The Lyttelton Times.

Lyttelton Times, Volume XII, Issue 698, 16 July 1859, Page 4

The Lyttelton Times.

Saturday, July 16. The common topic of discussion of late leads naturally to a consideration of the origin, nature," and ends of banking, the desirability of competition, and the possibility of originating a bank in New Zealand. Such a subject may, we conceive, be entertained without prejudice to the public or hostility to the Union Bank of Australia.

The institution of banking was first devised for facilitating money and trading operations generally, and the transfer of large sums between distant places and individuals; and in the history -of banking no detail perhaps is more striking than the singularly recent date of its existence under the form in which it now exists. Money, or that medium which represents abstract value and is exchangeable for all commodities indifferently, was used long before Judas Iscariot betrayed the Saviour for 30 pieces of silver; and when we consider how cumbrous coin is (1000 of our sovereigns weighing more than 21 lbs. troy), and the danger and difficulty of removing it from one place to another or retaining it safely in a private house, it is strange that for so many ages nothing approaching to systematic banking was s«t on foot; the old accommodation through the Jews and Lombards of the middle ag^es effected by drafts on their correspondents in various cities, for the most part goldsmiths or dealers in jewels or other precious materiel, not being' at all comparable to it for certainty and completeness. Banks now-a-days fulfil many very useful social purposes; they are places of safe deposit for large amounts; they extend the operations of the trader by entrusting to him' money at moderate interest on the security of his own. and his neighbour's honest repute and stability j they supplement with their notes or promises to pay the specie or coined precious metals of a country, always from their natural scarcity restricted in quantity; they' facilitate distant payments, and the collection of certain debts, as promissory notes, dividends on stock, &c.; promote, in fine, almost indefinitely the movements of commerce:; and often serve their customers as unquestionable referees as to character or credit. Banks may be originated by. individuals, by jointstock companies, or by private associations, indifferently, and are described as banks of deposit, banks of issue, either or both—most existing establishments combining the two functions. A bank of deposit, distinctively so-called, is merely a place for the safe keeping of money and transacting affairs for private individuals; it pays no interest or very little to its depositors (some late joint-stock concerns principally excepted), but charges nothing for its trouble in making and receiving payments or for presenting and collecting1 bills, cheques, and drafts sent into it before they are due; it sends out no notes of its own and makes no profit as a bank until it is enabled to use the capital ©£ its clients. To make it possible for such a society to exist and live on it is of course necessary, as in all kindred concerns, that it must originate with proprietors of wealth and respectability; and to fulfil its functions it stipulates or understands that those persons availing themselves of its services shall leave with it sufficient funds for current occasions and payments, over and above a permanent average balance constantly in its keeping-, proportioned to the extent of its customers' ordinary business. The bank can thus calculate how much cash it will be necessary to keep in its hands for the daily use of depositors, and employ the rest in discounting mercantile bills, purchasing securities, and general investment; and its profits consit in what it can gain on speculations of this kind. A bank simply of deposit would never be established if it had to depend on its own capital; it is the use of the capital of others that supplies its expenditure and dividends. A.bank of issue is distinguished as such by the characteristic of circulating notes or promises to pay of its own,, under certain legal restrictions and rules having relation to the amount of paid up capital and securities ; and most banks combine both the varieties of constitution specified. A short sketch of the origin and progress of the Bank of England and other national banks will illustrate the general doctrine and productiveness of banking, especially by appending to it some particulars as to the minor associations.

The Bank of England, the greatest in the world, is a bank both of issue and deposit, and originated so late as 1694, in a loan of £1,200,000 to King William 111., for the public service, the financial state of the kingdom being then from many causes embarrassed. The subscribers to this loan, in addition to receiving 8 per cent, for their advance as interest, and ,£4,000 a-year for the expense of management, in all £100,000 per annum, were also incorporated into a Society denominated " The Governor and Company of the Bank of England." This company at first was simply a large corporation for tradingpurposes, being by irs charter entitled to purchase for themselves and successors any manors, lands, tenements, goods, and chattels whatsoever, and also to grant, demise, and dispose of the same. It was soon after restricted to dealing in bullion only and bills of exchange; and was exempted from all taxes and assessments levied on other property ; and it was subsequently enacted that forging the company's seal on any bill or bank note, or erasure in any bill or note, should be felony. It was also granted the exclusive advantage of the London circulation—no other bank being allowed to issue notes payable to bearer on demand within sixty-five miles ot St. Paul's. And thus favoured and with the state for its constant debtor and in fact customer and patron, it has grown, not with-

out vicissitudes' 'from a commencement of £1,200,000 in 1694 to its present immensity. By the Bank Improvements Acts of 1844 and 1&45, the Bank of England is at present allowed to issue £14,000,000 of notes upon securities of which her loans to Government (then amounting to over £11,000,000) form a part; and whatever paper is issued over the maximum limit above given must have an equivalent in coin or bullion laid by in her coffers. In 1843 she had £20,218,000 of notes in circulation, and held deposits to the amount of £11,520,000, making her liabilities in all £31,738,000, while her assets in bullion and securities amounted to £34,580,000 or £2,842,000 over and above all claims, dues, and demands. The same acts above quoted restrict in like manner the issue of notes payable on demand by provincial, joint-stock, or other banks, and oblige the observance of a certain proportion between the paper circulated and the amount of bullion in present possession of the issuers. The Bank of Scotland originated in 1695 by an act of the Scottish Parliament with a capital of £1,200,000 pounds Scotch, or £100,000 sterling, distributed in shares of £1000 Scotch or £83 6s. Bd. sterling each. The capital of this bank, as its engagements widened, was increased to £200,000 in 1744, and finally has reached to £1,500,000j its present amount. It was not till 1783 that a National Bank was set up in Ireland j the present Bank of Ireland first existed that year, beginning with a capital of £600,000, which has since been increased to over £3,000,000. This mode of gradual development extends to all private and lesser companies also, as well as the system of partial payments on shares taken, at shorter or longer intervals. Thus it.is plain how lucrative the pursuit of banking must be, vast establishments developing from moderate or comparatively small beginnings, and all these institutions in "the course of years not merely increasing their- capital enormously from their profits, but affording very liberal dividends to the holders of stock in them at the same time. The Scottish system of banking has obtained the repute of being the best adapted of all to, the necessities of the public at home; and as some of its peculiarities seem also particularly suited to the requirements of nascent societies, such as that of New Zealand, we will consider somewhat at length the chief advantages derivable from its adoption here, be the bankers who they may, foreign or domestic.

Most of the -Scotch banks are managed on the same principles as the Bank of Scotland, and the details of their business earned out in a like way. It must be borne in mind that the recent exposure of mal practices in some of these banks does not affect the system, but the manner in which it has been abused. One of the first striking1 peculiarities of these banks, and one of the most valuable to the-''community at large, is their system of < cash credits' which may be explained as follows., In addition to dealing in ordinary discounts as in England or Ireland, Scotch banks give to persons in trade, of good character, intelligence, and industry, on their; personal security and that of two or three others approved by the management, a credit "for a limited sum, rarely under £100 or £200. The trader obtaining* such a credit is empowered to draw the entire sum or any part thereof when he pleases, repaying it or portions of it as convenience enables him, interest being charged only for whatever sum he draws. "If a man"—says Hume (Essay on the balance of trade)— " borrow £5000 from a private hand, besides that is not always to be found when it is required, he pays, interest for it whether he is using it or not: but his bank credit costs him nothing except during the moment it is of service to him, and this circumstance is of equal advantage as if he had borrowed money at a much lower rate of interest." This, then, is manifestly one of the most advantageous forms in which bank accommodation can be given, and has had the highest testimony as to its great utility and even moral advantages in the reports of the Lords' Committee of 1826 on Scotch and Irish Banking. "There is also," says the report, "one part of their system which is stated by all the witnesses (and in the opinion of this committee very justly stated) to have had the best effects upon the people of Scotland, and particularly upon the middling and poorer classes of society, in producing and encouraging habits of frugality and industry; the practice referred to is that of Cash Credits. Any person who applies to a bank is called upon to procure two or mdre competent sureties, who are jointly bound; and after a full inquiry into the character of the applicant, the nature of his business, and the sufficiency of his securities, he is allowed to open 'a credit' and to draw upon the bank for the whole of its amount or for such parts as his daity transactions may require. To the credit of the account he pays in such sums as he may not have occasion to use, and interest i 3 charged or credited on the daily balance as the case may be. From the facilities which these 'cash credits' give to all the small transactions of the country, and from the opportunities they afford to persons who begin business with little or no capital but their character, to employ profitably the minutest products of their industry, it cannot ba doubted that the most important advantage are derived to the whole community." The charge for a .' cash credit' is £4 stamp duty, and from ss. to 10s 6d. for filling it uj>. Another valuable attribute of these banks is the fact of their taking in deposits so low in amount as £10, or sometimes lower, and allowing interest upon them according to the ourrent value of money—it was 3 per cent. in 1846. According to the report before quoted, the laboring classes are generally the depositors of small sums in towns like Glasgow ; while in country places like Perth or Aberdeen, they are servants, and fishermen, and that class of the community who accumulate small savings till,they attain to the amount of a bank depositVand the regular banks of deposit and issue are in this department supplemented of late years in Scotland by provident ox -savings barik 'which take i"' at interest also small individual savings until

V . — ■———H I) theya'each/£lO, when they may be transferred || and place'd;in-the greater establishments at M compound interest, and otherwise added to Mtintil^they grow' to £100, or £200 or £300, and Iptly/depositor is enabled to set up as master in *Jj'ajfline in which he has hitherto been a servant, ii"/&r build a house, or otherwise advanrtageously employ it. The amount of deposits in all the banks of Scotland was estimated in 1846 to be not far short of £28,000,000, The "; total amount of their 'cash credits'in 1826 A> was said by a witness before the Lords' ComVmittee to be £5,000,000, of which about one- |[ third was the. average amount taken out of the I, banks and put to practical use. Now these are % items in the Scotch system which, if adopted in New Zealand, would naturally produce to ' £ the public here the same good fruits which ;;/ have .been found to proceed from them at ( v home, and at the same time serve any bank I' so doing in-this colony, as elsewhere, by ex■v tending widely the circulation of its notes. !/, With relation to originating or star tin g banks, { ■, we here repeat what on a late occasion we X" said of Insurance Companies, that such conf; •cerns need for their, opening bufa proportional $jj per cehtage on their share lists to be paid up '% at once; and that this, with the solvency and ]| respectability, of. their directory and stock--f holders, facilitates their early proceedings;

<| while at a later date their own income in f* part and fresh calls at convenient intervals I could be made available for maintaining- a due t relation between capital and increasing- busi- ' r ness. , Banks are now, we believe we have f, before said, obliged to retain in their coffers ! a sum proportionate to their paper issue and ip other responsibilitiesj and their issue is also jj: restricted by the last Bank Improvement I Act of 1845. In the case of the B .iik of I England the sum so retained amounts in coin | and bullion to one-third of its liabilities. If | a bank had to hold in hand metallic money | equal- to its total note circulation, it could | of course gain nothing-; and so its profits I consist in its application of the differj ence between its reserved fund and its gene- ■ ral capital. The establishment of a colonial bank founded on the Scotch model. would beyond question be a great advantage here. With & domestic proprietary and management naturally well acquainted with colonial affairs and necessities, many inconveniences would be obviated, and long delay in communicating with authorities far away rendered unnecesf sary. It would foster native industry and frugality, while its gains would remain where they were.procured, and enrich those from amongst whom. they were gleaned. Many details might be hereto appended, but want of spaqe at present forbids us doing more , . now than giving the paid-up capital of one, : .s or two Scotch joint-stock establishments and the amount of permanent paper issue "allowed to. them under the last enact-

merits. The Central Bank of Scotland, founded in 1834," with a paid-up capital of £55,575, and.465 shareholders, issues in paper. £42,933. The Caledonian Banking- Company, with a paid-up capital of £125,000 and 920 shareholders, issues notes to the extent of £53,434. From such particulars large returns may be assumed, even with the ordinary interest in Great Britain j what would they be here at the 8 per cent, rate of discount in Canterbury ? Whatever may be thought of the suggestion of a new colonial bank, however (and the large capitals put forward by old establishments need not detract from its rationality, seeing their small beginnings), another bank would be a great boon to New Zealand. The public gain by competition in all commercial, enterprise, and the reaction of one bank on another could not fail to be wholesome. •