The Private Banks.
Perhaps some readers of the last part of the last chapter have been
inclined to say that I must be a latent enemy to Joint Stock
Banking. At any rate, I have pointed out what I think grave defects
in it. But I fear that a reader of this chapter may, on like
grounds, suppose that I am an enemy to Private Banking. And I can
only hope that the two impressions may counteract one another, and
may show that I do not intend to be unfair.
I can imagine nothing better in theory or more successful in
practice than private banks as they were in the beginning. A man of
known wealth, known integrity, and known ability is largely
entrusted with the money of his neighbours. The confidence is
strictly personal. His neighbours know him, and trust him because
they know him. They see daily his manner of life, and judge from it
that their confidence is deserved. In rural districts, and in former
times, it was difficult for a man to ruin himself except at the
place in which he lived; for the most part he spent his money there,
and speculated there if he speculated at all. Those who lived there
also would soon see if he was acting in a manner to shake their
confidence. Even in large cities, as cities then were, it was
possible for most persons to ascertain with fair certainty the real
position of conspicuous persons, and to learn all which was material
in fixing their credit. Accordingly the bankers who for a long
series of years passed successfully this strict and continual
investigation, became very wealthy and very powerful.
The name 'London Banker' had especially a charmed value. He was
supposed to represent, and often did represent, a certain union of
pecuniary sagacity and educated refinement which was scarcely to be
found in any other part of society. In a time when the trading
classes were much ruder than they now are, many private bankers
possessed variety of knowledge and a delicacy of attainment which
would even now be very rare. Such a position is indeed singularly
favourable. The calling is hereditary; the credit of the bank
descends from father to son: this inherited wealth soon begins
inherited refinement. Banking is a watchful, but not a laborious
trade. A banker, even in large business, can feel pretty sure that
all his transactions are sound, and yet have much spare mind. A
certain part of his time, and a considerable part of his thoughts,
he can readily devote to other pursuits. And a London banker can
also have the most intellectual society in the world if he chooses
it. There has probably very rarely ever been so happy a position as
that of a London private banker; and never perhaps a happier.
It is painful to have to doubt of the continuance of such a class,
and yet, I fear, we must doubt of it. The evidence of figures is
against it. In 1810 there were 40 private banks in Lombard Street
admitted to the clearing-house: there now are only 3. Though the
business of banking has increased so much since 1810, this species
of banks is fewer in number than it was then. Nor is this the worst.
The race is not renewed. There are not many recognised
impossibilities in business, but everybody admits 'that you cannot
found a new private bank.' No such has been founded in London, or,
as far as I know, in the country, for many years. The old ones merge
or die, and so the number is lessened; but no new ones begin so as
to increase that number again.
The truth is that the circumstances which originally favoured the
establishment of private banks have now almost passed away. The
world has become so large and complicated that it is not easy to
ascertain who is rich and who is poor. No doubt there are some
enormously wealthy men in England whose means everybody has heard
of, and has no doubt of. But these are not the men to incur the vast
liabilities of private banking. If they were bred in it they might
stay in it; but they would never begin it for themselves. And if
they did, I expect people would begin to doubt even of their wealth.
It would be said, 'What does A B go into banking for? he cannot be
as rich as we thought.' A millionaire commonly shrinks from
liability, and the essence of great banking is great liability. No
doubt there are many 'second-rate' rich men, as we now count riches,
who would be quite ready to add to their income the profit of a
private bank if only they could manage it. But unluckily they cannot
manage it. Their wealth is not sufficiently familiar to the world;
they cannot obtain the necessary confidence. No new private bank is
founded in England because men of first-rate wealth will not found
one, and men not of absolutely first-rate wealth cannot.
In the present day, also, private banking is exposed to a
competition against which in its origin it had not to struggle.
Owing to the changes of which I have before spoken, joint stock
banking has begun to compete with it. In old times this was
impossible; the Bank of England had a monopoly in banking of the
principle of association. But now large joint stock banks of deposit
are among the most conspicuous banks in Lombard Street. They have a
large paid-up capital and intelligible published accounts; they use
these as an incessant advertisement, in a manner in which no
individual can use his own wealth. By their increasing progress they
effectually prevent the foundation of any new private bank.
The amount of the present business of private banks is perfectly
unknown. Their balance sheets are effective secrets--rigidly guarded.
But none of them, except a few of the largest, are believed at all
to gain business. The common repute of Lombard Street might be wrong
in a particular case, but upon the general doctrine it is almost
sure to be right. There are a few well-known exceptions, but
according to universal belief the deposits of most private bankers
in London tend rather to diminish than to increase.
As to the smaller banks, this naturally would be so. A large bank
always tends to become larger, and a small one tends to become
smaller. People naturally choose for their banker the banker who has
most present credit, and the one who has most money in hand is the
one who possesses such credit. This is what is meant by saying that
a long established and rich bank has a 'privileged opportunity'; it
is in a better position to do its business than any one else is; it
has a great advantage over old competitors and an overwhelming
superiority over new comers. New people coming into Lombard Street
judge by results; they give to those who have: they take their money
to the biggest bank because it is the biggest. I confess I cannot,
looking far forward into the future, expect that the smaller private
banks will maintain their ground. Their old connections will not
leave them; there will be no fatal ruin, no sudden mortality. But
the tide will gently ebb, and the course of business will be carried
elsewhere.
Sooner or later, appearances indicate, and principle suggests, that
the business of Lombard Street will be divided between the joint
stock banks and a few large private banks. And then we have to ask
ourselves the question, can those large private banks be permanent?
I am sure I should be very sorry to say that they certainly cannot,
but at the same time I cannot be blind to the grave difficulties
which they must surmount.
In the first place, an hereditary business of great magnitude is
dangerous. The management of such a business needs more than common
industry and more than common ability. But there is no security at
all that these will be regularly continued in each generation. The
case of Overend, Gurney and Co., the model instance of all evil in
business, is a most alarming example of this evil. No cleverer men
of business probably (cleverer I mean for the purposes of their
particular calling) could well be found than the founders and first
managers of that house. But in a very few years the rule in it
passed to a generation whose folly surpassed the usual limit of
imaginable incapacity. In a short time they substituted ruin for
prosperity and changed opulence into insolvency. Such great folly is
happily rare; and the business of a bank is not nearly as difficult
as the business of a discount company. Still much folly is common,
and the business of a great bank requires a great deal of ability,
and an even rarer degree of trained and sober judgment. That which
happened so marvelously in the green tree may happen also in the
dry. A great private bank might easily become very rotten by a
change from discretion to foolishness in those who conduct it.
We have had as yet in London, happily, no example of this; indeed,
we have hardly as yet had the opportunity. Till now private banks
have been small; small as we now reckon banks. For their exigencies
a moderate degree of ability and an anxious caution will suffice.
But if the size of the banks is augmented and greater ability is
required, the constant difficulty of an hereditary government will
begin to be felt. 'The father had great brains and created the
business: but the son had less brains and lost or lessened it.' This
is the history of all great monarchies, and it may be the history of
great private banks. The peculiarity in the case of Overend, Gurney
and Co. at least, one peculiarity is that the evil was soon
discovered. The richest partners had least concern in the
management; and when they found that incredible losses were ruining
them, they stopped the concern and turned it into a company. But
they had done nothing; if at least they had only prevented farther
losses, the firm might have been in existence and in the highest
credit now. It was the publicity of their losses which ruined them.
But if they had continued to be a private partnership they need not
have disclosed those losses: they might have written them off
quietly out of the immense profits they could have accumulated. They
had some ten millions of other people's money in their hands which
no one thought of disturbing. The perturbation through the country
which their failure caused in the end, shows how diffused and how
unimpaired their popular reputation was. No one in the rural
districts (as I know by experience) would ever believe a word
against them, say what you might. The catastrophe came because at
the change the partners in the old private firm--the Gurney family
especially--had guaranteed the new company against the previous
losses: those losses turned out to be much greater than was
expected. To pay what was necessary the 'Gurneys' had to sell their
estates, and their visible ruin destroyed the credit of the concern.
But if there had been no such guarantee, and no sale of estates, if
the great losses had slept a quiet sleep in a hidden ledger, no one
would have been alarmed, and the credit and the business of
'Overends' might have existed till now, and their name still
continued to be one of our first names. The difficulty of
propagating a good management by inheritance for generations is
greatest in private banks and discount firms because of their
essential secrecy.
The danger may indeed be surmounted by the continual infusion of new
and able partners. The deterioration of the old blood may be
compensated by the excellent quality of the fresh blood. But to this
again there is an objection, of little value perhaps in seeming, but
of much real influence in practice. The infusion of new partners
requires from the old partners a considerable sacrifice of income;
the old must give up that which the new receive, and the old will
not like this. The effectual remedy is so painful that I fear it
often may be postponed too long.
I cannot, therefore, expect with certainty the continuance of our
system of private banking. I am sure that the days of small banks
will before many years come to an end, and that the difficulties of
large private banks are very important. In the mean time it is very
important that large private banks should be well managed. And the
present state of banking makes this peculiarly difficult. The detail
of the business is augmenting with an overwhelming rapidity. More
cheques are drawn year by year; not only more absolutely, but more
by each person, and more in proportion to his income. The payments
in, and payments out of a common account are very much more numerous
than they formerly were. And this causes an enormous growth of
detail. And besides, bankers have of late begun almost a new
business. They now not only keep people's money, but also collect
their incomes for them. Many persons live entirely on the income of
shares, or debentures, or foreign bonds, which is paid in coupons,
and these are handed in for the bank to collect. Often enough the
debenture, or the certificate, or the bond is in the custody of the
banker, and he is expected to see when the coupon is due, and to cut
it off and transmit it for payment. And the detail of all this is
incredible, and it needs a special machinery to cope with it.
A large joint stock bank, if well-worked, has that machinery. It has at
the head of the executive a general manager who was tried in the detail
of banking, who is devoted to it, and who is content to live almost
wholly in it. He thinks of little else, and ought to think of little
else. One of his first duties is to form a hierarchy of inferior
officers, whose respective duties are defined, and to see that they can
perform and do perform those duties. But a private bank of the type
usual in London has no such officer. It is managed by the partners; now
these are generally rich men, are seldom able to grapple with great
business of detail, and are not disposed to spend their whole lives and
devote their entire minds to it if they were able. A person with the
accumulated wealth, the education and the social place of a great London
banker would be a 'fool so to devote himself. He would sacrifice a
suitable and a pleasant life for an unpleasant and an unsuitable life.
But still the detail must be well done; and some one must be specially
chosen to watch it and to preside over it, or it will not be well done.
Until now, or until lately, this difficulty has not been fully felt. The
detail of the business of a small private bank was moderate enough to be
superintended effectually by the partners. But, as has been said, the
detail of banking--the proportion of detail to the size of the bank--is
everywhere increasing. The size of the private banks will have to
augment if private banks are not to cease; and therefore the necessity
of a good organisation for detail is urgent. If the bank grows, and
simultaneously the detail grows in proportion to the bank, a frightful
confusion is near unless care be taken.
The only organisation which I can imagine to be effectual is that
which exists in the antagonistic establishments. The great private
banks will have, I believe, to appoint in some form or other, and
under some name or other, some species of general manager who will
watch, contrive, and arrange the detail for them. The precise shape
of the organisation is immaterial; each bank may have its own shape,
but the man must be there. The true business of the private partners
in such a bank is much that of the directors in a joint stock bank.
They should form a permanent committee to consult with their general
manager, to watch him, and to attend to large loans and points of
principle. They should not themselves be responsible for detail; if
they do there will be two evils at once: the detail will be done
badly, and the minds of those who ought to decide principal things
will be distracted from those principal things. There will be a
continual worry in the bank, and in a worry bad loans are apt to be
made and money is apt to be lost.
A subsidiary advantage of this organisation is that it would render
the transition from private banking to joint stock banking easier,
if that transition should be necessary. The one might merge in the
other as convenience suggested and as events required. There is
nothing intrusive in discussing this subject. The organisation of
the private is just like that of the joint stock banks; all the
public are interested that it should be good. The want of a good
organisation may cause the failure of one or more of these banks;
and such failure of such banks may intensify a panic, even if it
should not cause one.