The Sun.
London, England, 1849-05-09 00:00:00

JOINT-STOCK BANKS.

On the order of the day
being read,
Mr. HEADLAM rose to move for leave to bring
in a Bill to render lawful the formation of Incor-
porated Joint-Stock Banks, based upon the principle
of a limited liability of the shareholders. In doing
so he said, in a commercial country like this it was of
the highest importance that the laws which regu-
late the system of joint-stock banking companies
should be based on the clearest principles which
reason, fortified by experience, could discover.. things
Not
the least of the evils of the present state of
was, that it had brought discredit upon the
whole system, and prevented that full development
of it which was necessary for the full play of the
capital and energies of this great country. When they
considered the infinity of mercantile transactions that
were constantly carried on, and which affected the em-
ployment of the labouring classes, and especially when
the House contrasted what we had done with
what had been done in other countries, they
could not fail to be of opinion that if a bet-
ter system had been adopted the country would
have been greatly benefited. When the failure
of one of these banks took place, the energies of the
whole district were paralysed, public confidence shaken,
whole masses of the people left unemployed, and irrepar-
able injury thrown upon a banking system which wider
a wise limitation of responsibility would not exist.
Joint-stock banks were comparatively of recent growth
in this country. When they were first established men
were sanguine of their success, and shut their eyes to
the dangers that attended them. It was held out to the
world that a limit could be placed upon the responsibility
of the shareholders, and clauses were inserted in the
deeds of settlement providing that in case a certain
amount of the capital were lost the business of the bank
should be wound up, but so long as the present law ex-
ieoxpheirsiehnacoed
isted, it was perfectly right to attain the object of limit-
ing liability by clauses in deeds, or "conditions in
charters.—(Hear, hear.) And yet such allurements and
misrepresentations were held out to the public to this
day, and in districts too where the public might be sup-
posedin
the s u ch m
prospectusatt ers. —0 f
a bank in which this captivating condition of limited
(Hear, to have had
He some experience
responsibility was held out to the shareholders, and,
without mentioning names, he might state that these
prospectuses were continually appearing in paragraphs
and advertisements in the public prints.—(Hear, hear.)
Another characteristic of the evil of the present system
was, that it allowed every bank a degree of credit
which was thoroughly false in principle and
perfectly injurious in practice. A joint-stock
bank did not borrow money upon real security,
but generally upon the security of its proprietors.
There were instances in which as much as two millions
had been raised upon the security of the proprietors,
and he held that that was the most dangerous power
which they could possibly place in the hands of any
body, unless controlled by a superior power. In case
of failure, if the law worked *ll, two alternatives
ought to be held out to the propriTary, either to make
good the capital which had been lost, or to wind up the
hank and bring it to a conclusion at a comparatively
trifling loss. But as the law now stood, the bank could
continue its operations for' a considerable time upon
borrowed capital after it became bankrupt.—(llear.)
The law gave the strongest possible inducement that any
system could give to every individual in the bank to
maintain the unhealthy system which he had been en-
deavouring to describe. From the first commence-
ment of the bank till the failure took place
the operation of those laws marked the road
to ruin ; and not until that failure had taken
any healthy operation. It
place did the bank come to
the knowledge of the House that
would bein
18-9 6 jo
before int-stock banks were not ' lawful
in this country. The Bank of England then
possessed what were generally, though erro-
neously, called exclusive privileges in banking.
The Bank of England had not an exclusive monopoly in
banking, but it had an exclusive privilege, in the fact
that it was the only corporation which could carry on the
trade in banking. The Bank of England was a corpora-
tion in the strict term of our law, a corporation being the
complete merging of the individual in the body corporate.
The Bank of England had two of the greatest elements
of stability and permanence ; first, a limited liability in
a corporate character, and, secondly, a paid-up capital.
The Bank of England by its paid-up capital and the ad-
vantages conferred by its charter, had been enabled to
confer much public good. The liability of the share-
holders being limited, that establishment possessed an ad-
vantage over other smallerones, which was unjust. They
had applied to be placed upon the same footing, but the
Bank had objected, though Mr. Huskisson and Lord
Liverpool were of opinion that the advantages possessed
by the Bank of England should be extended, since they
could not fail to tend to the promotion of commerce.
He had now said sufficient to enable the House to form
some idea of the origin of unlimited liability, and the
same effects which resulted from it in early years fol-
lowed in 1833. At that time, however, the Charter of
the Bank of England came to an end, and then an
opportunity was afforded to Government of placing the
banking system upon a safe footing. Lord Althorp did,
indeed, endeavour to pass a Bill of this nature, but cer-
tain objections were raised against it, end he failed to
pass it. Since then, however, the Bank of England had
pursued a more liberal policy, they had given up all their
restrictions but this one, and he had no doubt, if the
house now expressed an opinion adverse to its continu-
ance they would be prepared to give that up too.—( Hear.)
Having stated the defects of the existing law, he would
now mention the nature of the provisions which he pro-
posed for the purpose of remedying them. In the first
place he required that no individual should be able to
form a bank without the sanction of the administrative
Government of the country. He proposed that a pe-
tition should be laid before the Board of Trade, stating
the circumstances which rendered it expedient
that an additional bank should be created, so
that the governor should be able to judge
whether it was properly constituted, and whether
it was desirable that another bank should be formed.
He also required that, before the promoters received
letters patent a certain sum should be invested in
the public funds ; but he would not prevent the
bank availing itself of the sum so invested
when periods of difficulty and danger arose,
although he required that no dividend should be
declared until the sum was reinvested. In addition lie
provided that a bank should produce its accounts,
which were to be kept in a particular form, four times
during the year; and that if there were any material
error in them, that the parties who were aware of it
should forfeit the share which they had in the bank. He
did not think that thero would be any practical
difficulty in putting that provision into operation.
The effect would be that the accounts would be
perfect Amounts, and the public might depend on

such accounts. The public would have, first,
the capital paid up, and they would know, secondly, how
the bank was going on by the continued publication of
its accounts. The security of the public would, therefore,
be considerably greater than it was at the present moment.
There was a provision in the Bill to enable existing
companies to come within its provisions. There were
some other minor provisions; but, looking at the length of
time he had addressed the House, he should not deal
further with the provisions of this Bill. He did not
propose the 13111 as a theoretical measure; for
they had tried that plan in this country, and
in Scotland ; and in America, where much attention
had been paid to the science of banking, a similar plan
to the one proposed had worked well. France also
had tried it, and looking at the extension of now banks,
and to the disastrous results that had taken place
with respect to many, and that the plan he
proposed had been approved of by Mr. Hes-
kisson and Lord Liverpool, he thought he had a
right to ask the House to permit him to introduce this
Bill, with the view to the protection of shareholders,
who wero exposed to greater temptations than men
should be subject to,—(Cheers.)
Mr. EWART seconded the motion, having for many
years entertained similar views to those enunciated ,
by the Honourable Member. He was opposed to
unlimited liability, because it afforded no definite
protection to the public. The Scotch system had been so
successful because it was based upon the principle of
limited liability.
The CHANCELLOR, of the ENCHEIVER said
his Hon. and Learned Friend had, in the course of his
speech, gone into various details of the measure which
he proposed to submit to the House ; but into those de-
tails he would not follow him, as he was opposed alto-
gether to the principle of limited responsibility in banks,
which the lion. and Learned Gentleman contended for.
Ho thought it was but fair to him to state at once his
opposition to the principle of the Bill, and his determi-
nation to take the decision of the House on the principle
of limited or unlimited responsibility as applied to
banks, and, therefore, it would be uncessary for him to
go into details. Last year he had certainly received
three or four representations from parties in favour of
the views held by the Honourable and Learned Gentle-
man, but all of them came from the town of Newcastle,
where this notion of limited liability had taken hold
of the public mind. From no other part of the
country had ho received a single representa-
tion in favour of the principle of limited liability.
His Hon. and Learned Friend had stated correctly that
' the 7th and Bth of Victoria prohibited limited responsi-
bility; but ho had referred to an advertisement of a
bank about to be established in London, in which
" limited liability" was put forward. This advertise-
ment was extracted from the Newcastle Chronicle, where
it had been inserted no doubt to meet the views of the
people with whom the advertisers had to deal. It had
been inserted probably by the agent of the proposed
bank in Newcastle, and it contained in large letters the
words " responsibility to be limited."—(A laugh.) Any
one, however, who read the advertisement would discover
how far the liability would be limited, and there would
not be found in any paper but the Newcastle Chronicle
the words "responsibility limited."—(A laugh.) It was,
in fact, a quack advertisement, meant for the people by
whom it was to be read.—(Hear, hear.) His Hon. and
' Learned Friend, however, rightly stated that the 7th and
Bth of Victoria enacted that the partners of a bank were
1 responsible for the liabilities of the bank. The ques-
tion was whether a limited liability or an unlimited
liability tended most effectually to the ultimate solvency
and good management of a bank. Attaching as he did
no inconsiderable importance to the ultimate solvency
of a bank, ho agreed with his Hon. and Learned Friend
in thinking, that the immediate solvency and good ma-
nagement of a bank was of still more importance. He
did not think it necessary to enter into the history ot
the various attempts to alter the law on this subject. He
had at all times found public opinion to be against
limited liabilities. In 1836, on the motion of his Hon.
Friend the Member for the Tower Hamlets (Sir Wm.
Clay), a Committee on: Joint-Stock Banks was ap-
pointed. That Consmittc e sat for three successive ses-
sions. His Hon. Friend examined several witnesses, "
and had the opportunity of ascertaining the opinions
of practical men, and of expressing his own opinion on
the subject of limited and unlimited responsibility, but
not one single word was said in the report of that Com-
mittee on that subject. That was rather a
strong proof that his Hon. Friend could not
prevail on the Committee to express an opinion one
way or the other. Gen. Austin was examined before the
Committee, and he said,—" There is a great difference
of opinion as to unlimited liability and limited liability.
I think that a middle course may be steered." Mr.
Stuckey was also examined, and he gave it as his opinion
that " Persons of wealth and respectability would join
with limited liability. I every day hear of persons of
property taking shares." Mr. James was of opinion that
" Unlimited responsibility affords better security. Un-
limited responsibility does not prevent persons from em-
barking in joint-stock banks, properly conducted." Mr.
Gieb:ns stated that " A charter of limited liability might
induce respectable persons to purchase shares. It might
make the directors more negligent in looking alter the
concern. I think there might be danger to the public
in limiting the liability." Then came Mr. Robertson,
who said—" Wkere there are small stock banks, with
small proprietaries, I think the security which they
would give to the public would not be of that unquestion-
f able description which it ought to be." Then there was
an Irish Member, Mr. Callaghan, who stated—" I think
the condition of unlimited liability is the better
of the two; it is a security to the public. In the in •
stance of the late bank that stopped we have full
proof of that." There were only two other witnesses
examined upon that subject; the one was Mr. Samuel
Martin, who said—" I do not see myself any public ad •
vantage or security to be derived from limited responsi-
bility.' The last witness was a gentleman whose name
was often mentioned in that House as one of the highest
authority upon all commercial affairs—Mr. Samuel
Gurney. Ile was asked—" In reference to the system
of joint-stock banks, do you conceive it would be an
improvement or at disadvantage to the present system if
joint-stock banks were permitted to be established with
a limited liability? I think it would be a very serious
addition to the evils of the case." What he had thus
read must leave a decided impression on the House that
the weight of evidence of the majority of those who
were most competent to give an opinion on the subject
was distinctly against the principle of limited liability.
His Honourable and Learned Friend had said there
were two points that would be obtained by limited
liability coupled with the publicity of the accounts.
Now, as to the publicity of the accounts, his Honourable
and Learned Friend appeared to place more reliance on
that circumstance than experience induced him (the
Chancellor of the Exchequer) to do. Then his Hon. and
Learned Friend was ot opinion that limited liability
would command greater confidence than unlimited ; but
he (the Chancellor of the Exchequer) did not think
there was much in that argument. He did not believe
that a bank founded on limited liability would, in the
case of a panic—which it was said generally occurred
every ten years—prove to have obtained less credit—at
least, credit sufficient to get everybody into a scrape—
than a bank founded upon the principle of an unlimited
responsibility. Upon the whole, he must say, from
what they had seen of late days—that as to a restricted
confidence being placed upon a limited responsibility—
the extraordinary sums which had been vested in rail.
ways completely refuted that supposition, while the
utter falsification of accounts and the utter mismanage-
ment of those concerns must convince every impartial
mind that neither in the case of restricted confidence nor
in the accuracy of accounts was the argument in fa-
vour of limited liability. Upon the question of insole
vency, no man could entertain the slightest doubt that
a bank, where all the partners were liable to the full ex-
tent of their property must afford a better secur;t I than
where the partners were only liable to a limited extent.
In the case of a bank of limited liability no one would
think et vesting his whole property in it; but in the
case of a bank of unlimited liability the whole property
of the person holding a share in it would be responsible.
Now, unless his lion. and Learned Friend could prove
that a part was greater than tho whole, an unlimited re-
sponsibility must be better than a limited responsibility.
That was capable of mathematical proof. Then came
the question of good management. What was the best
security for good management? Surely it was the con-
sequences that would fall upon the shareholders if they
did not watch vigilantly over the affairs of the bank. It
was true when banks of unlimited responsibility got into
discredit they found themselves obliged to do extraordi-
nary things for the sake of maintaining their credit, but
banks of limited responsibility did much the same. They
paid interest on moneys borrowed and dividends on their
shares out of their capital. In the case of railroads those
establishments were founded on the principle of limited
responsibility—they paid interest on sums borrowed, and
dividends on their shares, but how? Out of their capital.
Within the last six or eight months these railroad
companies—with a limited responsibility—had taken
steps quite as extraordinary and quite as dishonest as
any body founded on unlimited responsibility ever did in
this world. It was alleged that there had been great
mismanagement on the part of joint-stock banks. lie
admitted the fact, but it had not often arisen from their
having invested not only their deposits, but their paid-
up capital in securities which rendered it not immediately
available when wanted? Neither a limited liability, nor
the publication of accounts, could protect under those
circumstances against failure. What was the best se-
curity for good management? The degree of interest
which the parties felt in seeing that their concern
was so conducted as to protect them from loss. If,
then, a party was liable to the amount of 10,0001. he
would feel a greater interest in 16oking after the ma-
nagement of the concern than if he were liable only
to the extent of 100/. But the principle advocated by
his Hon. and Learned Friend was quite the re-
verse of this ; and it was one which appeared to him
to be contrary to mathematical truth, to all thd prin-
ciples that regulated human action, and to the dictates
of common sense. In the United States the principle of
limited responsibility was acted upon; but had there
been no failures there? Now, in Scotia-el, where the
principle of unlimited liability prevailed, the failures
were remarkably few, while in the United States ho
found it stated in a book written by Mr. Gilbart—a most
eminent practical banker—that no less than 165 char-
tered banks had failed in America. In his History of
Banking in America, that gentleman said—" Unlimited
liability gives greater security to the public." . • • •
" Unlimited liability is to a certain extent a guarantee
for prudent management."
cases even this has been found to fail, are there no
failures on the other side? Has not limited liability been
also tried and failed? Ara the 165 chartered banks that
have failed in America to go for nothing?" The Right
Hon. Gentleman concluded by sas ing that he thought he
had shown that the principle of limited liability was no se-
curity whatever against mismanagement. He did not at
this time consider it necessary to go at greater length into
the question. He agreed with his Hon. R r. d Learned
Friend that the two main points were to secure imme- I
dilate solvency, but still more good management; but he
did not conceive that these two objects were so likely to

be attained by the adoption of the principle of limited
responsibility instead of unlimited responsibility, and
therefore, as he wished to take issue upon the question
as to which was the most advantageous mode, he should
resist the introduction of the Bill of his lion. and
Learnsd Friend, which was based on the principle of
limited liability.
Sir W. CLAY supported the motion for the intro-
duction of the Bill. Lord Liverpool, Mr. liuskisson,
and Lord Ashburton were in favour of banks of limited
liability, and it was solely in consequence of the apposi-
tion of the Bauk of England in 1846 that the experi-
ment was prevented from being made. He bad not a
moment's hesitation in saying that if the present princi-
ple were to be maintained he would much rather go back
to the old system that existed prior to 1826; for it was
impossible to deny that the private banks of that period
were incalculably better than the joint-stock banks of
the present day.
Mr. CARDWELL considered this to be a very simple
question—it was a question as to the application of the
rules of ordinary common sense to the transactions of a
very familiar business, the business of banking. The
question was, how were they to obtain well-constituted
and well-conducted banks ? Was it by requiring that
every person interested in them should be under the
serious responsibility of being liable to the whole extent
of their fortunes, or would they allow persons to whom
a few thousand pounds was a matter of comparative in-
difference to place that money in an institution where
they expected a high rate of interest, but who might be
careless about its safety, and therefore not vigilant as to
the mode in which that business was carried one In re-
ference to this question, Mr. S. Gurney having said before
the Committee appointed on the motion of the Hon. Ba-
ronet (Sir W. Clay), " I think we should retain all the
evils of both systems and none of the advantages of
either," the lion. Baronet asked this question, " Have
the goodness to state what are the evils we should
retain of the system of private banking ?" He an-
swered, " We should have a security interior to that
which most private banking establishments give, and,
generally speaking, a less safe system of manage-
ment." That was the language of Mr. Gurney in 1836,
and it was the language of experience and common sense
in 1849. It was proposed that no additional bank should
be established without the sanction of the Board of Trade.
Considering the effect of such a provision on the colt-
mercitl interests of the country, he thought it needed
very little observation to see its utter impracticability.
Then it was proposed that a portion of the funds of the
bank should be invested in public securities. The effect
of this would be to enormously increase the price of the
funds in good times, and proportionately depress the
price in a period of pressure. As to the publication of
accounts, he had received a letter from a gentleman who
was himself a conductor of a joint-stock bank in which
he said that—" I do not believe that any mode of
stating the accounts could be devised that could
enable the public to judge of the state or unworthiness
of any particular bank, or that any auditorship would
be a satisfactory pledge for its real position." The
writer went on to say—" I have a very strong opinion
that if you limit the responsibility of shareholders in
joint-stock banks you will take away from the public
the only really valuable security that they possess; and
that any law establishing joint-stock banks with limited
liability would be most objectionable as regards the
safety of the community at large. Without the power
and ability to scrutinize every bill and account of a
bank the publication of its assets, &c., would only be
like to deceive. By carrying forward as good securities
that cannot be realised, bills overdue and unpaid, and
debts owing by parties who have not met them with re-
gularity, it is obvious that accounts may be made to as-
sume any aspect that may best suit the views of those
who have the management of a hank or any other large
concern." Was that act consonant with every day's
experience? He had had a document tent to him which
was not altogether dull or unassuming; he had received
it from a gentleman of the highest respectability. It
purported to be the prospectus of a joints-stock bank, but
ho did not guarantee its accuracy, therefore ho would
not mention names, but give it as an imaginary case.
Suppose the bonds of a certain township near Liverpool,
amounting to 70,0001., on which no interest was paid : "The
revenue of the township barely meets its current ex-
penses; there are bonds amounting to about a quarter
of a million which have a prior claim both for principal
and interest before anything can be paid towards this
debt either in interest or principal. The value of these
bonds, amounting to 70,000 0001., is nil. Collieries and
mines, 40,0001.; value 9,0001.; bank-house, 21,3751.;
value, 10,0001.; loss on bills and accounts, 30,0001.;
value nil; loss on bills and current accounts at branches,
52,5001.; value nil. Total, 213,8751., from which deduct
19,0001. as estimated value of property, leaving 194,875/.
The capital as per last report is 149,4731.; the esti-
mated loss beyond capital is 45,4011." Now, just ima-
gine a bank in that condition.—(Hear, hear.) The
Honourable Baronet (Sir W. Clay) would no doubt
argue that with a bank of limited liability such losses
would never have occurred; but he asked the Hon.
Baronet to give proof of that, and not be content
with assuming, that because there had been failures
with banks of unlimited liability, there would be no
failures if the liabilities were limited. He (Mr. Card-
well) would venture to express his belief, that if
there was any business more than another in which
they should abstain from limited responsibility, and in
which they should render gambling impossible, it was
that of banking. Banks were the great reservoirs to
which the streams of commerce flowed, and from which,
in times of pressure, came the supplies which commerce
required.—(Hear, hear.) Under these circumstances
the calamity in a district on the failure of a bank was in-
deed fearful. He would repeat the early part of the
speech of his Hon. Friend (Mr. Headlatn), sentence for
sentence, and word for word, in which he had pressed
upon the House the sufferings and calamities which had
occurred, and he would say that if, notwithstanding all
the vigilance of private banks, and all the wide resources
of joint-stock banks, those sufferings and misfortunes
had occurred, they should be careful not to aggravate
those calamities by establishing that kind of bank
which, in the expressive language of Mr. Gurney,
" will unite all the evils which both possess, with none
of the advantages of either."—(Hear, hear.)
Mr. W. BROWN said, that the reference which had
been made to the American banks was most unfortunate;
considering that in 1837 nearly 700 banks of limited
liability had failed in that country.—(Hear, hear.) In
consequence of having resided nine or ten years in
America, it was within his own knowledge that many of
these banks were complete jobs from the commencement
to the end, and had led to great abuses in the banking
system of America. With this experience, he did not
feel disposed to allow the establishment of banks of
limited liability in this country. He opposed the mea-
sure of his Hon. Friend, therefore, because he considered
it would be injurious to the general interest of England,
both at home and abroad.—(Hear, hear.)
Mr. MACGREGOR also opposed the measure, on the
ground that the establishment of joint-stock banks with
limited responsibility would be a great misfortune to the
country. With reference to the question of security, he
begged to remark that the people of England did not
consider, that the three chartered banks there gave any
greater security to the shareholders than the other banks
which existed. Ho was glad that the Bill of 1844 pro-
vided that in future no joint-stock bank should be estab-
lished in this country except upon the principle of
extended security to the public.
Mr. HEADLAM having intimated that lie would not
trouble the House by dividing,
The motion was, by leave, withdrawn.
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