ON

THE GENERAL PRINCIPLES

AND

PRESENT PRACTICE

OF

BANKING,

IN ENGLAND AND SCOTLAND;

WITH OBSERVATIONS ON THE JUSTICE AND POLICY

OF AN

IMMEDIATE ALTERATION

IN

THE CHARTER OF THE BANK OF ENGLAND,

AND THE

MEASURES TO BE PURSUED IN ORDER TO EFFECT IT.

ON BANKING,

&c. &c.

BANKS are by far the most important of all our commercial establishments. They are the fountains of our currency, the depositories of our capital, and at once the wheels and pillars of our trade. Business to any great extent could not be carried on without them; and all who have cash transactions of any kind are more or less dependant on them: the landed proprietor finds them a convenient place of deposit for the ready money he possesses, or a useful resource in case of need; the capitalist, when he deems them safe, can lodge his money with them, receive interest for it, and have it ready when the chances of trade or changes of property may throw a desirable purchase in his way; merchants and traders of every denomination are enabled through them to send money to, and receive it from the most distant places, to raise money when in want of it on the bills which they receive from their customers, to have those bills presented for payment through a channel which in general secures their being duly honored, and to deposit in them that money which any particular occasion, or the current demands of their business require; while their promissory notes furnish the country with a useful and convenient circulating medium, and are in the hands of every one.

They are, therefore, intimately connected with every class of society. Every person who has any thing to do either with capital or money is interested in their stability. But the capitalist, merchant, manufacturer, and tradesman, and all who have large payments to make and receive, are continually under the necessity of trusting them in amounts, the loss of which might prove their utter ruin; besides having daily to confide in them for the negociation of bills and advances of capital, which, in commercial transactions, are continually required.

On this account, a very deep interest is felt in the welfare of banks. Nothing can in any way affect them without exciting the immediate attention of the public, and (if it involve their credit) without producing the greatest possible agitation and alarm. Thus when the slightest apprehension is entertained respecting their solvency, however groundless it may sometimes prove, a run on them immediately takes place. That is, hundreds of people immediately crowd the doors of the banks, to demand payment of the notes they hold, or to withdraw that money out of their hands which they have deposited with them. This puts a stop to their usual banking operations, and people in trade cannot receive that accommodation on which they have relied, and on which the regularity of their payments, and consequently their credit, depends: while, at the same time, no person can make remittances without placing their money in a state of peril, which they can only ascertain to be groundless, by waiting until it is over. All is, therefore, confusion; and the whole community is thrown into a state of apprehension and alarm, which may be better conceived than described.

On such occasions the greatest exertions are always made to allay the fears, and restore the confidence of the public; and very great risks are sometimes run in doing so. It is not unusual for the friends of a bank so situated, to issue out bills or notices, pledging themselves to the public, to take its notes in payment, to any amount. By which measure, should the bank happen to stop, many of them would necessarily be ruined. Within these few years, pledges of this kind were repeatedly issued in favor of the Durham, Stockton, and Sunderland banks, all of whom ultimately failed; but as they were not attended with any serious consequences, it is probable that the banks did not stop payment immediately when they were issued, or perhaps the public may have overlooked the obligation contracted, and, from inadvertency, not have called on the parties to redeem the pledge they had given.

We may, however, form some idea of the inconveniences in which the mercantile world are involved, when people are found wandering so far out of the track of ordinary prudence as to guarantee the security of establishments with whose affairs they have no intimate acquaintance, and whose insolvency would involve them in certain destruction.

Nothing, in fact, can affect the credit of the banks without being immediately felt in a corresponding degree by the public; and the actual stoppage of an extensive banking concern deranges the whole frame of mercantile affairs, and carries confusion, misery, and ruin, into every department of society.

Great, however, as the inconveniences are, which the discredit of banks, and consequent runs on them occasion: and great as are the calamities by which their failures are uniformly attended, they are, both in this country and Ireland, of very common

Occurrence.

By an account printed in the appendix to the Lords' Report on the Bank resuming Cash Payments, it appears, that in the last twenty years (that is, twenty years previous to 1818), no fewer than two hundred and thirty commissions of bankruptcy had been issued against country banks alone; an average of failures, proportioned to the total number of them, in all probability far exceeding that of any other regular business.

Sometimes, as if epidemically, the banks of a whole district will fail together, as was the case a year or two ago, in the south of Ireland. That part of the country was, in consequence, involved in the greatest distress; its trade was materially injured, and a shock given to its prosperity, from which it is said not yet to have recovered. The same event happened also in the counties of Northumberland and Durham a few years back, when the Durham, Sunderland, and Stockton banks failed within a short time of each other. This district, however, was better able to endure it, though the inconveniences generally felt were great, and the sufferers numerous; and, even in this town, to which the evil but partially extended, the want of confidence and the general state of alarm which it produced, must be fresh in the recollection of every one.

Now, while England and Ireland are continually subject to disasters of this kind, it seems an extraordinary fact, that Scotland is totally free from them: the Scotch banks rarely, if ever, either failing or losing money.

No one, I dare say, will, from this, imagine, that there is any thing different in the nature of their money transactions, or that trade is subject to fewer vicissitudes in Scotland than with us. I believe that trade is pretty much the same in both nations, or if there is any difference, that the merchants of Scotland are the more speculative, and less stable of the two. But the true cause of the difference is to be found in the nature of their respective banking establishments: the Scotch banks being joint stock companies, while the English banks are private concerns.

The Scotch banks consist of a great number of proprietors or stock-holders, who contribute, some to the extent of one hundred pounds, some of a thousand, and some of many thousands, with which they form a joint capital, establish a bank, and intrust the management of it to a committee chosen from their body, called a Court of Directors. The English banks, on the contrary,

never consist of more than six partners, though often fewer, and are for the most part managed by one, or at the furthest by two

of them.

To the uniform success of joint stock banking companies, his tory affords but one exception, viz. :-The case of the Douglass, Herron, and Co. (or Ayr) bank, some account of which is given by Smith, page 58, vol. 2nd, of his Wealth of Nations; but if we examine the circumstances which produced that failure, we shall find it attributable to causes which are not likely again to occur, and that as an exception, it establishes the rule.

About fifty years ago, this bank was established in the west of Scotland, by a number of country gentlemen, totally ignorant of business, and entertaining erroneous views of banking. Their object was not to make money, but to furnish capital, (which was then scarce,) to the country at large, in order to promote and improve the cultivation of land, &c. This they imagined could be done by means of a few reams of paper, manufactured into notes. They were unable to see that it was not in the power of any bank to keep more notes in circulation than are wanted as a circulating medium by the country, and that the surplus would inevitably be returned on them for repayment. Conformably to the object of its establishment, the bank therefore issued its notes, with great freedom, in permanent loans, which were immediately expended in agricultural improvements, and when they were returned for payment (having been issued in advances which could not be recalled) it had nothing to pay them with; and was compelled, in a short time, to raise money by improvident expedients, at eight or ten per cent. when it had lent it out to others at five. Such a mode of business was not likely, of course, to be long pursued. The bank came to a stand in about two years, its establishers lost money, and it now remains the only exception to the success of such concerns.

It must, however, be understood that the uniform success of the Scotch banks, applies only to the joint stock companies. Private bankers fail in Scotland, as well as in other places. The pri vate banks in Scotland, however, are but few, and only one or two of them at present issue notes. They keep the accounts of individuals, and transact business with the public banks in the same manner as the bankers of London transact it with the Bank of England. But the credit requisite even to private banks is much greater in Scotland than with us, in consequence of their having to compete with establishments of superior stability, which do business on the same terms.

The only bank failures, however, that I have heard of in Scotland, with the exception of the Ayr bank already spoken of, are