LIMITED LIABILITY IN BANKING.
IF the general public is torpid upon the late crisis in its relation to currency and banking, the letters we receive show that not a few individuals are active enough. Some of the letters bear upon what may be called the principles of currency. One correspondent, for instance, propOses, inter ails, to proportion the Bank rate of discount to the amount of bullion ; a plan that Mr. Macleod advo- cates in the second volume of his Theory and Practice of Banking,* but with a more stringent ratio. Mr. Macleod fixes the rate of dis- count at four per centwhen the bullion amounts to fourteen millions, whereas our correspondent would be satisfied with three ; and this difference increases as the bullion declines. Most of our corre- spondents, however, refer to "limited liability,"—the question' which seems next on the cards, and which wonder-working panacea we may perhaps be dosed with before we reach the stage of more stringent regulations for speculative shareholders and severer laws against insolvent bankers. Of course the main if not the only point for consideration is the security of the public—of the customers and depositors. Besides the fact that people would be shy of trusting this kind of banks with their money, almost the only argument in their favour that we have heard of is the greater prudence with which banking business would be conducted when the share- holders were released from all responsibility after having paid up the amount of their shares. One form of this argument is put by a correspondent, "L.," whose letter we print; and it is to the effect, that under limited liability you would get a 'better class of shareholders—a grandee, may be, with "a million," instead of a man with only "ten thousand pounds." We demur to the con- clusion drawn by our correspondent as to the superior caution and
• Bpectator 1850, page 317; where the list of Mr. Macleod is given.
steadiness of millionaires. We think the observation of mankind rather inclines to award the palm for these qualities to men of moderate means. Your genuine speculator is mostly a man with nothing to lose, or next akin to nothing, or else a per- son with so much money and so many ways of using it that he never knows or cares how he stands. It is not your humble prince but your great emperor whose ambition disturbs the peace of the world.
But under the "limited liability" system, it is difficult to see what interest the customers of a bank can have in the property of
the shareholders. Their poverty may not injure them, but most assuredly their wealth can do them no good. When a shareholder has paid down his thousand pounds or any other sum for his shares there is an end of him as regards customers and deposit- ors. If the directors make away with the capital of the bank, he loses what he has paid down, but nothing can touch him farther. Except as matter of gossip to the curious, it matters not to the creditors of an insolvent limited liability bank whether a share- holder has a thousand pounds or a million in his pocket; for not a penny can they reach.
Our correspondent L. deprives himself of any argument to be drawn from the superior prudence with which a bank under li- mited liability will be managed whatever that argument may be worth. Substantially he intimates—and the facts seem to support him—that shareholders cannot or will not control the directors, or even acquire a knowledge of their own affairs. He also inti- mates—what is more problematical—that a man with the influence that a million gives, and the commercial shrewdness, knowledge, and means of obtaining information, which it implies, is practi- cally "in the hands of the manager." If these views are true to the full extent, they rather point to the legislative extinction of joint-stock banks altogether, as mere hotbeds of fraud, and rob- bery. They certainly are no argument for our correspondent's wish to destroy such security as unlimited liability gives to the public. And this security, we repeat, is the main thing to be cared for. The shareholders, be it remembered, undertake self-imposed du- ties for their own profit, and guarantee the fulfilment of all the precautions implied in a trust. The public at large are not so independently placed. Legislative joint-stock companies have perhaps more or less of the nature of monopolies ; and this, as the Times often points out in the case of railways, has the effect of limiting or removing competition, and compelling people to deal with the monopolists. In London or large commercial towns, this might not be the case as regards banks; • the public would probably have a sufficient choice ; but in smaller towns, as our correspondent "T. C. H." observes, there would be little option, and in very many places none. The banks would dictate to the public. This question of general security is not altogether to be settled by theories or arguments, but by deduction from facts ; and the facts do not seem to us to favour the system of limited liability If the affairs of the banks whose failure has of late impressed the public mind be looked into, we do not think they will show that limited liability would have prevented their stoppage, still less have paid their debts.
I. The British Bank. The directors divided the capital of the bank, and more money too, among themselves and friends; the manager very promptly followed so excellent an example. 2. The Eastern Bank. Precisely the same course was pursued by ma- nager and director en chef, with even leas regard to appearances than in the British Bank.
3. The Newcastle Bank. One individual in high position, and we suppose with the repute of a millionaire, touched nearly three-quarters of a million.
4. The Western Bank of Scotland. The affairs of this bank have been rather hushed up. What has transpired shows that most culpable if not criminal advances have been made. In this ease there was no lack of millionaires or of great lords to back them. b. The Liverpool Borough Bank. Here one man, also with a mil- lionaire reputation, contrived to finger something like a million. Be- yond a culpable neglect of duty, the directors do not seem to have been criminal.
It is difficult to see how limited liability would have acted in preventing these proceedings. If it had influenced the con- duct of the directors, limited liability would have tended to render them more -reckless than they were, as they would feel that beyond the loss of their paid-up capital their constituents were secure. There is no doubt as to the effect of limited lia- bility on the creditors; they must have put up with "the plank from the shipwreck." We see at Liverpool, at Glasgow, at New- castle, how submissive the shareholders are to the director-in- terest, even when their property is at stake. Would they have lifted a finger had they been secured by a limited law ? The creditors in these banks have the prospect of a good dividend; they would never have got a farthing beyond the shipwreck-plank under limited liability.
The shareholder's question, though secondary to the public security, admits of further discussion. We now pass it by, how- ever, except to remark that we have proceeded upon the pre- sumption that the advocates of limited liability intend the full amount of the share to be paid up. If otherwise, we shall have all the real and alleged evils of the unlimited system as well as the evils of limited liability. The- tenderhearted might still lament over the woes of speculative shareholders compelled by the cruelty of the law to pay their shot.
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