said, that, in bringing before the House a Motion with respect to the unlimited liability of shareholders in joint-stock banks, he was not influenced by light or trifling considera- 360 tions or by any mere wish to vindicate a favourite theory, but by the serious object of preventing the recurrence of great national disasters. If he looked on this subject simply as an amendment of a law—if he acted merely for the interest of those who were at present, or might at a future time be interested in joint-stock banks—though he might have made a Motion of this kind in an ordinary Session, yet he would not think the circumstances such as to justify him in bringing it forward at such a peculiar conjuncture as the present, when Parliament was specially summoned to take into its grave consideration a great monetary crisis. The reasons which had induced him to bring forward this question at this particular period were these. He had long entertained a rooted conviction—not arrived at now for the first time, but come to after the panic of 1847, when he had occasion to investigate the causes of the failure of the joint-stock banks which then fell—a conviction strengthened by subsequent observation and confirmed by the events of the recent monetary crisis—that the principle of unlimited liability of shareholders was a chief moving cause of the mismanagement of joint-stock banks; and further than that—that the mismanagement of these banks, by leading on to their ultimate failure, most materially aggravated and precipitated a national crisis such as that we had just passed through. So strong was his conviction upon this head, that he did not hesitate to express his individual opinion that, if he had been successful in the Motion which he made upon this subject in 1849, the recent crisis would have been disarmed of much of its force, and he should not now have had to bewail the wide-spread ruin and disaster that has fallen upon a long list of personal friends and constituents. One additional reason which had induced him to bring forward this Motion at this time was, that it was almost hopeless for a private Member to attract the attention of the House to the subject except at a moment like the present, when the public mind was fully roused in respect to it. In as few words as possible he would now state the nature of the case which he had to bring before the House, and the propositions which he thought he could establish by an appeal to undoubted facts of which they all had cognisance. He contended 361 that in periods of prosperity in trade, when the rate of discount was not high, and there was no undue pressure in the money market, mismanaged joint-stock banks laid the seeds of disease in the commercial system, which, when a period of pressure arose, developed themselves in the most alarming form. There were two modes by which joint-stock banks produced these results. First, by the power they possessed over capital, they were enabled to foster undue speculations, to give rise to enterprises which, though they throve for a time by the false credit which gave them birth, still remained in a condition to be overthrown by the first symptoms of a pressure. Secondly, by the principle of unlimited liability, they were enabled themselves to become indebted to an almost fabulous amount in all quarters of the money market, and thus they were placed in such a condition that it was next to a matter of certainty that when a time of pressure came they themselves should fall. Thus they converted a period, which would otherwise be only one of trifling and temporary inconvenience, into a great national crisis, involving all the evils which the country had just experienced. Whenever the pressure came, whether it were the result of an adverse balance of exchange, a deficient harvest, which imposed upon us the necessity of exporting bullion to pay for the people's food, or monetary disturbances in foreign countries, or any other accidental circumstance, the inflated credit created by the mismanagement of joint-stock banks collapsed, the joint-stock banks themselves fell, and then occurred precisely the circumstances described in the recent letter of the Government to the Bank of England, where they said, "Her Majesty's Government have observed with great concern the serious consequences which have ensued from the recent failure of certain joint-stock banks in England and Scotland, as well as of certain large mercantile firms." The question, then, was, were they prepared to allow the evil to go on without endeavouring to grapple with it. They had done so in 1847, and the result was, that in 1857 exactly the same events had occurred. Having passed over the former period without doing anything to prevent a recurrence of the evil, if they pursued the same course now, there was no reason to justify them in supposing that a similar course of events 362 might not occur again and again in a constantly recurring cycle. He would now endeavour a little more fully to explain the particular modes in which a joint-stock bank was able to produce the effects he had just stated. A joint-stock bank possessed from its very nature an almost unbounded control over capital. At its foundation enormous sums, sometimes a million or more, were paid into its coffers in the shape of calls upon shares; by the modem system of paying high interest on deposits it was enabled to draw to itself all the capital of the surrounding district; and in consequence of the law of unlimited liability it had a further power of an infinitely mischievous nature to which he wished particularly to direct the attention of the House. A joint-stock bank, by the present law, possesses the power of mortgaging the real and personal property to the last farthing of every one of its shareholders. This was the very root of the evil. However notorious it might be that the original capital had long ago been wasted, however flagrant mismanagement might have been, and however widely it might be known that the assets were locked up in reckless speculation and worthless investments, yet still a joint-stock bank was able to keep up its head in the money market, and to borrow money, from the power which it possessed of pledging the credit of its shareholders. To make the case more intelligible he would illustrate it in this form:—Suppose that the shareholders in a joint-stock bank were to do individually that which they were enabled, under the existing law, to do conjointly, and were to pledge the whole of their fortunes in the money market, in order to raise as large a sum as possible to apply in promoting speculative enterprises. Suppose any individual thus to pledge his whole fortune and raise what he could in the money market to apply in speculation, there is little doubt but what such a course would lead to ruin, but such a course, fatal though it might be to the person pursuing it, would of course not deserve the name of a national disaster; but if, in place of one or two persons so acting, four or five hundred were to pursue such a career, then no doubt it would be admitted that that which was comparatively innocuous in one individual might well become a subject of serious concern. The mischief, however, 363 which these persons could do, in pledging separately their respective fortunes, was not so great as that which they could effect when they were united by the bond of a joint-stock bank, while it was impossible that they could spend the funds which they separately raised more recklessly or improvidently than joint-stock banks expended the funds which they raised upon their conjoint security. He had stated that joint-stock banks became indebted in large sums of money under the action of this principle of unlimited liability. How precisely was this accomplished? In the letter of the Directors of the Bank of England to the Government this paragraph occurred:—In the following week a great shock of credit, and a consequent demand on the Bank of England for discounts, arose from the failure of the Liverpool Borough Bank, whose re discounted bills were largely held by the bill-brokers and others in London.He had no reason to suppose that the practice of re discounting, which had clearly prevailed at the Liverpool Borough Bank, had not also been acted upon by the other joint-stock banks which had failed; and, indeed, in former years he knew that it had prevailed in such banks as had failed. The profit of a bank in the case of the re-discount of bills consisted, of course, in the difference between the rate charged by the bank in the first instance, and the rate at which it procured the bills to be re-discounted in the money market, and therefore the higher the rate of discount charged by the bank to its customer the higher the profit. The consequence was, that the bank had a direct interest in discounting bills of a speculative character on which a high rate of discount could be charged, the, bank itself procuring the re-discount of the bill at a lower rate on the faith of the liability of the shareholders, whose names it put on the back of the bill. What was that but selling in the money market from time to time the security of its shareholders? The practical result was, that a bank acting upon this system was continually indebted in a large sum in the money market. Such was the state of the Liverpool Borough Bank at the period of its suspension, and such the state of the other banks which had failed. Now, although he (Mr. Headlam) did not pretend to have any intimate knowledge of banking, he was sure that the House 364 must agree with him that a bank so circumstanced was in a thoroughly false position. It was the imperative duty of a bank which received deposits, not only not to be in debt, but to have a considerable reserve at all times available in order to meet any extraordinary demands which might be made upon it; and a bank which had not such a reserve was constantly liable to have its advances stopped, when the only course for it to pursue would be to suspend its operations. He might add that it was within his own knowledge that the joint-stock banks in London were not in that position; that they were not largely indebted in the money market; but that, on the contrary, they had large balances at the Bank of England. With respect to them, therefore, all he could say was, that the law of unlimited liability conferred upon them a power of a most mischievous description, which, however, practically, they did not make use of. He had stated that the great and serious difficulties which arose in the period of a monetary crisis were greatly enhanced by the failure of joint-stock banks. He confessed he thought it not necessary on this part of his subject to press much on the attention of the House, but if any confirmation of his view were required, he might refer at once to the Speech of Her Majesty delivered at the opening of the Session, in which the failure of joint-stock banks was stated as the first aggravating cause of the present crisis. He might appeal also to the events of 1847, when again the failure of joint-stock banks aggravated most materially the circumstances of the panic. Or he might refer to the speech with which Sir Robert Peel, in 1844, introduced his Bill for the Regulation of the Currency, when the right hon. Baronet stated that one of the things which he wished to guard against the recurrence of was the failure of joint-stock banks,—an object which the Act, whatever might be its other merits or defects, certainly had failed to accomplish. He would now proceed to state some of the reasons why he thought that the principle of unlimited liability tended directly to render the mismanagement of joint-stock banks not only possible, but probable. It would be found by reference to the history of these cases that when a great failure occurred in the case of a joint-stock bank, it almost invariably arose from the paid-up capital in the first instance being 365 wasted and squandered; and he was sorry to add that in cases where the paid-up capital had been so wasted it was generally attributable to mismanagement, amounting to something worse than a mere error in judgment on the part of those who had originated the bank in question. When a bank lost its paid-up capital, the law, if it were good and sound, would either compel it to be wound up at once, the shareholders submitting to the comparatively small loss which they had already incurred, or would render it incumbent upon them, if they chose to carry it on, to replace the capital which had been lost, to alter the form of management, and to place the establishment upon a safe foundation for the future. Instead of this, however, the operation of the existing law was such that, after the paid-up capital was lost, it was perfectly easy for a bank to continue its career of mismanagement. It could still obtain unbounded credit in the money market; it could continue its business for years, although its failure might be from the first almost a matter of mathematical certainty, and owing to the credit which it obtained through the unlimited liability of its shareholders, it was enabled to continue its downward career over a lengthened period. When its capital was thus lost it was almost a matter of certainty that it must go on for years getting into a worse and worse condition. It was compelled to pay large dividends upon the capital it had lost in order to give some compensation to its shareholders for the risks thus run, and in various modes it was obliged to carry on its business in a less economical manner than a solvent bank. It went on during the period of prosperity getting deeper in debt, and year by year the number of its bills for re-discount became larger, till at length the time came when its failure was immediately in sight and could only be delayed for a short time; and even then how did this law of unlimited liability work? It assured the wealthy shareholder and mismanaging director that if they could only contrive to carry on their mismanaged bank for a little longer they might dispose of their shares and the liability attaching thereto. It also assured them that should they attempt to bring exposure upon the fragile state of their bank, they would be the first victims of the crash, and would in all probability be ruined. When the law ex- 366 posed men to temptations like these—when it held out to them such advantages and such means of escape if they pursued a wrong course, and such evils if they pursued a right course—was it wonderful that they should pursue that course which would lead to certain failure, and that they should endeavour to carry on a bank after it had in fact failed, in order to protect their own interests from the ruin? The result was that they went on until a pressure came on the money market, and then a bank in that position fell with a crash, which affected an entire district, and then it was that the shareholders were at length involved in entire ruin, that the trade of the whole district became paralyzed, and so continued till, by the gradual growth of capital in the district, trade again slowly revived. The daily records of the Court of Bankruptcy told of failures of this kind. The unlimited liability of the shareholders in a joint-stock bank rendered mismanagement probable, easy, and possible, and led to the fatal consequences to which he had alluded. He would now state to the House what was the origin of this law of unlimited liability, because he verily believed that a large proportion of its Members seriously thought that this law was prescribed in the first instance for the security of the public by providing for the good management of joint-stock banks. He believed that they imagined that joint-stock banks constituted the exception to the general law, because there was something in the principle of unlimited liability specially applicable to those banks. Now, so far from that being the case, he could assure the House that the truth was diametrically the contrary. So far from the Government of the time at which that principle was applied to joint-stock banks thinking that unlimited liability was beneficial to the public, they were of the reverse opinion, and that, instead of strengthening, it weakened joint-stock banks, and it was only because they were forced to do so that they applied that principle to them. That principle was, in fact, forced upon the Government by the Bank of England with the view of rendering joint-stock banks less formidable rivals than they otherwise would be to the Bank of England. Previously to the year 1826 joint-stock banks were not lawful in this country. The Bank of England alone, at that time, possessed the privileges of a 367 corporation governed by the principle of limited liability. With that single exception, all the banks throughout the country were carried on upon the principle of unlimited liability, and it was also a part of the law that they should not have more than six partners. A large proportion of those private banks failed in 1825, and then it was that the Government sought to establish joint-stock banks for the purpose of giving greater security to the public. The Earl of Liverpool and Mr. Huskisson, who then presided over the financial affairs of this country, took a view of the matter, which was a singular proof of their prescience and their sagacity, because at that time the country had not had the benefit, which we of these days have, of experience as to the principles of limited and unlimited liability. The Earl of Liverpool and Mr. Huskisson proposed that the principle of limited liability should be applied to the joint-stock banks then about to be established; but the opposition on the part of the Bank of England was so great that they consented to the principle of unlimited liability being applied to them. Again in the year 1833 the same thing occurred when the charter of the Bank of England came to an end. Lord Althorp was then Chancellor of the Exchequer, and he adopted precisely the same view as that entertained by the Earl of Liverpool and Mr. Huskisson with regard to joint-stock banks. Lord Althorp, in fact, in that year, proposed to the House of Commons that the principle of limited liability should be applied to joint-stock banks on the occasion of the renewal of the Bank Charter. He proposed that in the case of joint-stock banks not issuing their own notes, one-fourth of the capital should be paid up and vested in securities, that the shares should not exceed £ 100 each, and that the partners should only be liable to the amount of their shares; the opposition of the Bank of England was again fatal to the proposition. But having observed the conduct of the Directors of the Bank of England for some time, he (Mr. Headlam) had not the slightest fear that the Bank would at this day attempt to oppose the principle by which itself was governed being applied to joint-stock banks generally; and if the present Government held the same opinion as the Earl of Liverpool, Mr. Huskisson, and Lord Althorp on this 368 question, he had every reason to hope that he should succeed in his attempt to gain for the country the great advantage of having joint-stock banks governed by the principle of limited liability. He was glad upon this occasion to bear witness to the large and sound principles which they had now adopted. He would now refer to the direct evidence afforded by experience. None of those evils which resulted in this country from the mismanagement of joint-stock banks had attended the management of those chartered banks which had been established in the Colonies. Take the case with regard to Scotland. In that country there was one bank which certainly was based upon the principle of limited liability, and there were two others with regard to which some doubt existed as to their liability, but the liability in the Bank of Scotland was certainly limited. Now, the Western Bank of Scotland and the City banks were both founded upon the principle of unlimited liability, and so far as experience went the results were in favour of the principle of limited liability; for while the two banks to which he had referred as having unlimited liability were compelled to suspend, the Bank of Scotland not only was able to tide through the difficulty, but also was able to avert disaster from her sister banks. When he had brought forward the question in the year 1849 the argument upon his side was much more difficult than it at present was, because at that time the principle of unlimited liability was the general principle of the law, and, therefore, no doubt, it was a difficult task to ask that House to alter the general principle in one particular case. At the present day, however, the principle of limited liability had been admitted with regard to other companies, and he believed still, as he had believed in 1849, that the case for the limitation of liability was stronger with regard to banks than with regard to any other commercial bodies. At present the case of joint-stock banks was the only exception, and even Lord Over-stone, who was a strong opponent of the principle of limited liability, had stated in his evidence that if the principle were admitted he did not see any necessity for the exception. The question was one of great magnitude, and one which ought not to be delayed, and it was most desirable that the House 369 should come to a decision with regard to it, for to leave any question relating to banking in a state of uncertainty was almost as great an evil as the adoption of a wrong principle. If his arguments were wrong, and his experience unfounded, let the House reject his proposition; but he felt confident that the Resolution which he proposed was well worthy of being agreed to by the House. They had a precedent of the House adopting a Resolution in favour of limited liability, and upon that occasion the Government which was presided over by the noble Lord still at the head of the Government, and who for his firmness in carrying out the principle expressed in that Resolution was worthy of great credit, brought in a Bill to carry the Resolution of the House into effect. Should the House agree to the present Resolution, he trusted that the noble Lord would follow that precedent, and bring in a Bill founded upon it, containing such safeguards as he might think to be expedient. He could say, for himself, that he was so convinced of the propriety of the Resolution as to believe that if it were made the foundation of legislation, this short Session of 1857 would not have been passed over in vain; nay, he would go further, and say, that, although there had been great losses and distress occasioned by the recent crisis, still, if the House adopted the principle contained in his Resolution, they would have the satisfaction of thinking that we as a nation had at least gathered wisdom from our misfortunes.
Motion made, and Question proposed,
That the Unlimited Liability of Shareholders in Joint Stock Banks gives rise to a species of credit injurious to the interests of the public; and that the present Law enforcing the adoption of this principle requires alteration.
§ MR. COWAN
said, that it was very seldom that he had the misfortune to differ from his hon. and learned Friend, or to oppose his proposals in that House, but he hoped that the House would allow him, as the representative of the ancient metropolis of Scotland, and the seat of several of the most valuable institutions in the country, some indulgence in expressing his views upon a subject which was well worthy of the serious attention of the House. For his own part, he could only say that he had been entirely unconvinced by the argu- 370 ments which his hon. and learned Friend had employed in order to induce the House to consent to the Resolution which he had placed on the paper. He would ask his hon. and learned Friend to suppose the case of a fleet of merchantmen accompanied by a convoy caught in a hurricane, and some of them driven ashore, with a great destruction of property, and he would ask him whether, under such circumstances, he would introduce a new theory as regarded navigation, or the rigging of ships, especially if it appeared that on board the wrecked ships no proper look-out had been kept, that too much canvass had been carried, or that there had been too little ballast on board? There was no need to explain the metaphor; in fact, perhaps an apology rather than an explanation was due to the House for using a figure with regard to a subject of such gravity and solemnity. His hon. and learned Friend had stumbled upon an argument which was not a very happy one, when he assumed that because the Bank of Scotland was founded upon the principle of limited liability, and that the Glasgow banks had unlimited liability, and that as the Glasgow banks succumbed when the Bank of Scotland did not, therefore the sound effects of the principle of limited liability had been illustrated in contradistinction to the mischievous results of unlimited liability. He would beg to inform his hon. and learned Friend that, with the exception of one or two doubtful instances, all the banks of Scotland were banks of unlimited liability, and by all of them were their obligations met with as much readiness as by the Bank of Scotland. Now with regard to the Glasgow banks, no doubt some of the shareholders had suffered severely, but he believed that all the obligations of those banks would be met in the course of time, and he thought that the great body of public creditors or depositors had not suffered one farthing's loss. He himself was most unwilling to accede to any Motion which would militate against the security of the creditor, unless some equally good security were provided. He had always thought it his duty to vote against limited liability, except in the case of companies formed for carrying out railways and other undertakings of such a magnitude as to be beyond the reach of private individuals, for he 371 thought that it was a principle fraught with danger to commercial credit. It was a sound principle, and one held by the best commercial lawyers of Scotland, as well as by that eminent authority Mr. Marshall, Lord Curriehill, that a man who shared the profits of any business was equally bound to bear the losses. Various taunts and insinuations had been thrown out by hon. Members of that House and by the public prints—and not the least, by the great Jupiter Tonans of Printing house Square, against the Scotch system of banking—taunts displaying an amount of ignorance which was only equalled by the intense and unworthy prejudice they indicated. There were two classes of institutions to which Scotland owed her prodigious advancement, if not her pre-eminence in many respects; namely, her banking system and her parochial schools, which had done more to elevate the moral and intellectual character and to develope the national resources of Scotland than any institutions that could be found in any age or country. He thought this discussion was ill-timed, and that they ought to wait until they got into smooth water again, but he would observe that the unlimited liability of the partners of joint-stock banks gave a valuable security to the poorer class of depositors which it would be most unwise to destroy. It was shown by the balance-sheet lately submitted to the partners of the Western Bank of Scotland that upwards of 26,000 of the depositors in that institution had sums below £50, and averaging only £19 12s. 6d. each. The position of these humble depositors, who had entrusted their hard-earned savings to this bank, which was, unfortunately, in a state of suspended animation, would be greatly deteriorated under a system of mere limited liability. Emphatic testimony had been borne by a Government Department in favour of the principle of unlimited liability as a security for the payment of all the obligations of a joint-stock bank, because not only had distinguished noblemen and gentlemen in Scotland offered to take the dishonoured notes of the two Scottish banks which had suspended in payment of their rents, under the conviction that every one of those notes would eventually be honoured, but the officers of the Inland Revenue Department had also issued a notice in which they represented themselves ready to ac- 372 cept them in payment of the public taxes; and this was a circumstance he wished particularly to impress upon the Chancellor of the Exchequer, as proving the confidence which was felt in the existing principle, and he might add that nothing had contributed more to the abatement of the panic. He had intended to meet the Motion of his hon. and learned Friend with a proposal for inquiry, which he now found to be informal; he trusted, however, that the House would allow him to state the reasons why an inquiry ought to be instituted. He thought his hon. and learned Friend (Mr. Headlam) had mistaken the causes of the late calamities. Malpractices, however, demanding a searching inquiry before that House had unhappily been rife. Was the case of the Great Northern Railway, which enjoyed limited liability, a favourable illustration of the advantages of that principle? The disasters which had occurred in connexion with joint-stock banks arose from gross mismanagement, breach of trust, and the neglect of a proper supervision of the officers. Moreover, there was reason to believe that for a series of years, in some one or other of these establishments, which he forbore to name, dividends two or three times as high as the sum fairly earned had been paid, merely because rival banks declared large dividends, and therefore it was necessary to keep up appearances without reference to the balance sheet. Again, if they were to believe the public prints, the entire available means of some of these institutions had been diverted from their legitimate object, and intrusted to two or three individuals, who used them for large trading or rather speculative purposes fraught with the greatest danger. Another mischievous practice which had much prevailed of late was the circulation of spurious bills of exchange called bills of accommodation, which purported to represent value interchanged between the parties, though no such value had really been interchanged. He did not wish to prevent one person becoming security for another, but the issue of these documents was something akin to forgery, and should be made an indictable offence. He hoped the Government would feel it to be their duty to carry out the suggestion of the right hon. Gentleman the Member for the University of Oxford, and consent to an inquiry into the causes of the commercial calamities that had 373 fallen upon the country. He had refrained from saying whether the inquiry which he now asked for should be by a Committee of that House or by a Commission appointed by the Crown; but he felt strongly that they would fail in their duty if they ignored the circumstances that had led to such frightful evils as he had described, and he trusted that even this short Session would not terminate without something being done to justify the expectations of their constituents on that head. Instead of moving the Resolution which he had placed on the paper, he should meet with a direct negative the proposition of the hon. and learned Member for Newcastle.
§ MR. COLLIER
said, that having in a previous Session moved a Resolution in favour of the principle of limited liability, a Resolution which had been carried, and had formed the basis of subsequent legislation, he would not shrink from carrying out that principle to its utmost limits; he would consent that all mercantile firms, including bankers, should be permitted to contract with the public either on the ground of limited or unlimited liability, the public having full notice of the terms of the contract, and exercising their discretion whether to trust them or not. This principle was based on the assumption that the mercantile classes were better judges of their own interests than either that House or the Government; and if the Resolution of his hon. and learned Friend (Mr. Headlam) had been confined to the assertion of that principle he should have felt bound to give it his support, but it went much further, and committed the House to the expression of an opinion that unlimited liability was the cause of a great number of disasters, and that banking carried on upon the principle of limited liability was better than banking conducted with unlimited liability. Now, he thought it would be extremely unadvisable for the House to give an opinion upon this subject. It was not for the House to say that one mode of banking was better than another; it was enough for them to say that they would not interfere, but that hankers and the public should be left free to choose for themselves. If, however, an opinion was to be expressed, he thought it should be just the reverse of that asked for by his hon. and learned Friend, for though he would allow banks to be established 374 on the principle either of limited or unlimited liability, he thought that of the two an unlimited bank was better than a limited one. He would not prevent other people putting trust in a limited liability bank, but he would not do so himself. Of the two classes of persons whose interests were at stake—the shareholders and the public—he thought that if either were to be protected the interests of the public deserved more consideration than those of the shareholders. In the first place the shareholders were a very limited class as compared with the public; and again they had some cognizance of, and had, or ought to have some control over the conduct of their directors, while the public were altogether ignorant of their proceedings and innocent of their misdeeds. Take the case of the Royal British Bank, in which the greatest possible mismanagement, not to say fraud, had taken place. Even in that case the public had not suffered very much, for they would receive 16s. in the pound, and but for the grievous law expenses, which were referable only to a state of the law that was wholly indefensible, they would have been paid to the last farthing. His hon. and learned Friend said that unlimited liability encouraged speculation, while limited liability discouraged it; but that statement was at variance with all the arguments that had hitherto been urged upon the subject. It seemed to him to ignore all the experience we had of human nature to suppose that the man who had nothing to lose was not more likely to speculate rashly than the man who was liable to lose all that he had. Surely, the fear of loss must always be a great check upon the desire of gain. The arguments hitherto employed against unlimited liability were, that it checked commercial enterprise, and, on the other hand, it was contended that limited liability had a tendency to promote enterprise, to expand our commercial energies, and to some extent to encourage speculation; but now his hon. and learned Friend had discovered for the first time that all these arguments were fallacious, and that the tendencies of limited and unlimited liability were exactly the reverse of what everybody had hitherto supposed. He would not retain the House further than to say that for the reasons he had stated he could not support the Resolution of his 375 hon. and learned Friend as it then stood.
§ MR. JAMES EWART
said, he could see no reason why, as the House had adopted the principle of limited liability for other joint-stock partnerships, it should not be extended to joint-stock banks. The great objection he had to unlimited liability in banks was, that it induced persons to deposite large sums of money in them, and bill-brokers to discount to a great extent, which they would not do but for the reliance they placed upon the private fortunes of the shareholder. Hon. Members would remember the failure of a bank in South Wales some years ago. The bills upon the bank showed on the face of them a most wild and extravagant system of banking operations. At that time he was extensively engaged in trade, and discounted bills for them, and having obtained a list of all the shareholders in the concern he did not hesitate to go on discounting. At length he got somewhat alarmed and stopped the facilities which he had offered to them. The consequence was, that as other parties followed his example, the bank stopped, to the ruin not only of the unfortunate shareholders, but of very many persons in the district. He would give his cordial support to the Motion of the hon. Member for Newcastle.
§ MR. WYLD
said, it seemed to be assumed by the hon. and learned Member for Plymouth (Mr. Collier), that on the failure of a bank which traded on the principle of unlimited liability the public were not sufferers, but the truth was that in every such instance the public were severe sufferers. In the case of the Royal British Bank only 8s. in the pound had been declared, and it was supposed that 18s. 6d. would be paid after exhausting the whole shareholders, but this arrangement had not yet been carried out. In unlimited liability banks they had few of the wealthy and respectable portion of the community. The shareholders were usually people of small means. In the Royal British Bank many of the shareholders were governesses, shopmen, and clerks, &c. Though at first sight unlimited liability held out the prospect of obtaining means enough to meet all claims, yet in reality it was not so. Those who were in good circumstances left the country, and those who were compelled to remain had to pay as they could. He knew from 376 his investigation into the affairs of the Royal British Bank that if the principle of limited liability had been adopted the whole sum due to the creditors would have been paid. If the hon. and learned Gentleman (Mr. Headlam) did not succeed in carrying his Motion, he trusted that the Government would allow the subject to form part of the investigation entrusted to the Committee to be appointed.
MR. LOCKE KING
remarked, that he thought it important that one great distinction between banking and other trades should be kept in mind. Other traders employed their own capital, but bankers traded with the capital of other parties. If the principle of limited liability had been applied to banks he believed that there would have been far more distress than had actually occurred during the last few months.
§ MR. WEGUELIN
said, he was unable to vote for the Resolution as it stood. To limit the liability of banks to their paid-up capital would be, in his opinion, not only prejudicial to the banks themselves, but also to the public interest. He agreed with the hon. Member who had just sat down, that bankers dealt with the capital of other people, and in that respect there was a marked distinction between banks and other trading establishments with the exception of insurance offices. But if Parliament limited the liabilities of a bank it would also limit its credit, and the credit of a bank was its sole and true capital. Its credit was that on which it traded and which induced people to deposit their money. It was for the public interest that banks should be stable, sound, and of undoubted character, in order not only that the depositors should be protected, but that in time of pressure there should be no question about the stability of the banks, and no difficulty as to their circulation. It was true that in former years the Bank of England opposed the establishment of joint-stock banks. He did not remember the grounds upon which that opposition was founded, but he was satisfied that it was based upon public grounds. The Bank of England did not either then or now desire to see an unsound system of banking introduced into this country, for no establishment was more prejudiced than the Bank of England the moment commercial credit was shaken. It was most desirable in the interest of 377 the Bank of England that none but sound and stable banks should be established. Mismanagement had not been confined either to banks of limited or unlimited liability, and when it was stated that prudent men would not join in any bank of unlimited liability he could assert that he knew many wealthy and most respectable men in London who were members of joint-stock banks. The same also might be said of joint-stock banks in Manchester and Liverpool. He would admit that as far as prudence was concerned he should not like to be a shareholder in a bank of unlimited liability, unless the capital of the bank were so large that no doubt could be entertained that the capital would be sufficient under any circumstances of mismanagement. An argument had been used in favour of limited liability which certainly in his opinion had some weight. In the event of mismanagement occurring the shareholders who might be cognizant of that mismanagement knew that if they exposed the affairs of the bank they might stop it, and thus bring its liabilities upon themselves, and this rendered them timid and unwilling to expose that mismanagement. It was supposed that if their liability were limited they would no longer feel this timidity, and that the mismanagement would not go so far. There was force in that argument, and when he said that he could not support the Motion as it stood on the paper he meant that if the hon. and learned Gentleman (Mr. Headlam) would propose that there should be a large reserve of liability behind the paid-up capital, as in the colonial banks, where it was doubled or trebled, he should be happy to support the hon. and learned Gentleman. One objection to the proposal was, that the public could not very well take into consideration the difference between limited and unlimited liability in banks. Besides, it must be considered that the public are not exactly free agents in their transactions with banks. If a trader did not wish to place himself under a disadvantage with other traders he must take the notes of the banks in his neighbourhood, whether they were banks of limited or unlimited liability. There was therefore an objection to mixing up sound with unsound banks in the same neighbourhoods. The argument had been used that unlimited liability had not been sufficient for the protection of 378 those who had trusted joint-stock banks. That argument had astonished him, because, although ever since joint-stock banks had been established there had been many deplorable failures and to immense amounts, he could only recollect two instances in the last twenty-five years in which the depositors had not been paid in full—the one being the Glamorgan Bank, which paid 18s. or 19s. in the pound, and the other being the composition paid by the Royal British Bank. That was a very strong argument, as far as the public were concerned, in favour of unlimited liability. The difficulty of obtaining prudent managers was the same in both cases. It was well known that the circumstance which had prevented the increase of joint-stock banks in London was the difficulty of obtaining safe and prudent managers. It was easy enough to get ornamental and aristocratic directors, and to obtain good commercial names, but the great difficulty was to get a good manager. That difficulty would remain whether banks were established with limited or unlimited liability. He recollected that a few years ago there was a great desire to establish joint-stock banks in London in consequence of the large dividends paid by some of these banks, which were very well managed so far as he knew. Great difficulty was then found in obtaining persons who could be prudently trusted with the management. One or two applications were made to clerks in the Bank of England to undertake these concerns. Some accepted the offer, and he felt it as a great compliment to the way in which the business of the Bank of England had been conducted that these offers should be made. He thought, too, he might add that the prudent management of the London joint-stock banks was in great part owing to the excellent traditions of the Bank of England and to the Lombard Street style of banking; but it could not be expected that those principles would be carried out if banks were extended all over the country; but you would have weak and ill-managed banks, and in periods of pressure like that which had just occurred, instead of one or two joint-stock banks failing, they would go down by the dozen. For these reasons he was desirous of seeing the proposition modified, so that there should not only be a large paid-up capital, but a large reserve of liability.
THE CHANCELLOR OF THE EXCHEQUER
I quite concur in the observation made by my hon. and learned Friend the Member for Plymouth (Mr. Collier) with respect to the form in which my hon. Friend who has made this Motion has expressed it. The Motion is in the form of an abstract Resolution—which is a. form to which the House is always somewhat cautious in acceding—"that the unlimited liability of shareholders in joint-stock banks gives rise to a species of credit injurious to the interests of the public, and that the present law enforcing the adoption of this principle requires alteration." Now, if he had expressed his Motion "that the present law, which enforces on shareholders of banks unlimited liability and leaves them no option, is inexpedient and requires revision," the House might, perhaps, have been willing to entertain that proposition. But I must profess my unwillingness to be bound down to a formula of this sort, "that we think that the unlimited liability of shareholders in joint-stock banks gives rise to a species of credit injurious to the interests of the public." The inference which I understand naturally follows from these words is, that we ought to prohibit unlimited liability, and make it imperative on all shareholders in banks to have limited liability. If unlimited liability lead to dangerous consequences, surely it may be argued that we ought to set about enforcing limited liability. That is a conclusion to which I, for one, object to being bound without further investigation, and therefore, agreeing with my hon. and learned Friend the Member for Plymouth, I cannot vote for this Resolution. But the question is one of importance, particularly at the present moment, and perhaps the House will allow me briefly to express some opinions upon it. There is one distinction which I think has not been sufficiently adverted to in the course of this debate. The functions of banks are two. One function is the issue of notes, and the other is the receipt of deposits. There seems to me to be a considerable difference in the question of the unlimited liability of shareholders with respect to those two functions. When a country bank issues notes, although those notes are not, according to our law, a legal tender, as are the notes of the Bank of England, nevertheless they 380 do in the district pass current. They practically discharge the office of money, and no person in the ordinary course of business has an option about accepting them. Therefore the note of a country bank passes, not on the credit of the person who pays it, but on the credit of the bank which issues it. A tradesman in a country town to whom a country bank-note is offered in payment of a debt practically is unable to refuse it, although he does not take it on the credit of the person who asks him to receive it, but on the credit of the bank whose name it bears. He can hardly be said to be a voluntary agent, like the depositor who selects the bank for the deposit of his money; and it appears to me that unless you require the deposit of securities for the issue of notes,—unless you require notes to be issued against bullion in the custody of public functionaries,—unless you take some precaution of that kind, it will be unreasonable to deprive the holder of notes of the security from the unlimited liability of the shareholders. With regard to that part of the functions of a bank I must altogether dissent from the doctrine of the hon. and learned Gentleman who has moved the Resolution, "that the unlimited liability of shareholders in joint-stock banks gives rise to a species of credit injurious to the interests of the public." On the contrary, it seems to me that with respect to the issue of notes it gives rise to a species of security to which the public are entitled, and of which it would be most unjust to deprive them. My hon. and learned Friend's arguments, however, did not apply to that class of obligations. They applied altogether to the deposit business of banks. There is no doubt that many of the joint stock banks may be considered to a great extent as mercantile firms, and that when we have applied to other mercantile associations the principle of limited liability—when we have by statute given to those associations the option of having limited or unlimited liability, reasons may be fairly alleged against preventing banks, with regard to the deposit portion of their business, from conducting their business on the principle of limited liability. But I will call the attention of the House to the manner in which limited liability came into our legislation. We began by introducing it by special Acts with regard to large works 381 and projects, involving great expense, such, for instance, as canals and railways. The argument which prevailed in Select Committees of this House, and which was accepted as authorising the establishment of special Acts derogating from the general law, was, that it was expedient to encourage enterprise, that persons would not go into great and uncertain undertakings with unlimited liability, and that it was desirable, therefore, to limit their liability. That was the way in which the principle was introduced into our legislation. It was first engrafted into local Acts, and then embodied in a general statute, applicable to mercantile associations, and I have always understood that one of the main arguments relied upon for applying it to mercantile associations was, that it promoted mercantile enterprise. That argument, let me observe, does not apply to banks. There is no object in promoting enterprise in banks. In fact, one of the objects which you would seek to attain with regard to banks, is rather to check their credit and any tendency to speculation incident thereto than to increase it. And I must admit that I believe one of the effects of the limited liability of banks would be, as has been remarked in the course of this debate, that it would in some degree repress undue credit, inasmuch that at present the knowledge that various wealthy persons with large possessions are among the shareholders of a bank induces discounters to look to the name of the bank only on the back of a bill, to be indifferent to the bill itself, and not inquire into its character. I think it is not an unfair argument to urge that if the liability of the shareholders were limited, and the credit of the bank were therefore less comprehensive, bill-discounters would look rather to the character of the bill itself than to the single credit of the bank, and that it might introduce wholesome caution among commercial men with respect to such transactions. That argument, however, is accompanied by other considerations, and I confess that, looking to the fact stated by the hon. Member for Southampton (Mr. Weguelin), who spoke with so much ability on this subject, that the great majority of joint-stock banks which have failed have ultimately proved solvent and discharged all their obligations, it is strongly in favour of maintaining the present law, and not abridging the security which depositors are certainly entitled to, if they 382 can obtain it. The suggestion, therefore, which I shall make to the House will be, that if they should agree to the Motion which I shall submit on Friday night for the appointment of a Committee to inquire into the question of banking, the question of limited or unlimited liability with respect to joint-stock and other banks be considered by that Committee. It will properly fall within the scope of their inquiries. It will certainly involve other questions, such, for instance, as to the security which may be taken for note issues. It can hardly be considered by itself on the general ground of the limited liability of mercantile associations, and in that manner the House will be more likely to come to a satisfactory conclusion on the subject than if they accede to the Motion of my hon. and learned Friend. I therefore must be under the necessity of voting against the Motion of my hon. and learned Friend.
§ MR. MALINS
said, he agreed in thinking with the hon. Member for Southampton (Mr. Weguelin) that the joint stock banks of the metropolis had been conducted in a more satisfactory manner than those in the country, but at the same time no one could look at the recent failures of the Royal British Bank and the London and Eastern Banking Corporation without coming to the conclusion that the present system of unlimited liability was not based upon a safe, sound, and sensible principle. There were advantages, no doubt, in the unlimited principle, but there were also disadvantages which brought discredit on the country and ruin on shareholders, and it therefore became incumbent that the House should take some steps to prevent their recurrence. The principle of unlimited liability allowed joint-stock banks to obtain a greater degree of credit than they could otherwise command. It had been stated that without it acceptances of the Glamorganshire Bank would not have been discounted, and in that event, the public would to a certain extent have been benefited when the bank failed. The hon. Member for East Surrey (Mr. Locke King) argued that there ought to be an exception made with respect to banks, because they traded with the capital of others, but surely the man who traded with goods entrusted to him on credit, traded just as much on other people's capital as the banker who traded with the bank- 383 notes and sovereigns deposited with him. The two cases were exactly the same, and the principle of limited liability applied equally to both. The hon. Member for Southampton (Mr. Weguelin) had confessed that he should be very unwilling to be a shareholder in an unlimited joint-stock bank, and after recent experience that opinion probably would be shared by a majority of men of capital, experience, prudence, and far-seeing sagacity. But these were exactly the sort of men wanted to conduct the banking operations of the country, and who were prevented from engaging in that kind of business by the evils of the present system. It was most desirable that the proprietary should consist of such men, instead of shareholders, not one in ten of whom could meet their liability, when the occasion arose, and whose connection with a bank of unlimited liability was calculated to deceive the country. It seemed to him that the Motion of his hon. and learned Friend was not put in a tangible shape. He was not for enacting a compulsory limited liability, but would tender the option to joint-stock banks of conducting their business on either principle. If the principle of limited liability were chosen, of course the usual notices would have to be given, the public would know exactly the limit of the liability, and every man could choose for himself whether he would do business with the limited or unlimited banks; and if the limited principle did not find favour the banks conducted on it would soon have to shut their doors, and no harm would be done. At any rate the adoption of the limited principle would teach caution, and would never involve shareholders in the ruin and misery which had been produced by the unlimited banks. It would induce men of capital and experience to join these concerns, it would improve the condition of the banking interest, and confer a great been on the country at large. He rejoiced to find so strong a feeling in that House against the compulsory principle of unlimited liability, and he was well pleased that two such authorities as the Chancellor of the Exchequer and the hon. Member for Southampton had ranked themselves among the antagonists of such a principle. Every one must allow that the present state of things was most unsatisfactory, and could not be 384 allowed to go on without some attempt at amendment.
§ MR. T. HANKEY
said, that if he supposed the Resolution of the hon. and learned Member for Newcastle was intended to recommend the compulsory adoption of limited liability by all joint-stock banks he should not vote for it; but all that he understood him to propose was that it should be left optional, just as it was with every other joint-stock undertaking. His wish was to see the law which applied to other joint-stock undertakings extended to joint-stock banks; nor had he heard any argument to convince him that such an extension would have any other effect than to give greater confidence to the public, and induce persons of capital to embark their money in that species of trade, which under the uncertainties of the present system they were deterred from doing. With these convictions, and with the view of rendering the meaning of the Resolution upon this point clearer, he should move as an Amendment the substitution of the following words:—That the present law enforcing the unlimited liability of the shareholders in joint-stock banks requires alteration.
§ Amendment proposed, to leave out from the word "That" to the end of the Question, in order to add the words, "the present Law enforcing the principle of the Unlimited Liability of their Share-holders on Joint Stock Banks, requires alteration,"—instead thereof.
§ MR. BUCHANAN
observed, that he thought, as the subject involved questions of great importance, with respect to which much difference of opinion prevailed, that the best course would be to adopt the suggestion of the Chancellor of the Exchequer, and refer the whole matter to a Committee.
in reply, urged that the Motion was one which ought not to be got rid of by special pleading. Nor did he see any reason for altering its terms, as it expressed no opinion that banks on the principle of unlimited liability should not be permitted to exist; all that it declared being that the present law enforcing the adoption of unlimited liability required alteration, and he had certainly heard no valid objection to such a Resolution. As to referring the 385 subject to a Committee, the effect would be wholly nugatory. Twenty gentlemen could be as readily found to give evidence in support of one principle as the other; and when all was over the Committee could do no more than count the number of witnesses on either side and allow the public to balance the weight of testimony as they might think fit. Under the circumstances he would not accept the offer of the Government, therefore, to refer the subject to a Committee, but he had no objection to adopt the Amendment if the House should prefer it to the Resolution which he had proposed. The subject was of such a nature, however, that he was anxious to take the opinion of the House upon it.
§ Question, "That the words proposed to be left out stand part of the Question," put, and negatived.
That the words 'the present Law enforcing the principle of the Unlimited Liability of their Shareholders on Joint Stock Banks, requires alteration,' be added, instead thereof.
§ The House divided:—Ayes 47;Noes 111: Majority 71.