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Leader (1850-1860), 26th February 1859, Edition 1 of 2, Page 280, COMMEBGIAL

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    • COMMEBGIAL
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      Untitled Article

      RESERVE OR DIVIDENDS . —POLIQY OF JOINT-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 Ja _ 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 : — - " Nor is the commendable policy of forming a strong 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 Avhole of the profits divided from half-year to half-year , af ter the fashion of our . railway companies , a heavy loss

      falling on any one of the banks might ' completely cripple it for a time . " Analogies are of ten 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 accidents , 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 clerics ; and ail the . 'contingencies in them which it lias 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 and vigilance , and not on a reserved fund ...: The analogy therefore on wliich a reserved fund , so necessary for railways , is applied to justify a reseryed fund for banks , does not hold good . 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 the question " Reserve or Dividends" should be really decided . , It must be admitted that the public generally regard the formation of a strong reserye with approbation , and , as far as it serves to gain and increase confidence—the sole source of successit is recommendable ; but if the public pease to look on it in this li g ht , the recommendation ceases , and a change in opinion therefore puts an end to

      tins advantage . The reserve is only a portion of profit , and the amount or rate of profit is the real test of good management and the justification of public confidence . The censure conveyed in the words ^ U inordinate appetite for dividends , " applied to shareholders , implies that a part of the public does not regard with favour additions to the reserve , and would do better pleased if the fund wore distributed . Other portions of the public may come to entertain a eimilar opinion , and then this argument is at an ond . If the amount of nrofit . vonr

      by year , be the real nnd only test of good management , and if tho reserved fund have a tendency to diminish tho amount or the rate of profit , tho public will , ere long , we may expect , regard , an accumulation of reserve with disfavour ; ana then , instead of being a passport to confidence , it will be a barrier , and will injure tho banks . The increase of reserve wiU , on this reasoning , bo a foolish way of showing •? gratitude to the public for the liberal support , extended to them * Sentimentalities are raref y just , applied to trade , and this one— -borrowed from puffing shopkeepers , which represents tho mutual service or bankers and clients as a matter of ; favour , for . which the

      banks arc to be grateful—does not differ from the class . i , The reserve is a mere increase of capital ; ana if , as a general rule , the less the capital the greater the profit proportionably , to add to the capital by a reserve must be as injurious as to add to it by subscription . If an 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 subseription or by saving . The basis of the success which began before any reserve could exist , was not a vast amount of capital , but confidenceThe

      the good management Avhich won . same principle continues always operative . By good 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 at 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 tlie public in establishing a bank , and supporting it af ter it is established . Millions of capital do not command confidence , and it is a mistake to suppose that capital , in the shape of reserve , can do that which cannot be done by any amount of capital .

      A reserve ensures confidence from 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 inay weaken his discretion * and niay make hiia think it perfectly safe to negotiate bills * or engage in would otherwise

      transactions which he 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—which made it successful atfirst . A large reserve has no tendency to secure good management , and may hurry a bank into ruin .

      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 yet wholly remedied . In particular , the restriction on banks issuing their own promises to pay ad libitum has been productive of prodigious mischief The consequence of such an issue , checked by rival

      issues , by tho wants of the public , and by the obligation entered into by the issuer of tho note always to pay on demand , is to supply day by day a test of the good management 01 a bank , and of its solvency . It . must be always ready to redeem tho notes which its rivals and tho public are continually returning to it . As the rule , each bank makes all its advances on its own notes , and the issue , of these , therefore , informs its rivals and tho public of its proceedings , and tends to ensure their correctness . The free issue of notes of a small denomination by rival banks in Scotland lias been ,

      accordingly , the means , much more than tiny other circufastance , of keeping those banks right , and preserving for them the public confidence . Amongst them , for a long period , insolvency was unknown . Tho issue of notes by private bankers , which some of our political economists and the Legislature have denounced , is the very ark of banking pafety . It is a natural and necessary consequence of banking that a banker should oxchange his own small notes , payable on demand , for bills and drafts ; and to allow qvory banker so to do is to ensure the stability of banks . Competition amongst them is tho corrective of individual errors s and the

      joint - stock bank proprietors of London will eTegiously 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 Thanks , we must call attention to the following comnmnication , wliich 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 gains .

      Untitled Article

      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 produced" 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 , 0151 .: —tlie produce of the capital and the dividend and bonuses together would therefore have amounted to 4 , 4151 . If , during the sarnie period , 1 , 000 / . had been invested on mortgage at 4 per cent ., the party would have received back his principal , l , 0 OOZ ., and 1 , 000 / . in interest , making together 2 , 000 / , —being 2 , 415 / . less than the produce of the investment in London and Westminster Bank shares . Further—in the year 1841 , the holder of 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 Z . In January 1859 they might have been sold for 768 / . In tlie meantime , he would receive in dividends and bonuses 529 / . 12 s . making together 1 , 297 / . 12 s . Had the same sum ( 320 / . ) beeii invested in mortgage at 4 per cent , the mortgagee would receive back his principal , 320 / ., and interest , 2307 . 8 s ., making together 550 / . 8 s . Again , in the year 1847 , a holder of G 6 shares ( 50 and 16 assigned in 1841 ) , on-winch 1 , 320 / . had been paid , became entitled to 1 ( 5 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 . Tlie following table will exhibit a summary of the above transactions . Capital Capital Dividend Interest on Inveetcd . lleuHsea . and liomw . the Mortgage . & £ £ s . £ s . 183 * .. 1 , 000 2 , 400 2 , 015 0 1 , 000 0 1841 .. 320 708 520 12 2 ;) 0 8 18-17 .. 320 708 408 0 13 tt 13 £ 1 , 010 £ 3 , 030 £ 2 , 052 12 £ 1 , 3 S * ° # Thus wo find that while the cap ital invested in both cases is 1 , 640 / . —the produce of tlio shaves is . 6 , 888 / . 12 s . or 5 , 248 / r 12 s . beyond the npital , while the interest on tho mortgage amounts to only 1 , 384 / . The profit on the sharcsis thus 3 , 86-t f . 12 s . beyond the interest rcceivod on the mortgage .

      Untitled Article

      GENERAL TRADE REPORT .

      Untitled Article

      London , Friday Evening . DU 3 UCN . ESS provnib In Minclng-lanq , inMark-lnno , and in every other market of the metropolis . Only such . transactions take place as the consumptive doni&nil makes necessary . Everybody is waiting to soo wlint will take place , and every body narrows his business to be prepared for events which ho cannot foresee we never remember so complete a cessation of business as is now tho rosuit of political causoa , and . enn only wonder at tho pationce which submits week , after wcok , to such a state of things without remonstrance , iiioro being no business done Of any importance , there « uo no chancres Jn the mnrkots to record . . f , nafi It . 1 b hardly possible to estimate tho amount oi row which manufactures and commerce Imvo s » stft " ^ through tho apprehension of war . Our own fto no and foreign trnao have suffered much ; but our to » jw ** no comparison to tho loss of pur neighbours , fl « "' the mischief originates . On tho Continent—In Germany

      Untitled Article

      280 THE LEABEB , [ No . " 466 , February 26 r 1859 . » ^^ ^^ ^ „_ _ , ^^ J ^^—^^^ a ^^^^^ a ^^^^^^ M ^^^ M ^^^ M ^ ai ^ M ^ M ^ M ^^ M ^^ W ^^^^^^^ B ^^^^^^^^^^^^^^^^^^^^^^^^^^^*^^^^^^^^^^^^^^^^^^^ . - , ¦ . . ^^^^^^^^ ^ m *^^^^^^* m

      Commebgial

      COMEBGIAL

  • Citation
    • Leader (1850-1860), Feb. 26, 1859, page 280, in the Nineteenth-Century Serials Edition (2008; 2018) ncse-os.kdl.kcl.ac.uk/periodicals/l/issues/vm2-ncseproduct2283/page/24/