§ Order for Second Reading read.
§ Motion made, and Question proposed, "That the Bill be now read a Second Time."
§ MR. BLACK
said, that the principle of limited liability might be advantageous in many kinds of trade; and yet in banking, which stood on quite a different footing, it might be most dangerous. In banking, as was well known, it often happened that persons unacquainted with the principles of business came into the possession of property, and were obliged to look out for some bank in which to deposit it. In ordinary departments of trade persons carried on business with their own capital; but bankers carried on their business with other people's capital for their own benefit. If an insolvency happened in ordinary kinds of trade, the injury and ruin were generally circumscribed in their extent; but in banking the ruin spread much wider. Those who took on themselves to establish a bank 535 took on themselves a great responsibility, and the public had an interest in seeing that those who took on themselves that responsibility gave the largest security for the public safety. In the case of a bank to which allusion had often been made (the Western Bank of Scotland), it had been said, and said truly, that although the bank failed, the depositors and holders of notes would not suffer, because the proprietors were quite able to pay all the debts in full. He fully approved of the meeting which had taken place, recommending persons to take the bank's notes in payment, notwithstanding the failure; for the consequence was that the panic was greatly allayed. There the unlimited liability was their sheet anchor. If the liability had been limited the panic would have spread, and the whole country would have been involved in one general ruin. It was said that, if they had limited liability, they would not have panics; but in his opinion, there would, on the contrary, be much greater danger of panics; for if a man had money in a limited bank, and money also in a bank of unlimited liability, and a panic were to occur, assuredly he would run first to the limited bank to get his money. In this he was confirmed by Mr. M'Culloch, who said—The tendency to panics is one of the peculiarities of American society, owing to the liability of partnership in banks being limited. The depositors and the holders of notes take all imaginable pains, when suspicion is awakened, to withdraw their deposits and to cash the notes. Hence repeatedly panics occur throughout the Union, and the slowness with which they arc disseminated in this country arises from the contrary circumstance, namely, the confidence of the public in the unlimited liability of the partners to make good all demands.It had been said that it was very hard that the shareholders should suffer, but according to every principle of honesty he thought that, when one man took an-other's money into his keeping, he was bound to pay him back so long as he had anything to pay with. In the Western Bank of Scotland there were 1,300 shareholders. Some suffered very considerably. A few were ruined, but the great bulk by retrenchment were able to recover themselves. If, however, the loss had fallen upon the depositors, small as the sum might have been individually, the majority would have lost their all. Speculation had been of late years a great deal too rampant, and there was no reason why it should be encouraged. Besides, it might be asked, were they prepared to apply limited liability 536 to everything? Would they allow it to a pawnbroker? Let them suppose the case of a poor man losing his money in one of these banks, money which he had been frugally gathering up in order that he might have something in a time of sickness, or to provide for his widow. After his money was lost, he might see the banker who had received it lolling, perhaps, in his carriage, and he would be told that the bank was on the system of limited liability, and, therefore, the banker was not bound to pay. Upon the ground, then, that the Bill was a violation of that great moral principle, that every man was responsible for his actions, and was bound to pay his debts to the last farthing, he (Mr. Black) should move that the second reading be taken that day six months.
Amendment proposed, to leave out the word "now," and at the end of the Question to add the words "upon this day six months."
§ MR. FINLAY
seconded the Amendment. He had given much attention to this subject for several years, and he was sorry to say he had not been able to come to the same conclusions as the proposers of the present measure. It appeared to him that the principle of limited liability was essentially unsound. It certainly was not founded on the principle of free trade, but on that of protection, for it protected the shareholders against their creditors. They had been told that limited liability would be the means of attracting the capital of the wealthy, and would give security to the poor man, and open up several new sources of profit. In fact, they were told it was to be a great panacea for all our banking, as well as for the whole of our commercial system, but no proof had teen given that any such result had occurred. The principle of the Bill was totally unsound; but if there was any advantage to the country in this privilege of not paying debts in full, why should it be confined to associations? Why should it not be equally applicable to individuals? The truth was, that the adoption of the principle of limited liability had failed to produce those good effects which were predicted of it when it was first introduced; and that, he thought, was quite reason enough why the House should hesitate before it extended time principle, as this Bill proposed to do, to joint-stock banks.
§ MR. DRUMMOND
said, that he fully concurred in time observations of the hon. Gentleman who had just sat down, and he 537 would illustrate them by saying that, if his hon. Friend opposite and himself individually ran into debt, they would be obliged to pay their debts; but the effect of this Bill would be, that if they went into partnership they would not in that case be obliged to pay their joint debts. He wished to call the attention of the House to the deception which was practised by a class of banks called banks of deposit. He held in his hand several advertisements emanating from those establishments promising to pay a high rate of interest on deposits—6 or 7 per cent, at the same time giving ample security. Now, the effect of that must be enormously to increase the trade in paper. They used to have panics every ten years, now they had them every six or seven. There was no way in which the high interest on deposits to which he had referred could be paid, but by flying kites. And this Bill was nothing but a measure for establishing unlimited paper circulation.
§ SIR ROBERT CARDEN
said, he objected to the present Bill, because it would inflict a great injustice upon existing banks. Previous to the passing of Sir Robert Peel's Act the capital of banks might be divided into shares of any amount, while there was no limit as to the amount required to be paid up. By that Act, how. ever, the shares were to be of not less than £100, while £50 was to be paid up before commencing business. Then, by the present Bill both description of banks were to be placed on the same footing. The result would be that if this measure for creating limited liability were passed, the banks established under the old system (and upon the shares in which not more than 10 or 20 per cent was paid) would be able to call up four or five times as much as the now banks, half of whose capital was already paid up. This would practically give the former a great advantage over the latter. He thought a new system in banking should be established. There had latterly sprung up what were called "discount banks," which for all purposes were banks, while as they did not technically come within the operation of Peel's Act, they were, therefore, able to carry on business with not more than 30 or 40 per cent of their capital paid up. He hoped that a measure would be introduced applying the same law to all classes of banks.
§ SIR WILLIAM DUNBAR
said, if it was fair to allow limited liability in any trade or business, he could not conceive 538 any reason why the business of banking should form the only exception. The object of the Bill was to extend to banks the same privileges and facilities which were allowed other companies. It did not interfere with the system of unlimited liability, or with the liabilities of partners in existing banks, but simply proposed to remove the impediments which now existed to the establishment of co-partnerships with limited liability, for the purposes of banking, thus bringing banking within the operation of the general law. For his own part, he believed that one of the results of the change would be to induce many persons of respectability and prudence who feared the consequences of unlimited liability, to become shareholders, thus introducing a class from whom a better and more responsible direction might be selected. If there were proper, full, and detailed accounts, and a perfect system of audit, there would be faith in the bank. If the Western Bank had been a bank with limited liability, its management could not have been worse, and, in all probability, it would have been better. In any event its failure, instead of being as now, ft national calamity, would have been comparatively harmless. In saying this, it was far from his intention to say that limited liability would ensure unexceptionable management, but the management would be as good as under the present system, while the consequence would be less serious than now. But admitting that there were evils connected with limited liability, were there no evils connected with unlimited liability? To his mind there were many. As the law at present stood, unlimited responsibility, especially when combined with a power of issue, was synonymous with monopoly, especially in country districts, and it was not surprising that persons who reaped the profits of monopoly should support its continuance, instead of teaching people to trust to themselves and to look after the management. Unlimited liability taught nom to trust entirely to others and to rely on the ultimate claim on the shareholders—a reliance that often proved deceptive and illusory. The consequence was, that unlimited liability tended to divert capital from its legitimate channel, and to accumulate enormous amounts of money in the hands of a few institutions, which in many cases employed it in wild speculation, and in bolstering up fictitious traders, to the damage of the fair trader. One provision of the Bill, imposing certain 539 conditions on banks of issue, required attentive reconsideration. If those banks could not avail themselves of the measure without losing their statutory privileges, much of the benefit that would otherwise be conferred on the public would be forfeited. He admitted that there was a distinction between a noteholder and a depositor. The noteholder was an involuntary creditor, while the depositor was a creditor from choice. But could no protection be found for the noteholder, except by depriving existing banks of issue of their privileges? It appeared to him that every protection to the noteholder might be found in simply requiring banks of issue, like the Bank of England—which was a bank with limited liability—to give security, either landed or funded, or to have gold in their coffers for the amount of notes issued. In the Isle of Man, where there was a single bank of issue called the Bank of Mona, the notes were secured by mortgages on land, and why should not the same system be adopted here? For twenty years monied men in the city had been in the habit on all suitable occasions of endeavouring to win public opinion to their views, that note issues should be suppressed, by putting forth most exaggerated statements concerning them. When they looked at the returns of the note circulation, it was wonderful to see how steady that circulation was, and yet they found respectable men from time to time speaking of over issue, and attributing to it reckless trading, and consequent money panics. In his opinion, the true cause of one of those evils—reckless trading was to be found in the eager desire to get rich, which had become one of our national failings. He thought it was no part of the duty of that House by exceptional legislation to attempt to give prudence to the rich, experience to the inexperienced, and honesty to the unprincipled; nor was it within its province to attempt to dictate to men upon what terms they should deal with each other. He hoped that his hon. and learned Friend the Member for Newcastle would, when the Bill was in Committee, endeavour to obviate the difficulties to which he had referred.
§ MR. BOVILL
said, he was surprised to hear the hon. Gentleman who spoke last repudiate the right of that House to interfere for the regulation of joint-stock banks. An able Committee which sat in 1846 on this subject asserted the necessity for such interference on public grounds, and with a view to guard the community against wide- 540 spread ruin and destruction. If it was difficult for the shareholders of a joint-stock bank to understand how its affairs were managed, and what was its financial position, how was the unhappy customer of such a bank to obtain this knowledge, as the advocates of limited liability expected him to do? They had no control over the management, and without any default of their own, they might find themselves overwhelmed in ruin. This Bill was, in truth, nothing more nor less than an attempt to protect directors and shareholders at the expense of the public interest. All the objects with which banks were established would be better attained by unlimited than by limited liability. The first object was to secure au accumulation of capital, which should be diverted from its ordinary channels, and of which the surplus should be applied to commercial undertakings. How much more likely to effect this object banks with unlimited liability were than banks established on the opposite principle was assuredly proved by the argument of the promoters of this Bill—that so much capital was accumulated by existing banks as to encourage speculation. There was then no complaint of a want of accumulation under the present system of joint-stock banks or its appropriation by their means. The second object was to afford security to the bank and to persons trading with it. It was to give additional security that joint-stock banks were originally established; and how well this object had been attained had been shown by the fact that in the failures which had taken place in the north of England, in not more than two instances had the creditors received less than the full amount due to them, and in those cases the deficiency was only one of 2s. or 3s. in the pound. Another great object was to secure good management, and how was it likely that banks could be as well managed by men who had only a limited liability as by those who were responsible to their last farthing? In support of this Bill it was urged that the Legislature had decided that limited liability should be the rule in commercial undertakings; but the same Parliament decided that that principle should not extend to banks, and as far as our experience went, the adoption of the principle of limited liability had not been attended with favourable results. On the contrary, in the cases which had come into the courts it had generally appeared that all the money which had been paid up was spent, 541 and that there was nothing for the creditors. The promoters of this Bill said that unlimited liability prevented respectable and responsible persons from joining banks. This argument was sufficiently answered by the published lists of directors and shareholders of joint-stock banks, and would probably receive a still further refutation by directors of such banks rising to address the House upon this question. But, even if the argument were a sound one, of what advantage was a man's responsibility and repectability under a system of limited liability? All that you wanted under such a system was his money. Another argument was, that, although unlimited liability might not prevent respectable men joining a bank, yet that it induced them to retire as soon as they got an inkling that it was falling into difficulties. To this he replied, that they could not relieve themselves of responsibility for three years, and that if it was found that all the responsible men were retiring, the bank was sure to fall within that period, and thus the creditors were recouped. Another objection which had been urged against the present system was, that banks obtained too much money, which led to reckless and extravagant speculation. Now, he had always thought that banks were established for the express purpose of accumulating the money of the public, and using it in commercial operations. What, however, was the remedy for over accumulation of money? It was to put a limit to the amount which a bank might raise by crediting a proportion between its borrowing powers and its capital. The Bill before the House contained no such provision, and in that respect, therefore, it was not calculated to accomplish the object of its promoters. But the present law of limited liability, it was said, encouraged reckless trading. Now, there could be no doubt that it was competition which produced wild and extravagant speculation, and he maintained that banks with limited liability were far more likely than banks with unlimited liability to excite excessive competition. Mr. Gurney, when examined before the Committee of 1836, stated that limited liability applied to banks would give us all the evils of both systems, and none of the advantages of either; while Mr. Martin, of Norwich, declared that no public advantage or security could be derived from limited responsibility, which would have the effect, he added, of making bank managers more reckless and adven- 542 turous. The report of 1843 contained a valuable paper from the present Lord Overstone, in which that great authority stated that the commandite principle entailed something very nearly approaching to injustice, inasmuch as in case of insolvency it tended to remove a portion of the loss from those who had voluntarily engaged in the concern, who had possessed the means of watching its progress, and who had been the sole participators in its benefits, for the purpose of putting it upon those who had enjoyed no opportunity of looking into the affairs of the establishment, who had taken no part in its management, and who had not been allowed to share in its advantages. It was after repeated inquiries by Committees of the ablest men in that House that the Legislature, in its wisdom, expressly declared in 1856–7 that limited liability should not exist in the case of joint-stock banks. But the House were asked to believe that banks should be legislated for, on the same principle as other trading concerns. The case of a bank, however, was clearly exceptional. When an ordinary concern failed, the loss was confined to the directors and shareholders; but it was impossible to say how far the liabilities and engagements of a bank might extend, and in the event of failure, instead of the loss falling upon a limited number of persons, it entailed wholesale ruin, and might fitly be termed a national calamity. Banks with limited liability, as had been remarked, were established in the Colonies. But in the Colonies the object was to attract money, and force it into commercial channels; whereas the complaint at home was, that the banks obtained too much money, the consequence being reckless speculation. He had stated the grounds that had been put forward on behalf of the present Bill, but after all, the true explanation was to be found in the misfortunes that had recently fallen upon the managers and proprietors of banks. The question was between the directors and shareholders of banks on the one hand, and the public on the other. Now, the directors and shareholders had the lion's share of the profits, and he held that in the event of a failure the loss should fall exclusively upon them, and not upon those who trusted them. If the managers and proprietors of a bank chose to deal with the money of other people, were not the latter entitled to look to them for payment of the utmost farthing? Depositors received no benefit from the 543 profits of a bank, nor had they any means of controlling its operations. The misfortunes of a bank arose from mismanagement, and mismanagement was attributable in the first instance to the directors, and in the next to the shareholders who elected them. No balance-sheet could ever tell the public what was the value of securities lodged with a bank, and lie contended, therefore, that on the grounds of management, of superior knowledge, and of profit, the directors and shareholders and not the public, ought to be made responsible for any loss that might be incurred. But after all, did it not lie on those who promoted the measure to make out a case for its necessity? From the beginning to the end of the discussion he had not heard the slightest ground stated to show the necessity of the measure, unless it was desired to relieve the directors and shareholders of these joint-stock banks and to throw the loss on the innocent public who trusted the directors. In 1837, after the first Report of the Committee on joint-stock banks, it was stated in the Speech from the Throne that the best security against mismanagement of banking affairs must ever be found in the capacity and integrity of those who were intrusted with the administration of them, and in the caution and prudence of the public; but that no legislative regulation should be omitted which could increase and insure the stability of those establishments, on which commercial credit so much depended. The security of these establishments he maintained would be found in the security they offered for the payment of their debts, and in the accumulation of large sums of money to be devoted to the legitimate purposes for which banks were established.
§ MR. J. H. GURNEY
said, he would very briefly state his reasons for voting against the Bill. Those reasons were not based on any feeling as to the unsoundness of the principle of the Bill itself, because it appeared to him that if the principle of limited liability to trading companies were maintained the Legislature could not refuse to extend that principle ultimately to banking companies, though it was perfectly true that the position of trading and banking companies was not precisely identical, because, while trading companies borrowed money incidentally, banking companies borrowed it inherently, that being their business. Nevertheless, he thought that if the provisions of the Li- 544 mited Liability Act were applied to banking companies, so that all their cheques and passbooks would have stamped on them the word "limited," it would be impossible for persons doing business with them to be ignorant of the feet that the responsibility was limited. He therefore was of opinion that there was no sufficient distinction in principle between joint-stock banks and other trading companies to justify ultimately excluding the former from the adoption of limited liability, if limited liability should be at all maintained. Furthermore, supposing the system of limited liability to be extended to banking companies, and supposing, which was doubtful, that banking companies in general availed themselves of the privilege, this good effect would result, that, while the banking companies so limited would, if well managed, obtain sufficient credit for all legitimate purposes, they would be less able to obtain credit for improper purposes, and if once they went wrong, they would be wound up more quickly than at present. This was a reason for putting banking companies ultimately on the same footing as other companies; but another consideration prevented hint from supporting the Bill on the present occasion, and it was this—that the general experiment of limited liability did not appear to him to have been tried long enough to enable the House to judge whether it was a successful experiment or not. Until a proper experience of the system of limited liability had been obtained he thought it would be a great mistake to extend it, especially in so important a direction as banking companies. He should, therefore, on the present occasion, give his vote against the Bill; but, if he should have the honour of a seat in Parliament in future years, and were satisfied that the general experiment was successful, he, for one, should be quite willing to see it extended to banking companies.
SIR GEORGE LEWIS
said, he must dissent from the assumption of the hon. and learned Gentleman (Mr. Bovill), to whose ability in treating this subject he bore willing testimony, that it was incumbent on those who supported the second reading of the Bill to show a case of necessity for the alteration of the law, and that the burden of proof lay, not on those who resisted the second reading, but on those who gave it their support. The Legislature of this country had enacted in respect to all trading associations, when certain 545 conditions were fulfilled, limited liability for the partners, and the issue raised by the hon. and learned Member for Newcastle-upon-Tyne (Mr. Headlam) was whether there existed sufficient ground for making a special exception in the case of banking companies. Therefore, it appeared to him that those who were in favour of making an exception were bound to show in the case of banking companies special circumstances which took them out of the rule applicable to all other trading associations. His hon. and learned Friend had obviated the objection which he (Sir G. C. Lewis) had made in former stages of the Bill, to the effect that he established no distinction between banks of issue and banks of deposit, and comprehended in the same rule the note-holder and the depositor, far in the draught of the Bill now before the House the hon. and learned Gentleman had excepted from its operation all banks which were banks of issue, unless they renounced the privilege of issue. The position of a holder of notes was very different from that of a depositor. In point of fact, he was as an hon. Baronet, who had addressed the House with great clearness, had observed, an involuntary creditor. In country districts the notes of the local bank passed from hand to hand without question; and any person who refused to take them would find his customers leave him. The note bolder was therefore in the position of an involuntary creditor, and as such he was entitled to a large measure of protection. That objection, however, being obviated, was there any reason why banks of deposit simply should be made an exception to the general rule? There was, no doubt, a difference between banks of deposit simply intended for the purpose of custody, which gave no interest on the deposits, and banks which allowed interest on the deposits. It might be argued that a bank which received money for the purpose of safe custody received it in the way of a fiduciary contract, and not in the way of loan; and that, therefore, banks of that character should not be considered as carrying on trade, and coming within the principle of limited liability. That was, perhaps, a refined distinction between deposits of that class and deposits bearing interest; but it the distinction were admitted to be valid, it hardly applied to the case the House had to consider, because the great majority of joint-stock banks, if not all, were in the habit of allowing interest, either on the 546 whole or some portions of the deposits. In the case of a bank allowing interest, it must be admitted that the deposit was in strict sense a loan to the bank, for which the depositor received an interest, and on which the bank traded. Under these circumstances it seemed to him that no valid distinction could be established between banks of deposit and other trading speculations with respect to the principle of limited liability; and therefore he should be prepared to give his vote in favour of the second reading of the Bill. But, having stated this, he would guard himself against the supposition that he thought either that the principle of limited liability would be introduced extensively by joint stock banks, or that it was desirable to give any artificial encouragement to the increase of joint-stock banks with the view of diminishing the number of private banks. With respect to the it was in the first place to be observed that it was merely permissive; and if it became law it would be quite open to any joint-stock bank either to adopt it or remain in the same position as heretofore. Was it probable tied many joint-stock banks would adopt the principle of limited liability? In considering this question, they must ask what was now the ground on which so much trust was given to joint-stock banks? Why was it their deposits were so large? Why was it that the operations of joint-stock banks, which were carried on upon so gigantic a scale, had, both in London and the provinces, assumed within the last few years quite a new character? He apprehended the answer was, that the public and the depositors trusted these banks on the ground of the unlimited liability of a large body of shareholders. The public had but slight means of knowing how these banks were managed; they could only ascertain what were the dividends paid; but undoubtedly what they mainly looked to was the unlimited liability of a numerous and wealthy proprietary. Now, if that security were limited,—if joint-stock banks were to say, "Instead of giving this unlimited advantage to depositors they shall have only a limited capital beyond which their security shall not extend," undoubtedly one of the strongest motives which now induce the public to repose confidence in joint-stock banks would be withdrawn. Was it likely, under such circumstances, that a joint-stock bank with limited liability could compete with other joint stock banks Whose liability was 547 unlimited? He believed that, unless directors and shareholders of joint-stock banks could be convinced that, after limiting their liability, they could carry on a successful competition with other banks, it was not probable this measure would be adopted in many cases. There could be no doubt, looking to the constitution of joint-stock banks, that, without a coincidence of circumstances which could seldom be expected, unless there was great honesty, vigilance, and knowledge of business on the part of the managers and the few directors who practically conducted the affairs of such banks, the interests of the shareholders were exposed to considerable risk. The great body of shareholders in joint-stock banks had, in fact, no knowledge whatever of their affairs; they were incapable, for the most part, of forming a clear judgment upon the annual or half-yearly statements which were submitted to them; and they were unable to estimate the value of the securities which were placed among the assets of the banks. If a shareholder, who entertained doubts as to the management or credit of a joint-stock bank, came forward at the annual meeting to put questions to the directors, his mouth would be immediately stopped by other shareholders, who would tell him he was taking a course Which was dangerous to the credit of the establishment, and most inimical to his own interests. There was, indeed, no person in a more helpless position than a shareholder in a joint-stock bank who suspected something wrong in its management; for, unless he could obtain information confidentially from the very persons of whose integrity or discretion he entertained doubts, it would be extremely difficult to establish any ground for a complaint. Generally speaking, very little discretion was exercised by shareholders in the choice of directors, and directors who were substituted for outgoing members of the board were, for the most part, proposed to the shareholders by the other directors themselves. In some joint-stock banks there was a feeling among the directors that it was not expedient that the affairs of the depositors should be known to a large board, and, practically, the advances upon securities were determined either by the manager alone or by a small number of the directors. By the very constitution of a joint-stock bank, the confidence which the shareholders must repose in the directors was blind, and was not founded upon any accurate knowledge or information with 548 respect to the concerns and management of such bank. It was therefore likely that, from time to time, joint-stock banks would fall into discredit. What the shareholders in such banks generally expected was, that without any trouble they should obtain the high profits of trade combined with the security of an investment in Consols. He did not think that was at all all exaggerated description of the views entertained by many persons who became shareholders in joint-stock banks. It might occasionally happen that, from the mismanagement of directors, or, in some cases perhaps, from want of honesty, the shareholders in such establishments suddenly found themselves called upon to make good losses, and to investigate the affairs of an insolvent bank. Under the existing law they were answerable to the whole extent of their means; but if they should be permitted to limit their liability, they would only be responsible to the extent of their shares. In such case, if a bank became insolvent, the loss would be divided between the shareholders and the depositors. He thought that depositors who trusted a bank established on the principle of limited liability, and who, being aware of such limitation, deposited their money under a voluntary contract, had no reason to complain that, in the case of the failure of such bank, a portion of the loss fell upon themselves. Although, in his opinion, great defects were inherent in the very principle of joint-stock banks, and he did not wish to give them any undue encouragement or protection by legislative measures, yet, merely desiring to put them upon a level with other trading associations, he would vote for the second reading of the Bill.
§ MR. MALINS
said, he thought it was evident that his hon. and learned Friend (Mr. Bovill), though apparently arguing against the application of the principle of limited liability to joint-stock banks, was actuated by a strong feeling against the principle generally. As the principle of limited liability had been sanctioned by Parliament with respect to trading associations, he thought it might fairly be asked whether there was any just ground for establishing an exception in the case of joint-stock banks. His hon. and learned Friend had gone into an elaborate argument to show that the great object of the present measure was to protect directors and shareholders. No doubt, one object of such legislation was to protect directors and shareholders against a greater amount 549 of liability than was contracted by the constitution of their partnerships; but, at the same time, ample protection was afforded to the public, and those who dealt with them by the existing law, which obliged companies established on the principle of limited liability to announce the fact by painting it over their doors, and by stating it on their bills of parcels, cheques, and every document they issued. It might be supposed, from the speech of his hon. and learned Friend, that this Bill would establish limited liability absolutely; but that was not the case. If there were two banks in the same town, one established upon principles of limited, and the other on principles of unlimited liability, why should not the public have the option of choosing between them? If in the limited bank it should be found that there was a responsible body of men—responsible not only to the extent of the money they had subscribed, but also by that which was a far better guarantee, the prudence of their conduct as men of business—body of men who would not join a concern without taking care that there was a proper body of directors, and that proper provisions for conducting the business were made, why should not the public say, "we will trade with that bank in preference to the other?" An hon. Member opposite (Mr. Gurney) opposed the Bill on the ground that the principle had not yet been sufficiently tried; but that could be no ground why the experiment should not be extended to banking, for he could not see why the two experiments should not go on at the same time. That it was important creditors should be paid in full he quite allowed; but it was also very desirable to protect another class of persons scarcely less numerous—he meant the shareholders in these banks. Of course, unless clear notice of limited liability were given, every debtor ought to be liable to his last farthing; but where there was a distinct contract beforehand, what ground had a creditor to complain if he lost part of his money through the non-liability of the debtor beyond a certain amount? Parliament should give credit to both parties for being able to conduct their own affairs. It was a fallacy for the Legislature to interpose for the protection of one particular class of persons. if they thought it right that the purchaser of a thousand pounds' worth of iron or corn should be protected by limited liability, why not afford the same protec- 550 tion to his next door neighbour in a transaction for £1,000 of gold? For himself, he could see no reason for applying a different rule to the trader in goods and the trader in gold. They were not to assume that every person who became the creditor of a banking company was an idiot, and incapable of taking care of his own affairs; nor was the Legislature called upon to protect those who would not protect themselves. He quite believed, however, that the Bill, if it became law, would not be made use of by many of the existing and prosperous concerns; but he thought they ought not to be treated as if their case was an exceptional one. It was said that the greater sense of responsibility arising from their unlimited liability would make bank directors more vigilant in the conduct of business. Recent cases, however, showed that this afforded a very poor guarantee for prudent management. Whatever might be the case abstractedly, experience proved that it gave the creditors and shareholders no protection whatever. Did the House suppose that because a man's whole fortune was not involved in the success of a bank, he would not therefore bestow all his energies and exhibit all possible prudence in conducting its affairs? In any case the reputation as well as the pecuniary advantage of directors must depend on the prosperity of the concern, and there were plenty of inducements to make them use their best efforts for its benefit. It had been said that there ought to be a reserve in the case of banks, so that one half only of the capital should be paid up, and the other half should be available for the discharge of liabilities if the concern came to a stop; and to this proposal lie fancied there could he no objection. But he repeated that, having secured full notice to creditors respecting the limited liability of shareholders, the Legislature should then leave men to their own foresight, should make them look before leaping, and find out whom they were going to trust. This was the best guarantee for success in commercial transactions generally, and not less so for success in banking. Parliament had adopted the principle of limited liability with regard to traders, and he had heard no good reasons given why it should not be extended also to banks. For these reasons he should most earnestly support the measure.
§ MR. BAXTER
said, he quite agreed with the hon. and, learned Member (Mr. Mathis) that a large proportion of the ar- 551 guments used against this Bill were really directed against the principle of limited liability altogether. The Mover and Seconder of the Amendment had talked of moral principles and the Eighth Commandment; but these, if objections at all, were so, to the principle of limited liability, already sanctioned by the House, and it was for the opponents of the measure under discussion to show cause why the principle of limited liability should be productive of advantage when applied to commercial transactions generally, and should be injurious only in those cases in which money was concerned. For his own part, he must confess that he was one of those heretics who could see no good reason why the terms upon which one man should place his trust in another should be at all prescribed by law. It mattered not to him whether they prescribed banks of limited liability or banks of unlimited liability; he objected to prescription in either case, and contended that every man should be left free to take shares in banks, or to deposit his money in any way he pleased. And what, let him ask, apart from all the theoretical objections to the existing law, was its practical application? The right hon. Member for Radnor (Sir G. C. Lewis) had stated that even supposing banks based upon the principle of limited liability were established, the Bill of the hon. and learned Member for Newcastle would be a dead letter. Now, upon that point he begged leave to join issue with the right hon. Gentleman, and to express it as his belief that the public had of late years to some extent lost confidence in those banks which were conducted upon the opposite principle. The failures in the case of the Western Bank of Scotland, the Northumberland District, the Liverpool borough, and the Royal British Banks, had mainly contributed to that result, and would, he maintained, ultimately be attended with the most injurious consequences. He might also adduce in support of the views which he entertained the case of the Monmouth and Glamorganshire Bank, which paid only 15s. in the pound; while the Royal British Bank, to which he had already referred, paid, he understood, only 12s. in the pound, there being no likelihood that the shareholders in that bank would ever receive the whole of their money. The inference which he drew from those facts was that men of wealth, indisposed to incur undue risk, would withdraw their money from such concerns, and that they would ulti- 552 mately be left in the hands of men possessing little or no capital. He knew many gentlemen who were unwilling to become shareholders in banks conducted upon the principle of unlimited liability, who yet were most anxious to take shares in banks based upon the opposite principle. The law as it stood, however, precluded the shrewd cautious man of business, who was thoroughly alive to the evils which the last few years had brought to light, from carrying on banking transactions in accordance with that system which great experience and much consideration had taught him to be sound and just; and it was because be (Mr. Baxter) deemed it expedient that a man should be perfectly at liberty to carry on the banking business, as he might any other, upon that principle which he thought right, always provided there was no concealment from the public, that he should not hesitate to give his assent to the second reading of the Bill before the House. In taking that course he was not at all prepared to deny that banks with unlimited liability had conferred great benefit on the community. They were, however, attended with many obvious disadvantages. They gave rise to a system of undue credit, and created an undue confidence, which acted most injuriously upon the public at large. That confidence had arisen, not from the prudence of the management, but from the private resources of the shareholders. It was notorious, for instance, that the bills of the Western Bank of Scotland had been discounted in the City of London, not because Mr. Taylor, its manager, or the directors were prudent and discreet men of business, but simply because the Messrs. Baird were partners in the concern. The large sums which were committed to their charge tempted the Directors of such establishments to carry on a very much larger business than was warranted by the amount of their capital, and to discount bills to such an extent as to demonstrate beyond all question that their operations were based, not upon the paid-up capital of these concerns, but upon the private fortunes of the partners. Now, with respect to the banking system of Scotland, although he was ready to admit that it had conferred upon that country great national benefits, he was by no means of opinion that it ought to be indiscriminately praised. On the contrary, he believed that no one who had watched the course of events in Scotland during the 553 last few years could fail to arrive at the conclusion that the banks in that country had afforded undue facilities in the way of discounting bills. He, at all events, was one of those who held the opinion that the management of the Western Bank of Scotland amounted to a national disgrace, and be should be extremely sorry to find that no investigation into the affairs of that establishment would take place. But, while he was anxious that such should be the case, he should wish to suggest to the right hon. Gentleman the Chancellor of the Exchequer the propriety of considering whether it might not be expedient that the shareholders in the Western Bank should be permitted to sell the privilege of issuing notes which they possessed. By the failure of that bank, Scotland had been deprived of upwards of £300,000 of note circulation. A permission to sell the privilege of issuing notes would produce £50,000, and, considering the lamentable sufferings which the failure of the bank had inflicted upon numerous families, widows, and orphans, he thought it would be a very proper course to grant the permission which was asked for.
§ MR. J. C. EWART
said, he agreed with the hon. Member for Montrose (MR. Baxter) that the great objection to banks of unlimited liability was, that it induced persons to discount Bills, and generally to extend the business of the bank, not according to the prudence of the management, but according to the private means of the partners. The hon. Member had referred to the Glamorgan Bank, and he (Mr. Ewart) knew something of the affairs of that bank. He was at that time largely engaged in trade; he received the Customs' money at Liverpool, and the only way in which he could employ it was by way of discount. He discounted largely with that bank, so largely indeed that at last he became alarmed. Others, also, became alarmed, and in consequence the bank stopped payment, and great injury was inflicted on the district. As a general rule he was opposed to all legislation on the question of credit. All the safeguards which legislation could hold out were little better than a delusion and a snare. Let the banks be compelled to publish an annual account of the state of their funds, and then the public might be left to take care of themselves, and they would be in a safer position than any legislative protection could place them.
§ MR. H. B. SHERIDAN
said he did 554 not think that it was the principle of limited liability that was now on its trial, but rather that of unlimited liability. It must be remembered that it was not for the first time that banks had had limited liability conferred upon them. The Bank of England and various chartered banks were in that position, and in Australia the principle of unlimited liability had been in operation for twenty years, and had been found to succeed.
§ MR. SPOONER
said, he meant to vote for the second reading of the Bill. On a former occasion he had expressed himself as decidedly adverse to the principle of limited liability, and he was still exactly of the same opinion. But while he thought the recent legislation on this point wrong, and that it would ultimately have to be reversed, he could not see why one trade should be conducted upon limited liability while all others were on a principle of unlimited liability. On that ground, and not from any change in his general views, he would support the Bill.
THE CHANCELLOR OF THE EXCHEQUER
said, that the Bill had been very satisfactorily discussed and he wished to give the reasons, in a few words, why he should support its second reading. It appeared to him that the object of the Bill was to terminate a restriction upon a principle that had been adopted very generally, both by Parliament and the country, and applied to all trades and occupations of commerce. An exception had been made, he thought, originally from a plausible and prudential feeling, but one which could not be vindicated on any principle, and which no experience of the operations of banking would longer justify. He agreed with almost all who had preceded him, that the discussion ought not to involve any investigation of the soundness of the principle of limited liability. It was not now before the House; they had solely to consider whether the application of that principle should any longer be withheld from the business of banking. It appeared to him that all the complaints that had been urged as to the hardship upon creditors in the event of the failure of a bank of limited liability would have no foundation whatever, if that sufficient warning were given which they knew practically could be given. No doubt it was a great question whether this extension of the principle of limited liability would be of much advantage or not. He confessed he could not help thinking that it would be a very difficult compos- 555 tion for banks founded on limited liability to contend with those on the principle of unlimited liability. Should it turn out that the latter continued to command the confidence and support of the public, no great danger could result from the application of this principle and the termination of the restriction; but if, on the other hand, the abuses of the principle of unlimited liability, which were flagrant, exercised a very great effect on public opinion, no one could deny that the result of passing this Bill would be to encourage a tendency to prudence and caution among the community at large. Therefore, either way—whatever alternative they took—if the Bill were not productive of any very great effect, they would only be in the same position as they were before—while, if it did produce considerable results, the consequence would be more prudent conduct on the part of the community, and in the general management of banks. Therefore, it seemed to him that there was no sound principle on which they could resist the second reading of the Bill. He agreed with the right hon. Member for Radnor (Sir G. C. Lewis) that the position of the noteholder was a peculiar one, and that some legislative protection should be provided for him. It was a practical objection to the Bill on a former occasion, that this protection was not given, but it was sufficiently provided by this Bill. As the Bill was drawn, however, there was one objection to it: it had a retrospective influence. He did not think that the shareholders of any bank now established on the principle of unlimited liability should have the power, under this Bill, of lessening that which their creditors would suppose to be their principal security. It might be said by those who preferred the security of unlimited liability, that there was no great probability of the change taking place; and on the other hand it might be said that some would prefer such a change. At any rate it was founded in justice that the creditors of any bank now established on the principle of unlimited liability should not, against their own will and consent, find their security changed into one of a limited character. But if that objection were held to be valid, it could be remedied in Committee; and formed no reason for opposing the second reading of the Bill. The Bill appeared to him to be the necessary consequence of that principle in our commercial legislation which had been already sanctioned. He did not third, it 556 necessary at present to give any opinion upon the soundness of that great principle; but it had been urged that the principle of limited liability in commerce had not been sufficiently tried. It might be perfectly true that they had not sufficient data before them to draw a sound conclusion as to the excellence of that principle. It might be that they should have ultimately to retrace their steps. But granting all that, and he only assumed it for the sake of argument, there was no reason why they should not apply that principle to banking. Because the experience of mankind at certain times induced them to believe that they had been led into error, there was no reason why they should not retrace their steps in regard to banking as well as to commerce. Therefore, believing that there was no valid reason for opposing the second reading of this Bill, he should give his vote in its favour.
said, that he had already twice in the course of this Session entered upon a statement of the principles of the measure, and it would be quite unnecessary for him to state them again to the House. But he now felt himself in a difficulty precisely the opposite to that in which he had been on former occasions. On the first introduction of this measure, he could find scarcely an hon. Member of the House who was ready to support him in his conclusions, or to assist him in his arguments. But he was now in a directly opposite position. Now speaker after speaker rose and put forth arguments in favour of the Bill in far better language than he could hope to command, and it would therefore be unsuitable in him to repeat them. But he had one remark t make to the hon. and learned Member for Wallingford (Mr. Malins) with respect to banks of issue. He (Mr. Headlam) did not feel so strongly as others the necessity of making any exception in their favour. The hon. and learned Member said that if all the notes issued by those banks had the words "limited liability" impressed upon them, there would be no great objection in extending the privilege to them. But he (Mr. Headlam) did not attach much value to this. But he should certainly say that the plan proposed by the hon. Member for the Wigton Boroughs (Sir W. Dunbar) might be made available for banks of issue, namely, that of providing a fund to meet the liquidation of their notes, which should be applied to no other purpose. That. however, was a matter for the Committee. 557 He had witnessed such grievous and serious evils arising out of the failures of joint-stock banks, that he could not hope by any language of iris to convey an idea of them to the House. But great as these evils were, he had always argued this case upon public grounds, as he had seen just as great evils arise from improvident speculation upon the part of shareholders.
Question, "That the word 'now' stand part of the question," put, and agreed to:
Main Question put, and agreed to.
Bill read 2°, and committed fur Thursday next.