The New Orleans daily Democrat. [volume] (New Orleans, La.) 1877-1880, 1879-01-15
WHY BANKS FAIL.
ENGLISH sYsrEx AND ITS ABUSES


ENGLIsH SYSTEM AND ITS ABUSES
Rusipess IL Conducted In Scotland.
t.ondon Times. Dec. al
wa, must not attempt to shirk the TACT
that we are living In time OF failures. Let
Z - t,,rn these disasters to account. II we can,
mt at all events do not let us try to forget
,hem. Instead OF covering up the truth, let
~ Law it as bare as possible. We must track
the mischief to It's origin, because in SO doing
Iias our only chance OF preventing new
rrowths Of it in the days to come
The ultimate cause Of the failure OF q bank
q always the same. The business OF banker
q TO borrow money and to lend 1t, and il he
d nrrdent In the conduct OF his business he
,vill always observe two maxims-the first,
rnver to lend to any one where the chance OF
renayment is doubtful; and the second, to
such q proportion of money In his hands
unlant as shall suffice to meet any sudden
loas Of confidence on the part OF his custom
ara causing them to make run upon him
for the withdrawal of their deposits. These
maxims appear to be very simple, but they
are difficult enough to observe in practice
Every banker will admit their excellence, but
there will always be bankers who Will only
learn by the experience Of failure what Dor
rowers they should trust, and how much they
should lend them. One great cause OF UNI
sound business lies in the vague ideas often
held as to what is cash in hand. Bills
receivable, bearing good names on their
face. and other securieties, are
thought to be as good as cash, while
sbe actual stock OF money kept In reserve Is
allowed to run low. Hence 1t happens. when
time Of distrust arrives, that many bankers
ara forced to run out their bills and convert
ible SECURES, thereby aggravating the crisis
that has excited their alarm. Sometimes the
margin of cash has been reduced 80 low that
banker has been obliged to suspend pay
ment temporarily, though his assets are
sufficient to pay all his creditors ultimately
In full. This is q rare occurrence, but it has
happened, and, indeed, the Bank Of England
itself was In this position when the suspen-
sion Of cash payments was decreed at the
time OF the great war. 1t may, however, be
broadly asserted that almost every banker
under temptation to keep too little cash In
hand, and, indeed, 1t s only by reducing this
balance to dangerously small proportions
that banks are able to allow interest at rates 30
little below what they receive upon advances.
The Bank Of England is supposed to be under
an obligation to keep reserve Of cash amount
ing to from 35 to 40 per cent OF Its immediate
liabilities. If any banker or bank manager Is
asked whether he observes a similar rule, be
will answer that he could not make living
under It; the rate Of interest he allows his
depoeitors Is SO near the rate he can charge
that he Is obliged to lend nearly as much as
he borrows, and he does his best to protect
himself against sudden calls by lending fair
proportion on securities at short dates, OF
otherwise easily convertible In precisely the
same way he Is drawn on to lend on risky
securities; and we can all understand how be
tries to bolster up bad debt. deceiving
himself to the last with the. hope that some
how it may be turned into good one.
It is not strange that people who under.
stand how banks have failed should be ready
to cry out that banks ought not to receive
money at interest. They may, however, as
4 say that men should not travel by rail
M " There 10 nothing wrong In the prac-
@t1ce itself, the error lies In the imprudent
competition which induces bankers to offer
Yagher rates than they can safely give. This
CONTROVERSY is, indeed, settled by the logic OF
facts. Bankers must allow interest on de-
posits, or close their doors. The private
bankers OF London stood out against allow
ing interest, but they have had to succumb,
one by one, and they, are, moreover, passing
away. The old firms are uniting their estab-
lishments, and no new firm comes into ex.
i6tence. In the provinces 1t has always been
the practice Of private banks to receive
money on deposit. 1t is idle TO kick against
. usage which Is not in itself open to repro
baton. 1t may also be inferred. as lesson
OF experience, that the day Of private banks
Is passed. Existing partnerships throw out
new branches in adjacent towns to prevent
rivals entering their fields; but the setting
up anew Of private bank in town or country
70 80 rare as to be almost unknown. In Scot
land they have ceased to exist. We cannot
overlook these facts. The question Of the
future Is not whether banks shall be private
or joint stock but whether, being Joint stock
they shall be founded on the principle of linn
tied or unlimited liability. Here, again,
we egf s % RSann to guide
England since the law permitted them to
DO formed on the principle of limited
liability has been limited bank and in two
or three cases older joint stock banks have
We cannot doubt that this process will soon
be greatly extended. The shareholders in the
existing banks will insist on the first oppor-
tunity OF return OF confidence being seized
70 convert their partnerships from unlimited
to limited liability. Existing creditors must,
OF course, have the fullest notice and the
ampiest facilities for withdrawing their &C
counts. but we should not look for any large
Withdrawals; and If the banks are wise
enough to stick by one another, the process
would be practically impossible. The secu-
rlty OF creditors would, in truth, remain al
most unimpaired. II the present system Ia
maintained, responsible shareholders will
gradually retire; and these are the men who
get the earliest forewarning OF unsOund busi-
ness and contrive to slip out In time. When
the bank fails the shareholders are Commonly
found, az ct Glasgow, to be poor people, hav-
Ing nothing but their shares, whose liability
may be In theory unlimited but in practice is
narrowly restrained. 1t is needless. how
ever, to accumulate arguments where the
result Is evidently predetermined. The fact
that no new bank OF unlimited liabIlitv has
been formed for many years shows what we
must expect, and the severe lessons that have
been given as to what unlimited liability
means will accelerate the inevitable change.
II would Ia a pniGfaka IN orrrorc TO-