MODERN BANKING.

Colonist, Issue 133, 28 January 1859, Page 4

MODERN BANKING.

(From the London Examiner.) The trade of banking was not introduced into England till after the middle of the 17th century. Sir Dudley North, whose views on most branches of commerce were far in advance of his contemporaries, perseveringly refused to sanction what he deemed a dangerous innovation. When asked where he would keep his money he testily replied, "In my own house; where else should I keep it ?" At a latter period it was humorously remarked that the first person who set up as a banker, and persuaded people that their money was safer in his hands than in their own; must have been a very clever fellow.

Still cleverer should be- those who, after; the recent disclosures of the manner in which the business of banking is conducted on the modem system, shall undertake to persuade the public that their balances and deposits under joint-stock ' management are as safe as if they were invested in the Three per Cents. According to the old-fashioned theory and practice,, the banker, after laying by in his strong-box gold and notes enough to meet any probable emergency, invested the rest of the cash entrusted to him in Exchequer Bills and the funds, or discounted short and sure bills with part of it. The excess of the proceeds over the expenses of his establishment constituted his profits. The notion of paying; interest to a customer never entered his mind. In the autumn of 1857 it was not uncommon for jointstock firms to allow 8 or 9 per cent, interest on rnone}*' left with them; and the directors of some of these houses boasted that they occasionally made as much as 15 to 16 per cent, by employing it. If there be one maxim more unimpeachably true than another, it is the one laid down for the guidance of the recipients of prize-money in 1815, by the late Duke of Wellington—that, generally speaking, high interest is only another name for bad security. What description of bills must a firm be in the habit qf discounting to exact 15 -or,-16 per cent.? What"" kind of trade must they be driving to be able to afford 8 or 9 per cent, to their customers ? The crisis proved pretty clearly the delusion of supposing that the managers could instinctively distinguish the drawers or acceptors who, with ample assets, were merely pressed for cash, from those who were " making things pleasant," " raising the wind," or" flying kites.' 5 Amongst the earliest failures will be found bill brokers of respectability, whose whole lives had been passed in discriminating between good and bad paper. On the 11th of November last, Sanderson and Co. stopped payment, their deposits being estimated at three millions and a half. Yet nothing is more common than to see a joint stock bank appealing to credulity on the ground'of its having engaged some needy lord or member of Parliament to control the management.

The first-rate private banks stood out as long as they could against the innovation of allowing interest, but a custom has recently sprung up which must eventually compel them to depart more or less from the old and sound principle. After stating that the joint-stock banks of London, nine in number, have, by the temptations they hold out, increased their deposits from rather less than nine millions in 1847 to more than forty-three millions in 1857, the report proceeds:—

" The evidence given to your committee leads to the inference that of this vast amount a large part has been derived from sources not heretofore made available for this purpose, and that the practice of opening accounts and depositing money with bankers has extended to numerous classes who did not formerly employ their capital in that way. It is stated by Mr. Rodwell, the chairman of the Association of Private Country Bankers, and delegated by them to give evidence to your committee, that in the neighbourhood of Ipswich this practice has lately increased fourfold among the farmers and shopkeepers of that district; that" almost every farmer, even those paying only £50 per annum rent now keeps deposits with bankers. The aggregate of these deposits of course finds its way. to the employments of trade, and especially gravitates to London, the centre of commercial activity, where it is emyloyed first in the discount of bills, or in other advances to the customers of the London bankers. That large portion, however, for which the bankers themselves have no immediate demand passes into the hands of tbe bill brokers, who give to the banker in return commercial bills already discounted by them for persons in London and in different parts of the country, as a security for the sum advanced by the banker.

The magnitude of these transactions may be inferred from the statement of Mr. Neave, the Governor of the Bank—" We know that one broker had five millions, and we are led to believe that another had between eight and ten millions, there was one with four millions, another with three millions and a half, and a third above £800,000."

To facilitate the circulation of money and the employment of bona fide capital is to augment the national wealth. Let us utilise all our actual resources by all means; but no one can help seeing that this method of investment is especially calculated to promote over-trading, and requires to be rather checked than stimulated. When a banking firm is giving an extraordinary rate of interests for deposits, it will frequently in tbe hope of repaying itself, run risks, which prudence "and scrupulous integrity would condemn. Ought either bankers or bill-brokers .to be encouraged in making advances on doubtful security by the understanding or the hope that, in the last extremity, they may be rescued by the Bank of England or the State? If so, the Bank Act of 1844 is open to grave objections, as limiting the discretion of the "managers, and the late Government were to blame for delaying their Treasury missive of November the 12th, instead (as Lord Overstone would contend) of having laid themselves open to censure for interposing at all. The following passage of the report has an important bearing on this point :-—' "Whatever effect this letter may have had in other ways in calming the public mind and so tending to mitigate the severity of the pressure, it did not immediately diminish the demand for discounts and advances. This continued to increase until the 21st of November, on which day the Bank had advanced in discounts £21,600,000, a sum exceeding the whole amount of their deposits, both public and private; a sum nearly threefold the amount of their advances in July, when the rate was reduced to 5J per cent., and more than

double what they had advanced on . the; 27th of October, when the first bank failed. Half of these loans were made to the bill-brokers, and were partly made up securities which, under the circumstances, the Bank would have been unwilling to accept. They were made for the purpose of sustaining commercial credit in a period of extreme pressure."

It is clearly free to those who are for abiding at all hazards by the strict provisions of the law, to contend that this is a pressure to which the Bank of England ought never to be exposed; and they may fairly urge, moreover, that Government interference will be always open to the suspicion of partiality. If the Treasury letter had been received on the 11th, instead of the 12th, more than one large firm would have been saved; if it had been postponed till the 13th, the greatest ofthe London discount houses would have failed. Lord Overstone's opinion is so emphatically given and strikingly expressed that we think it best to quote it verbatim. After stating that he had no connexion, political or social, with Sir Robert Peel, and never exchanged a word with him on the subject, his lordship continued :—> "The Act is entirely, so far as I know* the Act of Sir Robert Peel, and the immortal gratitude of this country is due to him for the service rendered to it by the passing of that. Act. He has never : bedii" properly appreciated; but year by year the character of that man upon this subject will be appreciated. By the Act of 1819 Sir Robert Peel placed the monetary system of this country upon an honest foundation, and he was exposed to great obloquy for having so done. By the Act of 1844, he has obtained ample and efficient security that that honest foundation of our monetary system shall be effectually and permanently maintained ; and no inscription -. can be written upon his statue so honourable as that he restored our money to its just value in 1819, and secured for us the means of maintaining that just value in 1844."

At the same time great weight is to be attached to the opinions of the antirestrictionists and thoroughgoing freetraders in money, who maintain that the convertibility of the bank-note affords security enough, and that, the Bank directors may be safely left to their own discretion, subject to this all-powerful and self-acting check. But here again we are met by the same description of difficulty which presents itself when it is proposed to abide by the letter of the Act of 1844. The directors could not be expected to look on calmly whilst the commercial world was convulsed; and if the Bank were to get involved in endeavouring to avert or mitigate the catastrophe, the Government would be tempted to save them from the disgrace of bankruptcy by the suspension of cash payments; the upshot being that people can never be sufficiently impressed with the conviction that they will be left under all imaginable circumstances to the consequences of their imprudence. All things considered, then, we have arrived at the same conclusion, or resting point, as the committee; and without saying that the Bank Acts are not susceptible of improvement, we do not yet see our way clear enough to recommend any specific change in either of them.