The Joint Stock Banks.
The Joint Stock Banks of this country are a most remarkable success.
Generally speaking the career of Joint Stock Companies in this
country has been chequered. Adam Smith, many years since, threw out
many pregnant hints on the difficulty of such undertakings--hints
which even after so many years will well repay perusal. But joint
stock banking has been an exception to this rule. Four years ago I
threw together the facts on the subject and the reasons for them;
and I venture to quote the article, because subsequent experience
suggests, I think, little to be added to it.
'The main classes of joint stock companies which have answered are
three:--1st. Those in which the capital is used not to work the
business but to guarantee the business. Thus a banker's business--his
proper business--does not begin while he is using his own money: it
commences when he begins to use the capital of others. An insurance
office in the long run needs no capital; the premiums which are
received ought to exceed the claims which accrue. In both cases, the
capital is wanted to assure the public and to induce it to trust the
concern. 2ndly. Those companies have answered which have an
exclusive privilege which they have used with judgment, or which
possibly was so very profitable as to enable them to thrive with
little judgment. 3rdly. Those which have undertaken a business both
large and simple--employing more money than most individuals or
private firms have at command, and yet such that, in Adam Smith's
words, "the operations are capable of being reduced to a routine or
such an uniformity of method as admits of no variation."
'As a rule, the most profitable of these companies are banks.
Indeed, all the favouring conditions just mentioned concur in many
banks. An old-established bank has a "prestige," which amounts to a
"privileged opportunity"; though no exclusive right is given to it
by law, a peculiar power is given to it by opinion. The business of
banking ought to be simple; if it is hard it is wrong. The only
securities which a banker, using money that he may be asked at short
notice to repay, ought to touch, are those which are easily saleable
and easily intelligible. If there is a difficulty or a doubt, the
security should be declined. No business can of course be quite
reduced to fixed rules. There must be occasional cases which no
pre-conceived theory can define. But banking comes as near to fixed
rules certainly as any existing business, perhaps as any possible
business. The business of an old-established bank has the full
advantage of being a simple business, and in part the advantage of
being a monopoly business. Competition with it is only open in the
sense in which competition with "the London Tavern" is open; anyone
that has to do with either will pay dear for it.
'But the main source of the profitableness of established banking is
the smallness of the requisite capital. Being only wanted as a
"moral influence," it need not be more than is necessary to secure
that influence. Although, therefore, a banker deals only with the
most sure securities, and with those which yield the least interest,
he can nevertheless gain and divide a very large profit upon his own
capital, because the money in his hands is so much larger than that
capital.
'Experience, as shown by plain figures, confirms these conclusions.
We print at the end of this article the respective profits of 110
banks in England, and Scotland, and Ireland, being all in those
countries of which we have sufficient information--the Bank of England
excepted. There are no doubt others, but they are not quoted even on
local Stock Exchange lists, and in most cases publish no reports.
The result of these banks, as regards the dividends they pay, is--
No. of Companies Capital
L
Above 20 per cent 15 5,302,767
Between 15 and 20 per cent 20 5,439,439
" 10 and 15 per cent 36 14,056,950
" 5 and 10 per cent 36 14,182,379
Under 5 per cent 3 1,350,000
-----------------
110 40,331,535
that is to say, above 25 per cent of the capital employed in these
banks pays over 15 per cent, and 62 1/2 per cent of the capital pays
more than 10 per cent. So striking a result is not to be shown in
any other joint stock trade.
'The period to which these accounts refer was certainly not a
particularly profitable one--on the contrary, it has been specially
unprofitable. The rate of interest has been very low, and the amount
of good security in the market small. Many banks--to some extent most
banks--probably had in their books painful reminiscences of 1866. The
fever of excitement which passed over the nation was strongest in
the classes to whom banks lent most, and consequently the losses of
even the most careful banks (save of those in rural and sheltered
situations) were probably greater than usual. But even tried by this
very unfavourable test banking is a trade profitable far beyond the
average of trades.
'There is no attempt in these banks on the whole and as a rule to
divide too much--on the contrary, they have accumulated about
13,000,000 L., or nearly 1/3 rd of their capital, principally out of
undivided profits. The directors of some of them have been anxious
to put away as much as possible and to divide as little as possible.
'The reason is plain; out of the banks which pay more than 20 per
cent, all but one were old-established banks, and all those paying
between 15 and 20 per cent were old banks too. The "privileged
opportunity" of which we spoke is singularly conspicuous in such
figures; it enables banks to pay much, which without it would not
have paid much. The amount of the profit is clearly proportional to
the value of the "privileged opportunity." All the banks which pay
above 20 per cent, save one, are banks more than 25 years old; all
those which pay between 15 and 20 are so too. A new bank could not
make these profits, or even by its competition much reduce these
profits; in attempting to do so, it would simply ruin itself. Not
possessing the accumulated credit of years, it would have to wind up
before it attained that credit.
'The value of the opportunity too is proportioned to what has to be
paid for it. Some old banks have to pay interest for all their
money; some have much for which they pay nothing. Those who give
much to their customers have of course less left for their
shareholders. Thus Scotland, where there is always a daily interest,
has no bank in the lists paying over 15 per cent. The profits of
Scotch banks run thus:
Capital Dividend
L
Bank of Scotland 1,500,000 12
British Linen Company 1,000,000 3
Caledonian 125,000 10
Clydesdale 900,000 10
Commercial Bank of Scotland 1,000,000 13
National Bank of Scotland 1,000,000 112
North of Scotland 280,000 10
Union Bank of Scotland 1,000,000 10
City of Glasgow 870,000 8
Royal Bank 2,000,000 8
---------
9,675,000
Good profits enough, but not at all like the profits of the London
and Westminster, or the other most lucrative banks of the South.
'The Bank of England, it is true, does not seem to pay so much as
other English banks in this way of reckoning. It makes an immense
profit, but then its capital is immense too. In fact, the Bank of
England suffers under two difficulties. Being much older than the
other joint stock banks, it belongs to a less profitable era. When
it was founded, banks looked rather to the profit on their own
capital, and to the gains of note issue than to the use of deposits.
The first relations with the State were more like those of a finance
company than of a bank, as we now think of banking. If the Bank had
not made loans to the Government, which we should now think dubious,
the Bank would not have existed, for the Government would never have
permitted it. Not only is the capital of the Bank of England
relatively greater, but the means of making profit in the Bank of
England are relatively less also. By custom and understanding the
Bank of England keep a much greater reserve in unprofitable cash
than other banks; if they do not keep it, either our whole system
must be changed or we should break up in utter bankruptcy. The
earning faculty of the Bank of England is in proportion less than
that of other banks, and also the sum on which it has to pay
dividend is altogether greater than theirs.
'It is interesting to compare the facts of joint stock banking with
the fears of it which were felt. In 1832, Lord Overstone observed: "I
think that joint stock banks are deficient in everything requisite
for the conduct of the banking business except extended
responsibility; the banking business requires peculiarly persons
attentive to all its details, constantly, daily, and hourly watchful
of every transaction, much more than mercantile or trading business.
It also requires immediate prompt decisions upon circumstances when
they arise, in many cases a decision that does not admit of delay
for consultation; it also requires a discretion to be exercised with
reference to the special circumstances of each case. Joint stock
banks being of course obliged to act through agents and not by a
principal, and therefore under the restraint of general rules,
cannot be guided by so nice a reference to degrees of difference in
the character of responsibility of parties; nor can they undertake
to regulate the assistance to be granted to concerns under temporary
embarrassment by so accurate a reference to the circumstances,
favourable or unfavourable, of each case."
'But in this very respect, joint stock banks have probably improved
the business of banking. The old private banks in former times used
to lend much to private individuals; the banker, as Lord Overstone
on another occasion explained, could have no security, but he formed
his judgment of the discretion, the sense, and the solvency of those
to whom he lent. And when London was by comparison a small city, and
when by comparison everyone stuck to his proper business, this
practice might have been safe. But now that London is enormous and
that no one can watch anyone, such a trade would be disastrous; at
present, it would hardly be safe in a country town. The joint stock
banks were quite unfit for the business Lord Overstone meant, but
then that business is quite unfit for the present time.
This success of Joint Stock Banking is very contrary to the general
expectation at its origin. Not only private bankers, such as Lord
Overstone then was, but a great number of thinking persons feared
that the joint stock banks would fast ruin themselves, and then
cause a collapse and panic in the country. The whole of English
commercial literature between 1830 and 1840 is filled with that
idea. Nor did it cease in 1840. So late as 1845, Sir R. Peel thought
the foundation of joint stock banks so dangerous that he subjected
it to grave and exceptional difficulty. Under the Act of 1845, which
he proposed, no such companies could be founded except with shares
of 100 L. with 50 L.; paid up on each; which effectually checked the
progress of such banks, for few new ones were established for many
years, or till that act had been repealed. But in this, as in many
other cases, perhaps Sir R. Peel will be found to have been
clear-sighted rather than far-sighted. He was afraid of certain
joint stock banks which he saw rising around him; but the effect of
his legislation was to give to these very banks, if not a monopoly,
at any rate an exemption from new rivals. No one now founds or can
found a new private bank, and Sir R. Peel by law prevented new joint
stock banks from being established. Though he was exceedingly
distrustful of the joint stock banks founded between 1826 and 1845,
yet in fact he was their especial patron, and he more than any other
man encouraged and protected them.
But in this wonderful success there are two dubious points, two
considerations of different kinds, which forbid us to say that in
other countries, even in countries with the capacity of
co-operation, joint stock banks would succeed as well as we have
seen that they succeed in England. 1st. These great Banks have not
had to keep so large a reserve against their liabilities as it was
natural that they should, being of first-rate magnitude, keep. They
were at first, of course, very small in comparison with what they
are now. They found a number of private bankers grouped round the
Bank of England, and they added themselves to the group. Not only
did they keep their reserve from the beginning at the Bank of
England, but they did not keep so much reserve as they would have
kept if there had been no Bank of England. For a long time this was
hardly noticed. For many years questions of the 'currency,'
particularly questions as to the Act of 1844, engrossed the
attention of all who were occupied with these subjects. Even those
who were most anxious to speak evil of joint stock banks, did not
mention this particular evil. The first time, as far as I know, that
it was commented on in any important document, was in an official
letter written in 1857 by Mr. Weguelin, who was then Governor of the
Bank, to Sir George Lewis, who was then Chancellor of the Exchequer.
The Governor and the Directors of the Bank of England had been asked
by Sir George Lewis severally to give their opinions on the Act of
1844, and all their replies were published. In his, Mr. Weguelin
says:
'If the amount of the reserve kept by the Bank of England be
contrasted with the reserve kept by the joint stock banks, a new and
hitherto little considered source of danger to the credit of the
country will present itself. The joint stock banks of London,
judging by their published accounts, have deposits to the amount of
30,000,000 L. Their capital is not more than 3,000,000 L., and they
have on an average 31,000,000 L., invested in one way or another,
leaving only 2,000,000 L. as a reserve against all this mass of
liabilities.'
But these remarkable words were little observed in the discussions
of that time. The air was obscured by other matters. But in this
work I have said so much on the subject that I need say little now.
The joint stock banks now keep a main part of their reserve on
deposit with the bill-brokers, or in good and convertible
interest-bearing securities. From these they obtain a large income,
and that income swells their profits. If they had to keep a much
larger part than now of that reserve in barren cash, their dividends
would be reduced, and their present success would become less
conspicuous.
The second misgiving, which many calm observers more and more feel
as to our largest joint stock banks, fastens itself on their
government. Is that government sufficient to lend well and keep safe
so many millions? They are governed, as every one knows, by a board
of directors, assisted by a general manager, and there are in London
unrivalled materials for composing good boards of directors. There
are very many men of good means, of great sagacity and great
experience in business, who are obliged to be in the City every
day, and to remain there during the day, but who have very much time
on their hands. A merchant employing solely or principally his own
capital has often a great deal of leisure. He is obliged to be on
the market, and to hear what is doing. Every day he has some
business to transact, but his transactions can be but few. His
capital can bear only a limited number of purchases; if he bought as
much as would fill his time from day to day he would soon be ruined,
for he could not pay for it. Accordingly, many excellent men of
business are quite ready to become members of boards of directors,
and to attend to the business of companies, a good deal for the
employment's sake. To have an interesting occupation which brings
dignity and power with it pleases them very much. As the aggregation
of commerce in great cities grows, the number of such men augments.
A council of grave, careful, and experienced men can, without
difficulty, be collected for a great bank in London, such as never
could have been collected before, and such as cannot now be
collected elsewhere.
There are facilities, too, for engaging a good banker to be a
manager such as there never were before in the world. The number of
such persons is much on the increase. Any careful person who is
experienced in figures, and has real sound sense, may easily make
himself a good banker. The modes in which money can be safely lent
by a banker are not many, and a clear-headed, quiet, industrious
person may soon learn all that is necessary about them. Our
intricate law of real property is an impediment in country banking,
for it requires some special study even to comprehend the elements
of a law which is full of technical words, and which can only be
explained by narrating its history. But the banking of great cities
is little concerned with loans on landed property. And all the rest
of the knowledge requisite for a banker can easily be obtained by
anyone who has the sort of mind which takes to it. No doubt there is
a vast routine of work to be learned, and the manager of a large
bank must have a great facility in transacting business rapidly. But
a great number of persons are now bred from their earliest manhood
in the very midst of that routine; they learn it as they would learn
a language, and come to be no more able to unlearn it than they
could unlearn a language. And the able ones among them acquire an
almost magical rapidity in effecting the business connected with
that routine. A very good manager and very good board of directors
can, without unreasonable difficulty, be provided for a bank at
present in London.
It will be asked, what more can be required? I reply, a great deal.
All which the best board of directors can really accomplish, is to
form a good decision on the points which the manager presents to
them, and perhaps on a few others which one or two zealous members
of their body may select for discussion. A meeting of fifteen or
eighteen persons is wholly unequal to the transaction of more
business than this; it will be fortunate, and it must be well
guided, if it should be found to be equal to so much. The discussion
even of simple practical points by such a number of persons is a
somewhat tedious affair. Many of them will wish to speak on every
decision of moment, and some of them--some of the best of them
perhaps--will only speak with difficulty and slowly. Very generally,
several points will be started at once, unless the discussion is
strictly watched by a rigid chairman; and even on a single point the
arguments will often raise grave questions which cannot be answered,
and suggest many more issues than can be advantageously decided by
the meeting. The time required by many persons for discussing many
questions, would alone prevent an assembly of many persons from
overlooking a large and complicated business.
Nor is this the only difficulty. Not only would a real supervision
of a large business by a board of directors require much more time
than the board would consent to occupy in meeting, it would also
require much more time and much more thought than the individual
directors would consent to give. These directors are only employing
on the business of the Bank the vacant moments of their time, and
the spare energies of their minds. They cannot give the Bank more;
the rest is required for the safe conduct of their own affairs, and
if they diverted it from these affairs they would be ruined. A few
of them may have little other business, or they may have other
partners in the business, on whose industry they can rely, and whose
judgment they can trust; one or two may have retired from business.
But for the most part, directors of a company cannot attend
principally and anxiously to the affairs of a company without so far
neglecting their own business as to run great risk of ruin; and if
they are ruined, their trustworthiness ceases, and they are no
longer permitted by custom to be directors.
Nor, even if it were possible really to supervise a business by the
effectual and constant inspection of fifteen or sixteen rich and
capable persons, would even the largest business easily bear the
expense of such a supervision. I say rich, because the members of a
board governing a large bank must be men of standing and note
besides, or they would discredit the bank; they need not be rich in
the sense of being worth millions, but they must be known to possess
a fair amount of capital and be seen to be transacting a fair
quantity of business. But the labour of such persons, I do not say
their spare powers, but their principal energies, fetches a high
price. Business is really a profession often requiring for its
practice quite as much knowledge, and quite as much skill, as law
and medicine; and requiring also the possession of money. A thorough
man of business, employing a fair capital in a trade, which he
thoroughly comprehends, not only earns a profit on that capital, but
really makes of his professional skill a large income. He has a
revenue from talent as well as from money; and to induce sixteen or
eighteen persons to abandon such a position and such an income in
order to devote their entire attention to the affairs of a joint
stock company, a salary must be given too large for the bank to pay
or for anyone to wish to propose.
And an effectual supervision by the whole board being impossible,
there is a great risk that the whole business may fall to the
general manager. Many unhappy cases have proved this to be very
dangerous. Even when the business of joint stock banks was far less,
and when the deposits entrusted to them were very much smaller, a
manager sometimes committed frauds which were dangerous, and still
oftener made mistakes that were ruinous. Actual crime will always be
rare; but, as an uninspected manager of a great bank has the control
of untold millions, sometimes we must expect to see it: the
magnitude of the temptation will occasionally prevail over the
feebleness of human nature. But error is far more formidable than
fraud: the mistakes of a sanguine manager are, far more to be
dreaded than the theft of a dishonest manager. Easy misconception is
far more common than long-sighted deceit. And the losses to which an
adventurous and plausible manager, in complete good faith, would
readily commit a bank, are beyond comparison greater than any which
a fraudulent manager would be able to conceal, even with the utmost
ingenuity. If the losses by mistake in banking and the losses by
fraud were put side by side, those by mistake would be incomparably
the greater. There is no more unsafe government for a bank than that
of an eager and active manager, subject only to the supervision of a
numerous board of directors, even though that board be excellent,
for the manager may easily glide into dangerous and insecure
transactions, nor can the board effectually check him.
The remedy is this: a certain number of the directors, either those
who have more spare time than others, or those who are more ready to
sell a large part of their time to the bank, must be formed into a
real working committee, which must meet constantly, must investigate
every large transaction, must be acquainted with the means and
standing of every large borrower, and must be in such incessant
communication with the manager that it will be impossible for him to
engage in hazardous enterprises of dangerous magnitude without their
knowing it and having an opportunity of forbidding it. In almost all
cases they would forbid it; all committees are cautious, and a
committee of careful men of business, picked from a large city, will
usually err on the side of caution if it err at all. The daily
attention of a small but competent minor council, to whom most of
the powers of the directors are delegated, and who, like a cabinet,
guide the deliberations of the board at its meetings, is the only
adequate security of a large bank from the rash engagements of a
despotic and active general manager. Fraud, in the face of such a
committee, would probably never be attempted, and even now it is a
rare and minor evil.
Some such committees are vaguely known to exist in most, if not all,
our large joint stock banks. But their real constitution is not
known. No customer and no shareholder knows the names of the
managing committee, perhaps, in any of these large banks. And this
is a grave error. A large depositor ought to be able to ascertain
who really are the persons that dispose of his money; and still more
a large shareholder ought not to rest till he knows who it is that
makes engagements on his behalf, and who it is that may ruin him if
they choose. The committee ought to be composed of quiet men of
business, who can be ascertained by inquiry to be of high character
and well-judging mind. And if the public and the shareholder knew
that there was such a committee, they would have sufficient reasons
for the confidence which now is given without such reasons.
A certain number of directors attending daily by rotation is, it
should be said, no substitute for a permanent committee. It has no
sufficient responsibility. A changing body cannot have any
responsibility. The transactions which were agreed to by one set of
directors present on the Monday might be exactly those which would
be much disapproved by directors present on the Wednesday. It is
essential to the decisions of most business, and not least of the
banking business, that they should be made constantly by the same
persons; the chain of transactions must pass through the same minds.
A large business may be managed tolerably by a quiet group of
second-rate men if those men be always the same; but it cannot be
managed at all by a fluctuating body, even of the very cleverest
men. You might as well attempt to guide the affairs of the nation by
means of a cabinet similarly changing.
Our great joint stock bands are imprudent in so carefully concealing the
details of their government, and in secluding those details from the
risk of discussion. The answer, no doubt will be, 'Let well alone; as
you have admitted, there hardly ever before was so great a success as
these banks of ours: what more do you or can you want?' I can only say
that I want further to confirm this great success and to make it secure
for the future. At present there is at least the possibility of a great
reaction. Supposing that, owing to defects in its government, one even
of the greater London joint stock banks failed, there would be an
instant suspicion of the whole system. One _terra incognita_ being seen
to be faulty, every other _terra incognita_ would be suspected. If the
real government of these banks had for years been known, and if the
subsisting banks had been known not to be ruled by the bad mode of
government which had ruined the bank that had fallen, then the ruin of
that bank would not be hurtful. The other banks would be seen to be
exempt from the cause which had destroyed it. But at present the ruin of
one of these great banks would greatly impair the credit of all.
Scarcely any one knows the precise government of any one; in no case has
that government been described on authority; and the fall of one by
grave misgovernment would be taken to show that the others might as
easily be misgoverned also. And a tardy disclosure even of an admirable
constitution would not much help the surviving banks: as it was
extracted by necessity, it would be received with suspicion. A sceptical
world would say 'of course they say they are all perfect now; it would
not do for them to say anything else.'
And not only the depositors and the shareholders of these large
banks have a grave interest in their good government, but the public
also. We have seen that our banking reserve is, as compared with our
liabilities, singularly small; we have seen that the rise of these
great banks has lessened the proportion of that reserve to those
liabilities; we have seen that the greatest strain on the banking
reserve is a 'panic.' Now, no cause is more capable of producing a
panic, perhaps none is so capable, as the failure of a first-rate
joint stock bank in London. Such an event would have something like
the effect of the failure of Overend, Gurney and Co.; scarcely any
other event would have an equal effect. And therefore, under the
existing constitution of our banking system the government of these
great banks is of primary importance to us all.