JOINT STOCK BANKS. (Hansard, 22 July 1844)

§ Sir William Clay
said, that as an Amendment on the Motion that the Speaker should leave the Chair, he should move, that "it is expedient that facilities should be given for the formation of Joint Stock Banks, with limited liability of the shareholders." He was induced to take this course as a more convenient mode of accomplishing the object at which he had aimed, by the Motions in Committee on the Bill now before them, of which he had given notice, viz., the taking the opinion of the House on the question whether limited or unlimited liability of the partners were the best principle on which to constitute Banks. It had appeared to him on reflection that the Motion he proposed was a more intelligible form of raising that issue than a mere proposal to omit from the Bill the Clause imposing unlimited liability. That omission, moreover, would 1179 not leave the Bill in a form well adapted to carry into practical effect the principles he advocated. Were the House to concur with him in opinion, it would be necessary to remodel the Bill. It was quite unnecessary to enlarge on the importance of having sound and well constituted banks, banks so constituted as to afford ground for anticipating that they would conduct their business with prudence, and that their operations would not be of a kind to create danger or inconvenience to themselves or the public. Without entering on the disputed question of how far banking deposits, and the cheques by which they were transferred from hand to hand were to be considered as paper money, it would be admitted on all hands that the functions discharged by banks, apart even from issuing notes, were a most important part of our monetary system, and that the security, so far as such security could be obtained by law, that those functions should be adequately and safely discharged, was an object only inferior in importance to the regulation of the currency itself. The suspension of payment by a bank in large business was an occurrence always deeply to be deplored, from the widely-spread inconvenience and suffering it created; and under certain circumstances, and at particular periods, it might even be considered as a national calamity. In the case of the Northern and Central Bank of Manchester, which failed at the latter end of the year 1836, a period, it would be recollected, of much commercial pressure, so great was the alarm created by the prospect of its suspension of payments, and so strong were the reasons for thinking that its stoppage would be the commencement of a series of failures throughout the manufacturing districts, of which it was impossible to foresee the extent or conclusion, that the Bank of England, justifiably, perhaps, under all the circumstances, though contrary to sound principle, was compelled to interfere, to avert the calamities which all felt to be impending. Nor would it have afforded any sensible alleviation of the wide-spread misery and ruin which the non-payment at that time of the obligations of the Northern and Central Bank would have produced, that ultimately and after the lapse of years, their obligations should be paid in full. That a failing bank should eventually pay 20s. in the pound, was but a small compensation to its creditors, and none whatever to the 1180 public. No man has his whole fortune—never, perhaps, any very considerable portion of it—in the hands of his banker; but it is precisely that portion of his means which he has prepared to meet immediate demands, and the abstraction of which he can accordingly worst bear. To a person not in trade, the failure of his banker is an inconvenience; to the tradesman or merchant, whom it compels to dishonour his acceptances, it is loss of credit, bankruptcy, perhaps. To such a person what compensation was it that the bank, the failure of which has ruined him, pays at last 20s. in the pound, not to himself, but to his assignees? To the community at large, it is, of course, absolutely immaterial whether the creditors of a failing bank be or be not paid in full—all that the public have an interest in, is to avert that derangement of the monetary system, and that paralysis of commercial credit and enterprise, which the stoppage of banks is sure to create. The object of a wise legislation on this matter should therefore be, not so much ultimate, as immediate solvency—not so much to ensure that after suspending their payments banks should pay 20s. in the pound, as to take the best precautions against their suspending them at all. Now did the Bill before the House embody such precautions? Was it founded on the principle most likely, in its working, to create sound banks? He (Sir W. Clay) did not think so; on the contrary, he believed it retained a principle which had distinctly the tendency to produce unsound banking, and to tend to the suspension of payment of banks constituted on that principle. The Bill proceeded on the principle of unlimited liability of the partners of a bank; it was supposed, of course, that this would produce caution in the management of the concern. He (Sir W. Clay) did not know why it should be expected that this principle should produce good management in banking more than in any other trade—what reason there was à priori for expecting that the hope of greater gain should not tempt men to overstep the bounds of prudence equally in banking as in any other pursuit; but, at any rate, all experience was against the presumption. The ruin that had swept at various periods over the banking system of the country, in the half century previous to 1825 was notorious, and at last the failures of that year and the following induced the Legis- 1181 lature to attempt the application of a remedy. It was supposed that the unsoundness of our banking system arose from our only having private banks—banks with a limited number of partners. The Act of the 7th George IV., therefore was passed in 1826, permitting the establishment of joint-stock banks. What had been the result of the experiment? Why, that it had wholly failed in producing sound and safe banking. A suspicion that it had done so, induced him to move, in 1836, for the appointment of a Committee of Inquiry into the proceedings of joint-stock banks; and the evidence given before that Committee, which sat for three Sessions, as well as events which had since occurred, and were sufficiently notorious, showed, beyond the possibility of doubt, that there had been a recklessness of mismanagement, and a consequent injury to the public by joint-stock banks, to which private banking, in its very worst periods, probably afforded no parallel. They had, therefore, the amplest experience of the working in every shape of the principle of unlimited responsibility, and it was found to be inefficacious. If the feeling of cupidity, the desire of gain, was less strongly felt among the partners of a joint-stock than of a private bank, the sense of responsibility, by being more diffused, was also weaker, and the opportunities of mismanagement were greater. The credit which could be obtained by a joint-stock bank, and the consequent temptation to improvidence, were incomparably greater than in the case of a private bank. But that credit was utterly spurious, and dangerous to the community, because it was commensurate not with assets which were, but with assets which were not available. Nothing could be more false in principle, nothing more dangerous to the community, than that five hundred or a thousand persons, whose legitimate means of obtaining credit were separately, perhaps, taxed to the utmost, should, by joining together, obtain a fresh credit grounded on their possessions—possessions such as lands or houses, for instance, not convertible at need into money. This was the principle on which the Ayrshire bank, animadverted on by Adam Smith, was founded, and which led to its failure—this was really the principle on which Law's famous scheme for issuing a paper currency, grounded on the responsibility of all 1182 the land of France was based. This principle would never enable a bank in moments of difficulty to meet its engagements; but there could be no doubt, unhappily, that it enabled it to obtain credit. Theoretically, it was certain that it would be so; but the fact was equally shown by experience. The Northern and Central Bank obtained a loan of 150,000l. from a London bank, a wealthy and well-conducted Joint-Stock Bank. The very able manager of that Bank admitted to the Joint-Stock Banks Committee that the money was lent, not on any investigation of the affairs of the Northern and Central Bank, but on the credit of the known property of some of its members. Now there could be no doubt that it would have been far better if the Northern and Central Bank had not obtained that assistance. They were already in difficulties; their really available means were exhausted; every step they took afterwards added to the danger to which the public were exposed and to the losses of their own proprietors. So utterly vain was it to expect that the unlimited responsibility of partners should constitute any resource in times of emergency, that not one single instance could be cited where a bank in difficulties had succeeded in raising money from its proprietors. The Northern and Central Bank had a proprietary said to be worth in the aggregate 10,000,000l.; the managers were asked why, in the time of their utmost need, they did not make a call on their proprietors. They said, from their conviction of its utter inutility. But the Bill before them, it might be said, provided for the paying up a large proportion of the nominal capital: that was a good provision, but it was not enough; the Northern and Central had a paid up capital of 800,000l. There was but one real security—by limiting the responsibility of the shareholders of banks—by rendering those establishments real corporations—by making it clear that those who dealt with them could have no security but the amount of their paid up capital, and the prudence with which their business was conducted—to sharpen the vigilance of the public, and to put a stop to that spurious credit grounded on the private fortunes of the shareholders—credit commensurate, as he had said, not with assets which were, but assets that were not, available at need; credit, therefore, alike dangerous to the public and to the banks themselves. The experience of 1183 this country was not only against the presumption of security being derived from unlimited liability, it was also in favour of banks of limited liability—not to mention the banks of England and Ireland, there were the banks of Scotland. Among the banks of unlimited liability in that part of the kingdom, though all Joint Stock, there had been failures; the then chartered banks of Scotland, as they were the oldest, had also stood highest in reputation. There was only one other consideration which it seemed to him important to state to the House, it was the tendency of unlimited liability to lower the character of the proprietary body of a bank, and thus to lessen the chances of good management. He was far from saying that there were not highly respectable persons members of joint stock banks, but it was clear that such must be the tendency. When a man's whole fortune was to be liable for the engagements of a bank, and not only his own, but of those who succeeded him, it was quite certain that prudent men would hesitate before they exposed themselves for the sake of one or two per cent. additional on a thousand or two thousand pounds, to the remotest probability of a risk so terrible. And it was precisely the persons the most desirable for the partners of such institutions whom they excluded. Exactly in proportion as a person was wealthy, was conversant in affairs, was well known in any particular neighbourhood, would he feel reluctant to become a partner in a joint stock bank, from the full conviction that he would be the first person, in case of misfortune, selected for attack by creditors. In one respect the Bill now before them did, by its very merits, enhance this inconvenience by facilitating and expediting the recourse of creditors against individual shareholders. There were before legal difficulties and delays in the way of recovering from any shareholder a debt due from a bank. Now there would be none, and a man holding a few shares in a joint stock bank might have his whole property taken at once in execution, in discharge of its debts, and himself left to seek reimbursement from his brother shareholders, many of whom might have taken care to get out of his reach. He might add, that what he now proposed was substantially the same as Lord Althorp had intended to propose, as part of his plan in 1833, on renewing the Bank Charter. He had intended to give 1184 Charters of limited liability to banks not issuing their own notes. But finding, as he says in his correspondence with the Bank of England, "the opposition of the country bankers too strong for him on the question of limited liability," he did not persevere in his proposition. It was scarcely a want of charity to suppose that it was not the fear that limited liability would produce bad and weak banks, that prompted the opposition experienced by Lord Althorp; but rather the consciousness that the application of that principle would create banks of the highest character, and, therefore, the most formidable rivals to those already existing. The right hon. Gentleman, more fortunate than Lord Althorp, would not need to couple the privilege of limited liability with the obligation not to issue notes: for by the sound and salutary measure he had already carried, the currency was placed under regulations which prevented the power of issuing notes from becoming dangerous to the public; and he might, therefore, encounter less opposition than had been arrayed in this matter against the noble Lord. With these observations he should commit his Motion to the House. Of course, if the right hon Gentleman were opposed to him, he could not hope to succeed; but, impressed as he was with the great importance of the subject, and with the conviction that they must ultimately adopt the principle he advocated, he should have felt himself wanting in his duty, if he had not given the House an opportunity of expressing an opinion on the question.

§ Sir Robert Peel
opposed the Motion, Limited responsibility would be apt to make persons of influence and property who became shareholders in banks comparatively careless about the management of the establishments, as their chance of loss in consequence of mismanagement would be limited to the probable trifling amount of shares held by them. He did not see why banks should be exempt from the general principles of the law as to co-partnery, which was, that when all equally shared the profit, all should share the loss. All authority was against the hon. Baronet. The evidence of practical bankers taken before Committees of the House went clearly against the principle proposed by the hon. Baronet. The new regulations to be established as security against abuse would diminish any fear upon the 1185 part of persons of property of the application of unlimited liability, while the security to be given to the public, as to the solvency of banks, would be increased.

§ Mr. Hawes
supported the Amendment. Its principle was not condemned by all authority, as the right hon. Baronet had stated. He hoped that the question would be hereafter raised. He contended that the unlimited liability of the directors of a bank was a sufficient security, without subjecting the shareholders to the same principle.

§ Mr. Morison
supported the Government proposition. In America the banks, after having tried the system of limited, were establishing the system of unlimited liability. In this country it had not been found necessary to insist upon limited liability. He contended that it would be highly impolitic to introduce it. However, the banking system here was in many respects unsatisfactory, and must sooner or later be changed.

§ Mr. P. Stewart
doubted if any gentleman connected with banking would be found to support the Amendment of the hon. Baronet. The proposition was a hobby of his hon. Friend, but he hoped that having delivered his speech he would withdraw it.

§ Mr. Turner
thought the system of limited liability would not be tolerated in the country for a moment.