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Leader (1850-1860), 26th February 1859, Edition 2 of 2, Page 24

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      280 The Leader , [No."466, February 26, ...

      280 THE LEADER , [ No . " 466 , February 26 , 1859 .

      C O M M E B C 111.

      C O M M E B C 111 .

      Banks Are To Be Grateful—Does Not Differ...

      banks are to be grateful—does not differ from the class . . , The reserve is a mere increase of capital ; ana if , as a general rule , the less the capital the greater the profit proportionablv , to add to the capital by a reserve must be as injurious as to add to it by subscription . If aft increase of capital , in the shape of reserve , be so advantageous , why not increase it by subscription ? In truth , an increase of capital is disadvantageous , and the disadvantage belongs to it , whether the increase be by subscription or by saving ; The basis of the success which began before any reserve could exist was not a vast amount of capital , but confidence he

      joint-stock bank proprietors of London will egregiously misunderstand their own true interests if they should seek to check competition , and rely on a reserve instead , to keep management perfect . Without now adding to our former remarks on - the joint-stock banks , we must call attention to the following communication , which supplies a valuable illustration , by comparison of their gains . It applies exclusively to the London and "Westminster Bank ; but no doubt the other joint-stock banks could supply illustrations of equal snuiis .

      the food management which Avon , a same principle continues always operative . By g 9 O < l management will the confidence of the public be . always secured ; and capital is not good management , as we know , and cannot secure good management , as we also know . Why should the public look afe-one time to good management—to large profits as the test of worth—and at another look to the possession of a reserve ? One and the same principle secures the confidence of the public in establishing a bank , and supporting it after it is established . Millions of capital do not command confidence , and it is a mistake to suppose that capital , in the shajie of reserve , can do that which cannot be done by an v amount of capital . ..

      A reserve ensures confidence f toin being supposed to be a proof of good management , and if it tend to deteriorate management , it will in the end diminish confidence , and diminish the power and profit of a bank . Pride proverbially leads to a * full and extreme self-confidence and forfeits the confidence of others . A large reserve may readily make the manager of a bank careless ; it may weaken his discretion , arid may . make him think it perfectly safe to negotiate bills , or engage in transactions which he would otherwise reject .

      Then , might come losses of money , followed by loss of reputation ,- and thus--the reserve—a large capital which must be employed—by inciting to negligence or hazardous enterprise , would lessen the public confidence , and be injurious to a bank ; It can only be continuously successful by the same means—good management—rwhich made it successful at first . A large' reserve has no tendenqy to secure good management , and may hurry a bank into rum .

      One great element of the success of the jointstock banks is the publicity of their proceedings . Another is the competition to which they are all exposed . The constitution of the Bank of England , and the various regulations which grew from its connection with the Government , including its monopoly of the issue of promises to pay , & c , has always prevented complete freedom , and was the cause of the very unwholesome state of banking which existed amongst us for a long period , and is not rot wholly remedied . In particular , the l ' estriction on banks issuing their own promises to pay ' arf libitum has been productive of prodigious mischief . The consequence of such an issue , checked by rival issues , by the wants of the public , and by the

      obligation entered into by the issuer of the note always to pay on demand , is to supply day by day a tost of the good management of a bank , and of its solvency . . It ' must be always ready to l'edeeni the notes which its rivals and the public are continually returning to it . As the rule , each bank makes all its advances on its own notes , and the issue of those , therefore , informs its rivals and the public of its proceedings , and tends to ensure their correctness . The free issue of notes of a small denomination by rival banks in Scotland has been ,

      RESERVE OR DIVIDEKDS . ^ -POLICY OF JODfT . STOCK BANKS . This question deeply concerns the future management of joint-stock banks . Shall the shareholders call on the directors every half-year to distribute amongst them all the earnings of every bank ? or shall they , as is said , prudentially provide a fund as a contingency against losses ? Public opinion is very generally in favour of the latter ; and one public writer , to quote a specimen , thus expresses himself : — " £ vor is the commendable policy of forming a sti-ong reserve neglected .

      Attention to this point is one of the most useful modes wherein the joint-stock banks may signify their gratitude for the liberal support extended to them by the public . An inordinate appetite for dividends on the part of bank shareholders ought always to be checked by a prudent board ; for the gradual accumulation of a strong reserve fund is justly regarded as affording the strongest possible security " to all parties . Were the whole of the profits divided from halt-year to half-year , af ter the fashion of our railway companies , a heavy loss falling oh any one of the banks might completely

      cripple it for a time . " Analogies are often a , source of error , and we will at once say , therefore , that the success of the railway depending on the accurate , performance daily of an immense quantity of work , with very complicated machinery , is continually liable to great and unexpected'aeeidents , losses , and impediments , and is required by prudence to provide beforehand for such contingencies . A bank requires no other labour than that performed by its clerks ; and all the contingencies in them which it has to guard against is sickness or dishonesty , for neither of which is a reserved fund in the least necessary . The contingency of losses in a bank is an affair of management analogous to keeping time in starting trains , and in both cases success will depend on

      discretion arid vigilance , and not on a reserved fund . The analogy therefore on which a resez * ved fund , so necessary fbr railways , is applied to justify a reserved fund for banks , does not hold g ood . There is another similar analogy to be noticed . Individuals require a reserved fund to provide : against sickness , and accidents , and for old age . But a bank is not subject to sickness , ought not to be liable to accidents ; and old age with continual and equal care , is , for a bank , a source of strength . It does not need , a , reserve fund for the same reasons as individuals need one , and what is prudent in them may not be prudent in joint-stock banks . Having thus disposed of two misleading analogies , we pass on to consider the principles by which . . thequestion "Reserve or Dividends" should be really decided .

      It must be admitted that the public generally regard the formation of a strong reserve with approbation , and , as far as it serves to gain and increase confidence—the sole source of successit is recommendable ; but if the public cease to look on it in this li ght , the recommendation ceases , and a change in opinion therefore puts an end to this advantage . The reserve is only a portion of profit , and the amount or rate of profit is the real test of good management arid tlic justification of public confidence . The censure conveyed in the words , " inordinate appetite for dividends , " applied to shareholders , implies that a part of « rthc public dpes not regard with favour additions to the reserve , and would bo better pleased if the fund were

      distributed . Other portions of the public may come to entertain a similar opinion , and then ^ his argument is at an end . If the amount of profit , year by year , bo the real and only test of good management , and if the reserved fund have a tendency to diminish the amount or the rate of profit , the public will , erelong , we may expect , regard an accumulation of reserve with disfavour ; and then , instead of being a passport to confidence , it will be a barrier , arid will injure the banks . The increase of reserve will , on this reasoning , bo a foolish way of showing *' gratitude , to the public for the ljberal support extended to them . Sentimentalities are rarely just , applied to trade , and this one— -borrowed from puffing shopkeepers , which represents the 'mutual aervjee of bankers and clients as a matter of favour , for whioh the

      accordingly , the moans much more than any other circumstance , of keeping those banks right , and preserving for them the public confidence . Amongst them , for a long period , insolvency was unknown . The issue of notes 15 y private bankers , which some of our political economists and the Legislature have denounced , is tlie very ark of banking safety . It is a natural arid necessary conr sequence of banking that a banker should exchange his own small notes , payable on demand , for biHs and drafts ; and to allow every banker so to do is to ensure the stability of banks . Oompetitipn amongst them is the connective of individual errors ; and the

      Profits Of Joint-Stock Banking. (From A ...

      PROFITS OF JOINT-STOCK BANKING . ( From a Correspondent . ') It appears from the annual report of the London and Westminster Bank ,, that if 1 , 000 / . had been invested in the shares of that establishment in January 1834 , and sold out at 48 / . per share in January 1859 , a period of twenty five years , it would have 2 > roduced 2 , 400 / . It appears also that during this period of

      twentyfive years , the dividends and bonuses paid on this 1 , 000 / . would have amounted _ to 2 , 015 / .: —the produce of the capital and the dividend and bonuses together would therefore have amounted to 4 , 415 / . If , during the same period , 1 , 000 / . had been invested on . mortgage at 4 per cent ..,. the party would have received back liis principal , 1 , 000 / ., and 1 , 000 / . in interest , making together 2 , 000 / . t—being 2 , 4 ] 5 / 1 less than the produce of the investment in London and Westminster Bank shares .

      Further— -in the year 1841 , the holder ¦ 50 shares , on which 1 , 000 ? . . had been paid , became entitled to 16 shares at par . The party taking these shares would have to pay 320 / . In January 1859 they might have been sold for 768 / . In . the meantime , he would" receive in dividends arid bonuses 529 / . 12 s . making together 1 , 297 / . 12 s . Had the same sum ( 320 / . ) been invested hi mortgage at 4 per cent , the mortgagee would recuive back his principal , 320 / ., and interest , 230 / . 8 a .,

      making together 5501 . 8 s . . . Again , in the year 1847 , a holder of 66 . shares ( 50 and 16 assigned in 1841 ) , on which 1 , 320 / . had been paidj became entitled to 16 shares at' par . The party taking these new shares would have to pay 320 / . These shares , if sold in January 1859 , would yield 768 / ., and in the meantime they would have brought to the holder 408 / . in dividends and bonuses . If this sum , 320 / ., had been invested on mortgage at 4 per cent ., it would have produced in . interest 153 / . 12 s . The following table will exhibit a summary of the above transactions . Capital Cnnital PivMi-ml Tntcrost on Invested . Realised , and JJonun . thu Mortgage & £ £ . B . £ 8 ' 1834 .. 1 , 000 2 , 400 2 , 015 0 1 , 000 0 1841 .. ! W 0 708 G 20 12 ~ ' » 0 S 1847 .. 320 708 408 0 13 : t 12 £ 1 , 0-10 £ 3 , 030 " £ * , W 2 JSJ £ 1 , : W 4 0 Thus we find that while the capital invested in both cases is 1 , 640 / . —the produce of the shares is 6 , 888 / . 12 s . or 5 , 248 / . 12 s . beyond the apitul , while the interest on the mortgage amount * to only 1 , 384 / . The profit on the shares is thus 3 , 864 / . 1 « - beyond the interest received on the mortgage .

      General Trade Report.

      GENERAL TRADE REPORT .

      London, Friday Evening. Dyrxness Prevail...

      London , Friday Evening . DyrxNEss prevails in Mincing-Jane , inMark-Janu , and in every other market of the metropolis . Only suc' transactions take place as the consumptive demand makes necessary . Everybody Js waiting to soo wliot will take place , and every body narrows hiu business to be prepared for events which ho cannot foresee . >>« never remember so complete a cessation of businutra |> s is now tho result of political causes , and can only wonder at the patience which submits week , after wok , to evich a state of tilings withbut romonstrmice . iuow being no business done of any importance , tliovo mo iw changes in the markets to record . „ « , „„„ It % hardly possible to estimate the ' amount o mm which manufactures and commerce have eust mc »» through the apprehension of war . Our own one and foreign trade have suffered much ; but our loss 1 b « or » no comparison to the loss of ouv neighbours , from mwn the wtecUiof originates . On the Confluent—In Gonuwiy

  • Citation
    • Leader (1850-1860), Feb. 26, 1859, page 24, in the Nineteenth-Century Serials Edition (2008; 2018) ncse-os.kdl.kcl.ac.uk/periodicals/l/issues/cld_26021859/page/24/