The Sun.
London, England, 1857-12-09 00:00:00

would now in a very few words proceed to state the
stature of his case, and the proposition which he meant to
ground on it. He contended that in periods of state pro-
sperity, when there was no pressure on the money mar-
ket, the mismanagement of joint-stock banks sowed the
geode of future commotion, for these banks, possessing
unbounded command of capital, were enabled to foster
idle speculations, only to be overthrown by the first
moment of pressure on the money market. The second
objection was, that unlimited liability enabled these
banks to incur an unlimited amount of debt, thereby
precipitating their fall when the panic came. Whenever
evera
panic or pressure came, either from unfavourable
ex-
changes or bad harvests, then the inflated credit of the
joist-stock banks collapsed, and the state of things oc-
curred which was described in the Bank directors recent
letter. On receipt of that letter the Government
and the result
did
what they had previously done in 17
was the same in both cases, namely, that the country,
after severe disaster, at last righted itself. The remedy
was only temporary, but at neither period was anything
permanent done to prevent evil in future. Having ex-
plained the manner in which capital accurnu,a;:ed in
joint-stock banks, first by calls, and secondly by deposits
at high interest, the hon. member said that their machi-
nery gave them the power of mortgaging the whole
property of a district, and thus of acquiring unlimited
credit in the money market. From this it followed that
however great might be the mismanagement, of the
bank, it was always able to borrow money under the
principle of limited liability. In fact, a course was fol-
lowed by the corporation which no shareholder dared
attempt in his inlividual capacity. Oae of the most
injurious of the practises of these banks was that of re-
discount. The profits on such transactions was the
difference of discount between the heal and. London
money market, and therefore there was al ways a
temptation to take in speculative paper. But this was,
in short, nothing hut selling the cr,lit of the general
shareholders. The bank thus became I,.rgqiy indebted
to the money market, and was in consequence in a
thoroughly false and unsound position. A bank in such
a position was al Nays liable to have its advances stopped,
and when they were stopped there was then nothing for
it but to close the doors and su-pen 1 payment. He must
admit his conviction that this practice of re-discount had
not prevailed in the London joint stock banks. It would
be found that whenever a failure occurred the paid-up
capital had been squandered, and this generally from
something more than a mere error of judgment. When
a bank found itself in such circumstances the law should
enable the shareholders at once to wind up, or, if they
wished, to renew their capital ; but as the law stood it
was perfectly possible for a bank to go on after all its
capital had been squandered, on this abused credit of the
shareholders. From year to year it would go on from
bad to worse, paying larger.sums every time for accom-
modation, and in versos other ways it was compelled to
carry on its business in an un-economical manner until
at length the time came when failure was nurnedia:ely in
sight, and then if the wealthy shareholders held on for
a few years they got rid of their shares, and left the
burthen of the loss on the poor and helples4. With such
temptations it was no wonder that business was carried
on until the occurrence of a panic in the money market,
when closure was inevitable and whole districts were
ruined. It was unlimited liability that led to all this, by
encouraging mismanagement, and permitting uubounied
credit. It was generally believed that this unlimi-ed
liability was first established for the benefit of the pnbl:c
No such thing. It a-as forced upon the Goverainent of
the day by the Built of E with a view of
preventing joint stock hanks from becoming formidable
rivals. Previous to 1826 joint stock banks were not
lawful, and the private banks were on the principle
of unlimited liability. The Bank of England was the
only establlshment whose liability was limited. The
private banks all failed in 1321, and the government esta-
blished joint stock banks in order to crve greater security
to the public. Great sagacity and jo"dgment were shown
by Mr. Huskiseon and Lord Liverpool at that time,
and their object was to establish limited liability ; and
they would have dons so but for the opposition of the
Bank of England. Toe hon. member here quoted the
opinions of Lords Liverpool and Althorp and Mr. Hue-
kisson, all of whom were, he said, for limited liability,
but were obliged to abandon the cause in consequence of
the opposition of the Bank of England. He hoped now,
however, better things, as the recent conduct of the Bank
directors had evinced a much more enlightened spirit.
Some of the evils which bad occurred in the case of some
of the joint-stock banks had happened in reference to the
chartered banks of this country, and if they turned to
Scotland they found the Bank of Scotland, which was
based on the limited liability principle, not only main-
taining its position but assisting other banking establish-
ments in tiding over a period of difficulty, while the
Western Bank of Scotland and the Glasgow Bank,
wherein the liability was unlimited, were failing, and
bringing loss and ruin both upon the shareboldeneand
depositors. When in 1849 be brought forward the sub-
ject, unlimited lability was the general principle recog-
nised by the law in reference to joint-stock partnerships
—the task he undertook in urging upon the house to
make an exception in favour of joint-stock banks was
therefore then the more difficulty, Now, the principle of
limited liability was the rule, and unlimited liability the
exception ; and Lord 0 verstone, who was at one time
one of the strongest advocates for upholding that prin-
ciple as respected j Ant-stock banks, now admitted that
there was no necessity for maintaining it. It appE aced
to him that the time bad arrived when the House of
Commons ought to grapple with the au jest, and decide
upon it finally ; for anything like doubt in respect to
the law of banking was almost as dangerous as the
adoption of a wrong principle. There was a pre-
cedent for the course he recommended. It was not
long since the house adopted a resolution in favour of
the limited liability principle in regard to general partner.
ships, and the result was that a measure to carry that reso-
lution into effect, was introduced by the government. If
_they possed this resolution, he had no doubt that ministers
would deal with it in the same way, and introduce a bill
embodying its principle. There was every reason to believe
therefore, that, if carried, it would be speedily made
the foundation of substantive legislation even during the
present session, In conclusion, he called upon the
house, by affirming his motion, to prove that they had
gathered wisdom from the recent disasters.
Mr. COWAN, who had given notice of an amend-
ment to the effect "that as, from recent disclosures
affecting the management of certain banks and other
joint stock companies, the interests of large holies of
shareholders have been seriously damaged in consequence
of delusive representations and protracted mismanage-
ment, it is the opinion of this house that a searching
inquiry should be instituted into the correctness of the
allegations referred to, with a view to consider whether
more efficient means may not be provided in future for
securing the interests of shareholders in joint stock com-
panies," stated that he was utterly unconvinced by the
arguments of his boo, friend the mover of the resolu-
tion. Hie hon. and learned friend had referred to the
Bank of Scotland ; but ef all the banks of Scotland
there was scarcely one besides that in which limited
liability was the rule. The unlimited liability of the
shareholders afford a necessary, and the best, security
that the liabilities of the bank vroul I be met. He was
aware that in the Scotch banks that had failed, as well
as in the English banks, the shareholders—many of
them being persons in humble circumstance, who in-
herited the shares as legacies—had suffered mainly, but
it was some satisfaction to know that the creditors had
been paid. He looked upon the principle of limited
liability, especially when applied to banks, as fraught
with danger to the commercial world • and he was glad
to find that Mr. Marshall and Lord durriehill, the com-
missioners appointed to inquire into the law of part-
nerships in Scotland, took the same view.. He was
serry to say that the public of this country displayed a
Considerable amount of ignorance is regard to the
Scotch banks. For himself, he believed that the
banking institutions and the parochial schools of
Scotland had done more to elevate the moral and
intellectual character of the people and to develop
the resources of that country than anything else.
He would like to know how his hon. and learned friend
would; under his principle of limited liability, protect the
interests of the poorer class of depositories --the working
classes—who made the banks the depositors of their
savings, and who were certainly entitled to some consi-
deration at the hands of the Legislature. The balance-
sheet of the Western Bank of Scotland showed that there
Were 26,193 depositors in that institution whose deposits
were under 50/,, and whose average deposits amounted
to only 191. 12s. Bd. each. By the operation of that
principle which he held to be so valuable in Scotland
these persons would all be paid, bat if limited liability
were the rule, all their money would probably be lost.
To the value of the principle of unlimited liability he was
happy to say that tho Government had during the
recent disaster borne emphatic testimony. The house
was probably aware that the noblemen and merchant
princes of Scotland, when the failure of the Western
Bank-took place—relying upon the security which the
unlimited liabiality of every shareholder gave, that all
its liabilities would be paid in full—came forward and
offered to take the notes of that bank in payment of rent
and in discharge of commercial obligations. But perhaps
some hon. gentlemen were not aware that the Comptroller
General of Inland Revenue issued a circular, offering to
accept those dishonoured notes in payment of taxes.
(Hear.) This was a circumstance he wished particularly
to impress upon the Chancellor of the Exchequer, as
proving the confidence which was felt in the existing
IPineiple and hemigbtadd that nothing had contributed
*sore athe abatement of the panic. (Hear.) Ile
ibmiltbt some inquiry ought to take place into the mai-
"11444", amounting in some instances to breach of
tarecuttz-dowiivithhijonhintht e had heard so much of late, as con-
instance, there was stock companies. In some banks, for
reason to believe that dividends had,
for a series of
b bring perhaps
declared of 8 or 9 per cent.
per annum,
, and
trattniirr times as much as had
been fairly earned
eclared taraen yvbe_causeother competing
urnieaainesnd7. In some, too,
gehiletab!wi'hirlee tat
thed available
business had been diverted to large°tractrying "u
the
Wive objects foreign to banking operatiogie;nd sr"-
trusted to the hands of two or three individuals, These were fit subj.cts for investigation with ‘a
'teo
the application of a legiNlative remedy,
n.
either evil practice WAS was that of getting up ,46a,tis
bills of exchange_aecammoeation bills is mad without
value. He looked upon the issuing of ouch bills as akin
to the crime of forgery, and he thought it ought to he
undo an indietab:e offence, 110 trusted that Govern*
silent Woolf adopt the suggestion of the right hon.
member for Oxford Ilniver.ity to institute an inquiry,
and in that hope, understanding that his amendment,
which did not point out how the inquiry should take
place, was eomewhat out of form, be would withdraw it,
and content himself with opposing his hon. and learned
friend's resolution with a simple negative. (Hear-) He
considered the house would fad in its duty if—after the
sad experience we had recently had, and the lamentable
catastrophes that had occurred—it did not take some
-top even before this eboit preliminary session terl4l-

Mr. WEGITELIN said he was unable to support the
proposition before the house. He felt that the applica-
tion of the principle of limited liability to the paid-up
:Capital of banks would be unwise, not only as regarded
the banks, but as regarded the interests of the public. It
was certainly true tbatthe principle of the trade of bask-
ing was that it was carried on with the capital of other
persons ; and in that respect there was a marked distinc-
tion between banks and other trading establishments,
eihept insurance offices. If you limited the liability of a
baiik:you limited the credit, which was its sole and true
capital, which was that on which it traded, and on which it
induced people to deposit their money ; and, therefore,
it was fo:- the public interest that banks should be of a
sound and stable character, and that not only should de-
positors be protected, but that in times of pressure there
should be no doubt of the stability of banks, and no &fa-
culty in the circulation of their capital. It was true that
in former times the Bank of England did oppose the
establishment of joint-stock banks. He did not know ou
what principle that opposition was based, bat he was
sure that the Bank of England acted on a sound princi-
ple, and from a desire that a sound system of banking
should prevail in the country : for the difficulties of the
Bank of England were vary great when banking was in
discredit throughout the country. Tie argument that
mismanagements was confined to concerns which were
conducted on the princip'e of unlimited liability could
not, be thought, be maintained. It had occurred under
both systems; and when it was said that a prudent man
would not enter a concern carried on under unlimited
liability, the facts disproved it ; for many of the most
wealthy men and men of large capital were members of
joint,tock banks in London, and the same was the case
in Liverpool. As far as prudence was concerned, he con-
fessed that he should not himself like to belong to a con-
cern carried on uuder unlimited liability,' 'unless the
capital was so large as to meet every liability which
might occur under any state of mismanagement. An
argument had been used in favour of the limited liability
of banks which certainly had weight with him, and it
was this—that in the event of mismanagement in a bank
under unlimited liability, and the shareholders becom-
ing cognisant of it, yet knowing that in case they exposed
the affairs of the bank they would probably stop its credit
and bring its whole liability on themselves, they would
be rendered timid, and they would not have courage to
deal with the mismanagement and bring it under exami
nation. There was some force in that areument, and in
the supposition that if the liability was limited the share-
holders would not feel that timidity, and the mismanage•
ment would not be allowed to go as far as it otherwise
would. There was force in that argument, and when he
said he was not prepared to support the motion of the
hon. and learned gentleman, he meant to say that if he
had proposed that there should be a large reserve of paid
up capital, as was the case in the colonial banks, of
double or treble the amount of the liability of the
banks, he should have been happy to have supported it.
There was an objection in his mind to the mixing up
sound with unsound hanks in the same neighbourhood,
because persons would be obliged to trust one or the
other of the banks, and so expose themselves to undue
competition and perhaps to loss. An argument had been
used which certainly astonished him, and that was that
unlimited liability was not sufficient for the protection
of persons engaged in joint-stock banks. Now, notwith-
standing that, unfortunately, in the last 25 years, since
joint-stock banks had existed, there had been deplorable
failures in those concerns, he did not recollect but two
instances—that of the Glamorganshire Bank which paid
184. or 19e. in the pound, and the British Bank—in
which the depositors had not been paid ix full. That was
an argument in favour of unlimited liability. As to the
argument with regard to the prudent management of
banki, that applied equally to those under unlimited as
under limited liability. The want of proper management
was the great difficulty in reference to joint-stock banks
in London. You could get directors who were erne-
mental, aristocratic, with good names, bat the difficulty
was to get good managers. It would still be as difficult
to obtain them if limited liability was adopted as in the
case of unlimited liability, He recollected the; when
there was a desire to establish certain joint-stock banks,
owing to the success which had attended those which
existed in London, the great difficulty was to get mana-
gers, and one or two of the companies applied to clerks
in the Bank of England, some of whom had accepted the
offices of managers of those banks, and it was a compli-
ment to the mode of conducting the business of the Bank
of England that such applications had been made.
Still that was the case. He also was of opinion that
the prudent management of joint-stock banks was de-
rived from the excellent traditions of the mode of con-
ducting business in the Bank of England and by the
Lombard-street bankers. It could not be expected
that that principle would be carried out if banks were
extended all over the country ; but you would have
weak and ill-managed banks, and in periods of
pressure like that which had just occurred, in-
stead of one or two joint-stock banks failing, ,
they would go down by the dozen. F.x these reasons
he desired that the proposition of the hon. and learned
gentleman should be modified by the insertion of words
which would require, not only that in joint stock banks
a large capital should be paid up, but that there should
be a large reserve.
The CHANCELLOR. of the EXCHEQUER said be
confessed that he quite concurred in the observations of
the hon. and learned member who brought forward this
motion with respect to the form in which it alas ex-
pressed. The motion was in the form of an abstract
resolution, which was always a form of motion which the
house was cautious in acceding to; and it proposed
"that the principle of unlimited liability enforced upon
joint stock banks by the present law confers upon such
eltablishmente a species of credit dangerous in character
and prejudicial to their management, and is otherwise
hinrieue to the intereete of ale public." Now if hEs bon.
and learned friend had c xeresAid in his motion that the
ot doubtful experlieny liability, and
proposition the hoes
present law, n hich enforced on joint stock leknks the prin-
ciple.of unlimited and loft them no option, was
ought to bo altered, such a
might have entertained ; but he
(the Chancellor of the
conferred on ouch eatawbit
himself by a formulae Exchequer)
was
unwilling to bind
which declared that the present law
in character and pr hart.s a species of credit dan-
gerouspublic. The inference which would
to the interests of the
ought
utd flroove.from these wores
_into
stockalailait unlimited lia-
bilitywould be that the house
iit4ed liability should adapted,
if
t 3 iinmptliferasthivaeretloaldt
haeks
for, if unlimited liability led to such deug„,44
con4e.