or of dividend, the injury which the mismanagement, or the misfortunes of the branch, may inflict upon them. Thus when it is considered that these branches will be managed by men as respectable in their sphere, and as fit to be entrusted with the uncontrouled management of any bank, as the London board themselves, or any other directors could be ; — that they will have stronger motives for good management than the London directors, in a pecu- niary point of view ; — that they will have the same motives as regards their responsibility to their local constituents ; — and that they will also have to render an account of their management to the London directors — it may fairly be inferred that, nineteen times out of twenty, their manage- ment will be such as to call for no observation whatever from the London board. Each Branch will be managed as a separate Bank ; but the London Directors to have the same power as over an agent. — Each bank will be managed as if it were an inde- pendent establishment. It will have its own circulation, its own funds, its own London stock account, &c. ; and if it should want to borrow money of the parent bank, or of any other branch, or vice versa, it will have to be done by negotiation. The initiative of management — the thinking and contriving how to make the bank profitable, will be thrown altogether upon the local board. The London di- rectors, unless by general regulations applicable to all, will not trouble to interpose without a special reason for it ; the necessity for which it is reasonable to presume, will seldom occur. At the same time the London board will have the same power of interfering as with an agent. They will not only have the power of directing and controuling, but of dismissing the directors, should it be necessary, and of winding up the concern ; or otherwise, of calling upon the local shareholders to choose other directors. The same power, in short, so far as the parallel can be preserved, that Messrs. Gurneys', will reserve to themselves in the case of their banks. The London board will also have proper returns, and a proper system of inspection, which will en- able them at once to see if any thing be wrong. ^rhis system capable of being carried to a great extent. — The branch system on this plan could, undoubtedly, be carried with far greater safety and success, to a much greater extent, than a system of agency, under any form. 27 Indeed the more numerous tlie branches, the more cer- tain the profit. If banking is profitable, upon the ave- rage, the greater the average the better. All that tlie London company has to do, is to see that the shareholders of each local bank pay up capital amply suflficient to cover their share of an}^ loss that may occur, and that tlie direc- tors chosen are suflficiently respectable ; and it is hardly possil)le for them to have too many branches so constituted. This sj'stem will also afford great facilities for establish- ing banks in the smaller towns and agricultural districts, where they are so much wanted. Banking in these places is comparatively simple, and easily conducted ; and if a body of respectable shareholders would take half the con- cern, and chose a proper board of directors to manage it, the bank could have but little difficulty in joining them. The risk would be trifling, if any, and so would the trou- ble; while a moderate profit could hardly fail to be rea- lized, if it were but from the business oi' the shareholders themselves. In most places the Bank zooiild be opened first, and the shares given out afterzvards. — Where, however, a good business was clearly to be obtained, the bank would pro- bably proceed differently. Having obtained a few respec- table parties as local directors, they would open the branch first, and leave the local directors to distribute the shares afterwards, with a view to extending and cementing the connexions of the establishment, after they had had time and oppoitunity for ascertaining how this was to be done with the greatest advantage. In this way a much better, and a more binding connexion, could be formed, than with twice the capital subscribed to an independent bank, which would be obliged to raise its capital before it could com- mence business. By this means consequently the bank would be able, in a great degree, to secure itself against that local competition, which would be fatal to a mere agency. The Parent Bank will not subscribe capital^ but allow the local shareholders an interest instead. — The parent bank will not subscribe any capital to its branches, but will employ its ca])ital in London, for its own benefit, and only afford them its credit. This will be no disadvantage to the branch ; but in dividing the profit with the local share- holders, who have paid up their capital, it will be proper to 28 make an allowance of interest for it in the first instance. The rate to be allowed ought to be determined by the value of money in London. In consequence of being up- held by the credit of the parent bank, and having it to apply to in case of need, it will be enabled to employ all its own capital in the country ; whereas, without this, it would have to keep it, and if it did an extensive business, probably a much larger sum, in London, as a reserve fund, to be ready in case of an emergency. It will make more interest by being enabled thus to employ its capital in the country ; but as this will be the result of the connexion, the advantage of it should be equally divided, and the interest be allowed that it would have obtained, had the connexion not existed. Besides this, the London conipany, whose capital will be raised for the purpose of supporting the credit of its branch establishments, will only make this rate of interest of it ; and it consequently would be putting the parent bank, and its local shareholders, on an equal footing. Hence the advantages to the Parent Bank may he thus hriejly stated. — It will be able to obtain, on an extensive scale, and with very little anxiety or trouble, one half the profits derived from the connexions and labours of its local shareholders and directors, and it will, in consequence, be able to turn its attention to any business it may be permitted, and may think proper to undertake in London, which could never be the case under any system that involved a laborious attention to the details of a large number of branches. By the law, as it at present stands, the branches of the parent bank will not be allowed to do any banking busi- ness in London, and the branch estabiishraeuts will be obliged to have an account with, and to draw upon, private bankers. This, however, will be altered; but if it were not, for some years to come, it would be no disadvantage. The private bankers do the business on such moderate terms, that the branches must be rather numerous to cover the expences of the necessary establishment of cashiers, clerks, &c. before the parent bank could undertake the agency on the same terms without loss. The agency will, probably, under any circumstance, afford more trouble than profit ; but if it were undertaken from the commencement, it would be productive of loss ; while, at the same time, the arrangements necessary would occupy much of the time 29 and attention of the directors which could be most profitably employed in forming country establishments, and occupying the ground now at liberty. The advantages to the local shareholders from the con- nexion may also be thus enumerated. First, In the supe- rior credit derived from it. — The capital of a bank is only wanted for credit. It is not required for the purposes of banking, which consists in borrowing or receiving the de- posits of the public on the one hand, and lending them out on the other ; in circulating notes ; and in buying and selling bills upon London, &c. For this credit is necessary, and capital is wanted for the mere purpose of giving it. No profit is made upon the capital beyond the low rate of interest frequently obtained for it. The resources of the Bank of England, upon which in times of difficulty the whole nation depends, are exclusively derived from its credit. The whole of its capital is lent to Government, and it has not a shilling of it at its own disposal. Now^ although the branches would not have the disposal of the capital of the parent bank, they would have all the advantage from it which it is intended to afford : namely, the credit it would give them, which would be twenty times as great as what they could derive from their own, or from twice the amount were they to stand alone. They would, conse- quently, obtain more deposits, and be able to deal more extensively. As they would also l)e able to arrange with the parent bank for temporary assistance, should they ever require it, they might lend all the money they received in the country out to the public in the country again, upon any good security, that would yield them a good interest. By this the}' would make much more than if they were obliged to employ a portion of it in London, and, at the same time, give greater facilities to the country, and extend the connexions of the branch. Second. In the distribution of the Shares. — The shares also would be distributed more advantageously, and thouo-h the l(x;al capital were only half the amount which a local bank might possess, that had the whole profit to divide on the spot, yet they would command as mucii business. Tliird. In the circtdation of its Notes throughout the kingdom, and of her facilities. Eacli branch would have an agent in every other branch, that would pay its notes, ho- nour its drafts, jM-esent its bills, and answer its enquiries. 30 When the branches came to be spread over all parts of the country, these facilities would be a great advantage. They would induce merchants and manufacturers of extensive dealings to give it a preference ; while the nobility and gentry, who are continually travelling about, would find it a great convenience to deal witli a bank of which the notes would pass everywhere, and which had everywhere an agent that would honour its drafts without trouble. Fourth. In the smaller number of Directors that zvonld he required. — The blind confidence which it is necessary for the shareholders to repose in directors of independent Joint Stock Banks, and the chances that some of them may not be very efficient, render it necessary that every board should consist of more directors than would be required, could their management be overlooked, and their efficiency be depended upon. This is a disadvantage which these banks labour under. Those who deal with banks are jealous of too many persons being made acquainted with their private affairs. But it is a disadvantage which will be obviously guarded against by this plan, where the same degree of confidence is not called for. It will, clearly, not be necessary to appoint more directors than are required to manage the concern : as it may be arranged that they shall retire when they are unable to give the requisite attention to it. By this means it is probable that one half, at most, of the usual number of directors will be sufficient, which will give the branches a great advantage in the public estimation. Local Baltics will be unable to contend against these ad- vantages. — The only advantage which banks exclusively local could ever possess over the proposed branch estabUsh- ments, would consist in the larger number of their share- holders, which, as has been seen, would not, probably, under the circumstances of their distribution, give them any supe- riority; while, on the other hand, it would be impossible for them very successfully to compete with all the other pre- eminent advantages which the proposed system of branches would thus enjoy ; and there can be little doubt of its pre- vailing over every other. The Shareholders will have more confidence in the ma- 7iagement. — It may also be observed that it will be an advantage in the estimation of the local shareholders, which will make these branches be preferred, that the manage- 31 ment of thcni will be under the review of competent judges. The shareholders might have no objection to place unlimited confidence in the local directors, were it necessary, and might sooner place it in them than in any other parties, but such confidence will never be given in preference where it can be avoided. The controul of the London directors not ah objectionable one. — It may perhaps be objected that it is proposed to give the London directors too much power ; that it is not necessary for them to possess unlimited controul over men as respectable as themselves. In answer to this it must be observed, that it would be extremely difficult to define the proper limitations. That it is only in extreme cases where the power of dismissal would ever be used, and, in such cases, the more promptly it could be exercised, the better for all parties. That in point of fact, shareholders always reserve to themselves as much power as they can exercise with advantage ; and that any partner in a private concern, under similar circumstances, would reserve to him- self the same power over it. Besides which respectable men would never complain of a reasonable controul which in- volved a beneficial connexion, even were it attended with an interference to which they w^ould otherwise object. But such an interference would never occur. If the London board had any motives for interfering needlessly, the num- ber of branches would be a sufficient guarantee against its being done. The directors could never be desirous of cre- ating trouble to themselves. The whole of their arrange- ments, on the contrary, would naturally be directed to pre- vent the necessity of interference. In addition to this, it may also be observed, that the real management woidd necessarily be in the hands of the local directors, and the power and influence which it conferred would be proportioned to the credit extent of business and means ol' the establish- ment. And, in that respect, the branch directions would be more honourable, and more valued, than those of banks exclusively local. There are likewise always men of respecta- bility willing to undertake these duties, and in most places there are numbers sufficient to supply directors for several banks. Whereas, at present, local banks could only be formed for reasons already stated, in few places, and the proposeil establishment would be the only one lor which directors would be required. If therelore the establishment Ik' pro- 32 perly formed in London, there will be no difficulty whatever in getting men of the first respectability to take the manage- ment of its branches in the country. Having thus discussed the principles of the plan, we shall briefly recapitulate it ; and then proceed to consider the manner in which the capital will be best raised. RECAPITULATION OF THE PLAN. 1. That a Company be established in London, with a suitable capital, as hereafter determined upon. 2. That it form branches in the country in connexion with it, which shall be separate banks, with each a body of local shareholders, interested in it alone, and not responsible for, or connected with, any other establishment. 3. That the profits or losses of the branch shall be divided equally between the local shareholders, and the London company. 4. That each branch shall be managed by a board of local directors, chosen by the local shareholders ; subject to the inspection and controul of the directors in London ; that the London board shall possess supreme power, and be enabled to take any steps desirable for the interest of all concerned. 5. That the London company shall not advance any capital to the branches, but the local shareholders shall advance sufficient to cover their share of any losses that may possibly be incurred, and be allowed interest upon it ; the rate of which to be determined by the value of money in Lon- don ; after which an equal division of profits to be made. 6. It may be also added, that each company shall pay its own expencet. of management. THE MANNER IN WHICH THE CAPITAL OF THE BANK WILL UE BEST RAISED. The usual Mode of Raising Capital, and the Objections to it. — The plan usually adopted for raising the capital for such undertakings is, to fix the amount of capital much higher than there is any immediate prospect of requir- ing, and then to call such part up, either at once, or by degrees, as may be necessary. The reason for thus fixing what may be termed the nominal capital high, most fre- quently is, to give an imposing appearance to a small subscription, in order to cover the undertaking with an 33 air of respectability, which does not properly beloni' to it. But wliere there is any probability of the capital beinj^ ul- timately required in case of the concern succeeding, it becomes necessary to have the ]iower hereafter of calling for it, which, without it was conferred by the original con- tract, could not be done. When parties join an under- taking, they agree to pay their proportion or subscription if called upon, but no more. Any enlargement, therefore, beyond the amount so fixed, eiFected by the company itself, would require the consent of every individual. This, in concerns more especially that have been any time esta- blished, can never be obtained, however advantageous to the individuals, as some of the shares are almost always held in trust for others. Under such circumstances, there- fore, no enlargement beyond the amount originally fixed, however desirable, could take place, without the consent of parliament; and this, except under particular circumstances, would be refused. Not that parliament would have the least objection to any concern enlarging its capital, the more capital a bank in particular has, the better for the public; but the consent of parliament would be required to enlarge it, by breaking the original contract, and compelling certain parties, to embark more money in the concern than they had agreed to do, and for some reason or other, would consent to. This parliament would at all times feel a difficulty in sanctioning, and to avoid the necessity of such an application, the easiest mode is to make the nominal capital high in the first instance. If it is never wanted, no harm is done ; and if it is, an appli- cation to parliament is saved. But to this mode of raising capital, experience points out many objections. In the first place, the system of nominal capital has been very much abused, and it would be desirable if the whole, or a great part of the capital subscribed, were called up. It would hardly, after the experience of the past, be considered respectable, were this not the case. Yet if this plan succeeds, it will not require less than five, and may require ten millions ; and to call up the least of those sums, in the first instance, would be out of the question. The public would never subscribe to an undertaking in which it was proposed to call up so large a capital for the purposes of a business to be created. In the next place, were the calls made by degrees in the 34 usual manner, which must be llie case if this phin be adopted ; experience has shewn that every call for capital, on a great scale, would be certain to bring so many shares into the market, at one time, as to depress them, and cause great fluctuations in their market price. This would give rise to much jobbing, and its attendant consequences, which would be very objectionable, and which it would be desir- able to prevent. In the third place, the directors on this plan would have no motive for extending the concern, and fulfilling the objects of it, but the reverse. After having called up one or two millions of capital, and found the unpopularity of calls, they would be induced rather to limit the operations of the company to the capital in hand, than call for any more. They would naturally think, — why should we extend our business, and give ourselves additional trouble, if it is nei- ther to increase our dividends, nor the price of our stock ? If we have to make further calls, the additional profits will merely have to be divided over a large surface : the profit on the existing capital will not be increased, while the market value of it will be reduced ! It is clear that they would do no such thing. They would, in preference, confine their operations to the capital in hand, by which the objects of the institution would only be in part ful- filled. In the last place, it would not, on this plan, suit many persons, to subscribe for the purpose of investment. They would not find it their interest, did it suit their convenience, to keep by them for evei*y share they held, and upon which ten per cent, might have been paid, a considerable portion of its nominal value, to meet future calls. Yet this would be necessary if they intended to hold their shares. Neither., in all probability, would it suit the views of speculators, for the calls would be certain to reduce the price of the shares, and they would expect to purchase them at a discount, They would be disposed therefore rather to hold off with that expectation than subscribe. Hence it is very doubtful whether, on this plan, such a capital could be raised. There are thus four objections to this mode of pretend- ing to raise the capital. 1st. That it would not be respectable without the capital were paid up, and it would be too large to be so. 2d. That if a large capital were raised by a succession of 35 calls, it iniibt give rise to a gixvit deal of" jobbing, and its attendant consequences. 3d. That the system would not afford a motive for ful- filling, but rather defeating the objects of the institution. 4th. And finally, that it is much to be doubted whether so large a capital as would embrace the objects of the pro- ])osed institution, could be raised on this plan at all. Plan of Raishig the CapUal proposed. — All these diffi- culties, however, are very easily overcome by the judicious adoption of a very equitable principle, namely, that those who incur the risk of establishing the concern, should enjoy the benefits resulting from the extension of it. This is always aimed at in every undertaking, but often so clum- sily, as for it to happen that those who first establish the concern suffer severely ; while those who succeed them, enjoy the whole benefit of it. The plan is simply thus. PLAN. Let a capital, not more than sufficient to commence with, say a million, be raised in the first instance, which shall be called the original capital ; and as more is required, let it be raised by fresh issues of shares, at whatever premium they are worth, such premium to go exclusively to the original shareholders and eslablishers of the concern. Advantages of the Plan.~^y this plan all the foregoing objections would at once be removed. 1st. There would be no nominal capital. As the capital first raised would not exceed tlie amount necessary to com- mence with, the whole of it must, oi" coui-.se, be paid up ; and as fresh shares would only be issued when further capital was wanted, they would, of course, be issued at their full value, for the same reason. ^d. The [)rice of the stock would be kept steady, and all jobbing prevented. The company would not extend the concern and issue fiesh shares, unless a fair price could be obtained for them; while having so many to issue, it is hardly [)robable they would, at any time, rise much above the company''s price, until the whole capital had been raised. Material fluctuation, therefore, in their price would not oc- cur ; and all inducements to speculation in them, except for the purposes of investment, would be withlKld, instead (jf bein": created as with calls. 36 3d. The premium which would be obtained on the sale of the fresh shares, if the undertaking was successful, would form a source of very considerable profit, and would render it a great object with the directors to extend the concern, in order to justify their enlarging the capital. Thus, instead of a demand for more capital defeating the reform pro- posed, by limiting the operations of the company, it would completely secure it, by holding out a powerful motive for extending them. 4th. Instead of there being any fear of raising the capital, it would be rendered doubly certain ; first, by the limited amount that would be required in the com- mencement ; and next, by the double source of profit secured to the original subscriber. There is nothing ex- travagant in supposing that, in seven years, the shares would rise to fifty per cent, premium. Indeed it is almost a matter of certainty ; and if so, it cannot be questioned that the concern, in that time, might be extended so as to require at least five millions of capital. Now if we assume that only twenty-five per cent, premium would be on the average obtained upon the additional four millions issued, it would leave the original shareholder one hundred per cent, premium. To this must next be added fifty per cent, from the success of the bank, and it would make his share, in seven years, worth £250. ; and this is a moderate calcula- tion ; for although it may not be fully realized in practice, it is as likely to be exceeded. There is, consequently, not the most remote question of the capital being raised as soon as the subscription is opened; whereas. on the usual plan, as has been seen, the raising of the capital would probably be a matter of much difficulty, if it could be done at all. Nor would the advantage which would thus accrue to the original shareholders be gained by the loss of others. The chief part of the additional capital would, of course, be raised after a dividend had been paid ; and would be bought by parties who would have run no risk in establish- ing the concern. They would consequently be entitled to pay a premium, would be willing to do so, and would lose nothing by it. They would only pay for the shares what they would be really worth. Whereas, on the other hand, by the premium being given to the original share- holders, on the plan proposed, the parties would obtain it who were best entitled to it, while all that would be dis- reputable and injurious to the undertaking, if it did not prove fatal to it, would, as we have seen, be avoided.* Arrumnt of Original Capital, and principle hy which it shall be enlarged. — We have suggested that the original capital be one milHon. There is little doubt that, in a reasonable time, a profitable return might be obtained upon this sum ; while a less amount would hardly hold out the inducement of credit, which would be one of the chief advantages of the local shareholders in connecting them- selves with the branches. The enlargement of the capital also must be determined by a fixed princij)le, and the obvious and most simple one is, that the amount of capital raised in I-ondon shall be equal to the aggregate of that raised in the country. By this, though the London bank will not pay any capital over to its branches, imless borrowed in the ordinary manner, to be repaid as may be agreed upon, it will raise as much capital for their purposes as they do themselves. Every new bank formed will consequently entitle the London company to add to its London capital a sum equal to the local capital of such bank. On the other hand, it must be obvious that if the concern does not succeed, it cannot be extended. The directors cannot indulge fanciful prospects, as is frequently the case, on the plan of calls, and compel the shareholders to advance more money at par, when, if they wished to enlarge their interest in the concern, they could do it better by purchasing the shares at a discount. Directors often pretend, in such cases, that they have nothing to do with the price of the shares, whereas they could not " It has been proposed, and it is a proposal worthy of consideration, that the premium ought to be held for a given time, and not go to the original shareholders without the concern succeeded. Thus : let the i)re- mium originally given be marked on the certificate of each sliare ; and let the holder of it, at the end of a given time from the issuing of it, say seven years, have the option of calling upon the Company either to take the share off' his hand, at the original |)rice, or return him the premium. This he would do if the concern did not turn out according to tne expec- tations formed, and the share was at a less price than he had given for it. If the concern did succeed, the shares would, in seven years, be above the price they were issued at, and the Comijany would gain the premium ; but, in that case, they would only do so jjrovided they were enlilUd to it, and shares had really proved to be woith the money given for them. 38 have any more conclusive evidence of the opinion of their constituents. On this plan, however, no person will, at any time, be compelled to embark a shilling against his inclination. With these few observations, we shall briefly recapitulate the terms of the plan. RECAPI rULATlON OF PLAN FOR RAISING THE CAPITAL. 1. That an establishment be formed, in the first in- stance, with a million of capital, to be called the Original Company, the whole of which to be paid up. 2. That it proceed to form branches on the principle already proposed, until the local capital of its branches amounts to that sum. 3. That for every bank it may afterwards form, it shall enlarge its London capital to the extent of the local capital subscribed. 4. That the shares thus issued by the London com- pany, shall be issued at such premium as they may be worth. 5. That the premium thus obtained shall go exclusively to the original shareholders and establishers of the concern. W. J. Rufly, Printer, 29, Budge How, London, •m m m, ■■■^•^■ « — ■ ■■.■^_