CHAPTER VI.

ON THE CONSTITUTION OF BANKS.

I STATED, in the earlier part of these remarks, that I concurred in what I believed to be the prevalent opinion that there could no useful direct Legislative interference with the operations of banking, strictly so called-apart that is-from the issuing notes, but I added that I thought there were means and of great efficiency-by which those operations might be indirectly controlled. Those means I stated to be, first, the depriving Banks of the power of issue,and secondly, such an amendment of their constitųtion as would tend greatly to limit both the temptation and the power to go wrong. With regard to the first point, the reader is already in possession of my opinion, I have now to request his attention to the second.

It will be recollected that one of the measures by which it was hoped, in 1826, to prevent the recurrence of such alarming monetary disturbances as those of the preceding year, was the passing an act permitting the establishment of banking companies with more than six partners, and with the power of issuing promissory notes, beyond the limits of a circle round London of 56 miles radius. The improvident conduct of the country bankers, and their mismanagement of the

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currency, were supposed to have mainly contributed to producing the panic of 1825, and it was expected that the act in question would lead to the formation of banks of greater solidity, and conducted with greater caution. That this expectation has failed there cannot be the smallest doubt. The improvident conduct of the joint-stock banks has become matter of notoriety, and it is not a little curious that the monetary disturbances of the last few years have been with almost as much confidence ascribed to their mismanagement, as the panic of 1825 to the misconduct of the private banks which they were intended to supersede. A strong suspicion that the operation of the act of 1826 was not so salutary as had been anticipated, induced the House of Commons in 1836 to appoint a select Committee to inquire into the subject, and certainly the evidence given before that Committee, which continued its inquiries for three sessions, was such as fully to justify the doubts which led to its appointment. The Committee eventually made no report, but the evidence taken furnished both strong proof that the state of the law respecting the constitution of joint-stock banks was in great need of amendment, and indications of no equivocal nature as to what the character of that amendment should be. It is, however, scarcely to be regretted that the alteration of the act of 1826, which is clearly inevitable, has not yet been made the events which have occurred since the inquiries of

the Committee terminated, having only served to render the necessity of that alteration more apparent, and to furnish a yet wider range of facts wherefrom to draw indications which may lead to its being made with advantage. My limits only permit me to state very concisely the results to which the experience of the working of the act of 1826 appears to point.

It is clear, that by the permission to establish banks with an unlimited number of partners, an element of very great power has been introduced into our monetary system; first, because by the opportunities of participating in the profits of banking, thus afforded to the whole community, banking has been greatly extended; great numbers of persons, who had never had banking accounts, being induced to have such by the possession of a few shares in a bank; and secondly, and mainly, because these associations furnish an entirely new and additional means for the expansion of credit. Against the evils which may flow from the operation of these causes, the existing law provides but one safeguard--the unlimited responsibility of the shareholders. How completely valueless that provision has proved, I need not say. It is not more certain that the tendency of joint-stock banking is to absorb all other kinds of banking, than that the facility of credit which the association of large numbers of persons in one responsibility, has conferred on banks so constituted, has been grossly

abused. It is surprising, perhaps, that even in 1826 the principle of responsibility, after half a century's experience of its inefficiency, should have been relied on to secure prudent banking; but there was then this excuse, at least, for such reliance→ that the principle was about to be brought into operation under new circumstances, and it might be hoped, with respect to joint-stock banks, that while the slender interest of each shareholder in the returns would render the company less keen in the pursuit of profit than private bankers, the sense of personal responsibility might yet press sufficiently on all to secure vigilant control over the proceedings of the managers. Experience has shewn

the utter fallacy of such expectations.

If the cupidity of the individuals composing such associations has been but faintly excited, the sense of responsibility has been yet more weakly felt. The affairs of these associations, left to the uncontrolled management of persons but slightly inte rested in their prosperity, have been either neglected or conducted with a view to the private interests of the Directors; and the result has been, that during the few years, since the law of 1826, has been in existence, the history of Joint Stock Banking has afforded instances of reckless mismanagement, to which I verily believe the annals of private banking for the previous half century can present no parallel. These results ought to have been anticipated; remote or contingent dangers will never

operate with sufficient force on the minds of men, to deter then from the pursuits of immediate advantage, and I know not why it should be expected that the risk of loss of fortune, which does not prevent improvidence in the pursuits of the merchant or manufacturer, should secure invariable caution and good management in banking. But why, it may be said, endeavour to secure the trade of banking, from the vicissitudes to which others. are exposed? Because the public have a deep interest in the stability of banks, and none, or next to none, in the fluctuation of prosperity in other trades. The failure of the merchant affects but comparatively few individuals; the failure of a bank spreads distress or ruin amongst thousands. How, then, shall we secure that stability of banks essential to the welfare of the community? The principle of responsibility has failed; to what other shall we resort? To one which, if fairly and fully brought into operation, would go near, I cannot but think to the attainment of the object in view, I mean the subjecting banks to the constant and jealous vigilance of the public.

This may be effected by a threefold process. In the first place, I would have chartered banks, with limited liability of the shareholders, that is, so that all persons dealing with a bank should be aware that they had no other security for payment than the assets of the corporation and the prudence with which its concerns were managed. By this