THE UNLIMITED LIABILITY OF BANK SHARE- HOLDERS.
limited liability is of course to produce security. It is held, and we believe justly held, that a secure place for the deposit of savings is essential to the growth of thrift ; which, again, is the very foundation, if not of national well-being, at least of national wealth. That is the argument for Post-Office Savings- Banks, in which deposits are guaranteed by the State, and it is just as applicable to the savings of the well-to-do. In the absence of a State guarantee, it is imagined that security. may be obtained by making all shareholders liable to their last penny ; and no doubt, in the infancy of Joint-Stock Banking, while wealthy men saw in such institutions a chance of enor- mous interest, this security was obtained. As the system grew old, however, this security decreased, and is now, in part at all events, illusory. The Joint-Stock Banks, at the prices current before this last panic, do not yield dividends on their shares in any way proportioned to the risk that holding them involves. The tendency, therefore, of the rich is to sell out, while their places are filled either by the ignorant, who look on "Bank Shares" as excellent investments, or by persons who, having little to lose, are not deterred by any risk from unlimited liability. It is stated that in the West of England Bank, just deceased, even agricultural labourers held shares ; and a list of shareholders even in greater concerns would, we believe, just now astonish the world. Even yet, probably, any probable loss to depositors in any Bank could be made up, but it would be made up after repeated " calls " and lengthy litigation, which would involve nearly as much injury to depositors as the loss of their money. We believe some accounts in a Scotch Bank which failed, though the Bank paid every penny, were not settled in twenty years. It would be almost as comfortable for a depositor to be ruined at once. It is obvious, too, that as Banks gradually fail—and all institutions of the kind have in them a sort of vitality which exhausts itself—the reluctance of the rich to enter them will increase, and the security sup- posed to arise from unlimited liability will become more and more an illusion. There is no security in a legal right to claim the last shilling from a thousand persons who possess nothing. The illusion, if it be one, has, however, two dangerous results. The belief in the perfect security of an unlimited Joint-Stock Bank tends to attract to it masses of capital so great, that there comes a failure in the quantity of brain requisite for its safe management. There is an impression abroad that it is as easy to invest twenty millions profitably as three millions, but it is an utter delusion. No single man, or com- mittee of men, possesses more than a certain range of know- ledge, or can tell quickly whether more than a certain number of bills, or securities, or transactions are safe bases for an advance, and beyond their accustomed range bankers get as bewildered as ordinary people. They know that "Brown upon Smith" is good, but if a thousand Browns upon a thousand Smiths are offered, they have to proceed on information very little better than a guess. At the same time, they are, it must be remembered, under almost irresistible pressure to lend. The public, acting under its impression of the security derived from unlimited liability, loads a Bank with money, and as that money receives interest it must be employed, or there will be a deficit instead of a dividend. The temptation, therefore, to great transactions, transactions "over the heads" of all concerned, transactions which from the mere bigness of them involve risk, is excessive, and is yielded to every day by perfectly honest men. They see a great opening for employing burden- some money, and they follow it. A Scotch Bank this week made the odd announcement that it had only one transaction or series of transactions with a single house involving £100,000; and though the unthinking laughed, Bankers understood well the value of the announcement. The masses of money drawn to Joint-Stock Banks by the absence of limit to the share- holders are, in fact, unmanageable, and become at certain times a distinct danger to the Banks' prosperity. So strongly is this felt, that proposals have been made to tax deposits— there are Members of Parliament who have a sort of craze in favour of that proposal—and that combinations for refusing interest have been seriously suggested, but it would be better to attack the evil at its root. 1.1 the abolition of unlimited liability resulted in the diversion of deposits from few Banks to many Banks, so much the better. Four Banks with five millions would be more useful to the public than one Bank with twenty millions. Vulgar proverbs are as applicable to -the public as to persons, and a community should no more put too many eggs in one basket than an individual. What, however, would happen is not dispersion, but another process. The general body of depositors, lacking the illusory security of their right to ruin all shareholders, would look about for a new security, and would find it in extreme publicity, and perhaps a new kind of audit. The Bank which published the fullest weekly accounts, and got the most trusted financier to verify them, would have the largest deposits at low rates,— 'that is, would be precisely the kind of Bank which it is the public interest to maintain, a Bank about which everything was always known. Again, the prosperity of the Banks derived from unlimited liability is most injurious to them. That seems an absurd thing to say ; but it is true, the system working in this way. The mass of deposited money attracted by unlimited liability was so greatly out of proportion to capital, that while it could be used it allowed of dividends scarcely known in any other business. If the capital was £1,000,000, and the deposits £10,000,000, a profit of 3 per cent. on deposits allowed a dividend of 30 per cent. Twenty per cent. came to be re- garded as a proper rate, and as prices rose in proportion, new shareholders became very sensitive about dividends. Twelve per cent., say, is a capital dividend for an original share- holder, but it is a very bad dividend for a man who has -given £300, or three times the par value for his share. It is necessary, when prices rise so rapidly, to keep up the level of dividend, and this can only be done by employ- ing all deposits at high rates. The effect of leaving money idle is not to reduce dividends from a very high figure to a moderate one, but to reduce them to a figure which the new shareholders regard as beggarly. A man will bear to have his 20 per cent, reduced to 10 much more easily than to have his 5 per cent. reduced to 2. The pressure, therefore, to risk deposits for the sake of earning dividends increases with the prosperity of a Joint-Stock Bank, and when deposits are enormous, as they are sure to be under unlimited liability, is / a source of the greatest danger to the institution. This is so well understood, that financiers say a Bank is often safer for the low price of its shares, which makes moderate dividends look large, and relaxes pressure upon the Directors. That evil is directly traceable to unlimited liability. But, says the Times, why should Parliament interfere Shareholders can register their Banks, if they like ; and why should they be compelled to do it ? Just for the same reason that they are compelled to abstain from issuing notes payable to bearer, because the majority of men and women are very ignorant, very credulous, and very careless, and cannot be trusted to know a good note from a bad one, while their not knowing makes free banking a source of endless perturbation. There is absolutely no argument against free banking which will hold water for one moment, except the ignorance of the majority ; but then that argument is final. The perturbations consequent upon that particular form of human ignorance, viz., the readiness to accept rubbishy notes, would ruin any com- merce, and so their issue is prohibited. Nobody is pleading for the abolition of unlimited liability, because it may ruin Mr. Smith and Mrs. Brown. Let them be ruined, as if they had opened shops and failed. The plea is, that their ruin causes at recurrent periods such perturbation in commerce and finance that the whole community suffers, and not they alone, and that plea seems to us unanswerable. The fall of a Bank like the City of Glasgow Bank shakes the prosperity of a kingdom, and ought, if possible, to be prevented. The most certain pre- ventive is to abolish the unlimited liability, without which that Bank would never have had those millions to squander away. The depositors, without that "security "—which, if we can read figures, will not be a perfect one—would have insisted on weekly accounts, or perhaps have divided their deposits between the Glasgow concern and a more honest Bank.
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