With regard to the provisions laid down by the law for the organization and working of the ordinary English joint stock banks, it may be said that, except with regard to note issue and one or two quite unimportant details,
no special provisions are made; and it has already been shown that the note issues of the English banks, apart
78
The English Banking System
from the Bank of England, are now a quite negligible quantity, averaging something under half a million; and
since no joint stock bank with an office in London can possess the right ofnote issue, it follows that all the great English banks, which necessarily from their position must have an office in London, are debarred altogether from note issuing. Nevertheless, for the sake of com-
pleteness, it would be as well to state the nature of the restrictions upon the right of note issue which govern those of the few country joint stock banks which still
maintain them.
By the act of 1844 it was laid down that no banking company in England which did not then possess the right of issue could acquire it, and that those which then exer- cised it could not under any circumstances increase their note issue above the limit laid down by the act, which was based on the average of its circulation during the twelve weeks preceding the 27th of April, 1844. The
right of issue might only be exercised outside a circle
drawn around London with a radius of 65 miles, within which the Bank of England's monopoly was protected against competition by other joint stock companies.
In order toexercise the privilege, abank must annually take out a license subject to a duty of £30, a separate license being necessary for every place at which notes are issued. In respect of the note issue, the law thus laid down an absolute limit upon English banking, and
also made strict regulations for the presentation of re- turns showing that it had not been exceeded. The bank charter act provides that a weekly return shall be sent to the commissioners of stamps and taxes, giving an
76651—10 6 79
account of the circulation of bank notes on every day during the previous week, and also the average amount
of the circulation, and at the end of every period of four weeks an average circulation during the four weeks is to be stated, and also the amount of notes which the Bank
is authorized to issue under the act.
These returns were to be published by the commission- ers in the London Gazette, and though, owing to the supersession of the note by the check, they have no
practical valueas a statement of English currency move- ments, these returns do still make their appearance in the Gazette, an official publication which is read only by thosein search of curious information. It may be added that any neglect of the duty of presenting this return to the commissioners, or any falsification of the accounts, render the Bank Hable to a fine of £ioo. Under the act the commissioners have the right to inspect the books of the noteissuing banks, but this right does not appear to
have ever been exercised.
Before leaving the subject of notes, we may add that the limitation of liability on bank shares does not apply to the liability under notes. But here again, owing to the insignificant dimensions of the note issue of the English banks,this provisionis of noimportance. Under
the provisions of the joint stock companies acts, which apply to all joint stock companies as such, the English joint stock banks have to furnish to the registrar of joint stock companies an annual list of shareholders in the company, with their names, addresses, and occupa-
tions, and the number of shares held by them. A bank- ing company must add to this list a statement of
80
The English Banking System
the names of the several places in which it carries on
business. The register of members is to be kept at the registered office of the company, and any shareholders in a joint stock bank can claim to inspect the list during business hours.
A special provisionwithregard to the purchase and sale of bank shares on the stock exchange was laid down by a statute, commonly known as Leeman's Act, which pro- vides that all contracts and claims for sale and purchase in the shares of joint stock banking companies shall be null and void unless they shall set forth the numbers of the shares transferred. The object of this provision was
topreventattacksonthecredit ofbanks,which might have
serious results from the public point of view, by means of bearsales on the stockexchange. Itspractical resultwas
that nobody could sell a bank share unless be possessed
them or could borrow them from some actual holder, and
sowas able to give the numbers of the shares at the time
whenthesalewaseffected;anditwasthusmadeimpossible
by means of fictitious sales, with a view to repurchase before the completion of the bargain, to give any appear- ance of weakness to the position of a bank.
With regard tothe liability of directors and officers, the banks are again subject to the ordinary law of joint stock companies. Under this law it is permitted to companies
to provide under their memorandum of association that the liabihty of the directors shall be unlimited, but this provision is rarely, if ever, made use of. The directors of a company, being to all intents and purposes a specially elected committee of shareholders appointed to manage
its affairs inthe interests of the company asa whole, thus
8i
undertake certain duties and responsibilities to which the law expects them to apply reasonable diligence and care.
They are bound to accountto the company forall profits,
andareresponsibleforany losses that maybeincurredby
their acting ultra vires, or by their willful misconduct, or
by negligence. Innocent mistake does not appear to ren- derthemliable, andthey areentitledtoplaceareasonable
amount ofconfidence in the officersof thecompany.
In the course of giving judgment on a case which is
quoted by Dr. Heber Hart in his work on the law of banking, Dovey v. Cory, the Lord Chancellor made a statement containing the following remarks:
"The charge of neglect appears to rest on the assertion that Mr. Cory like the other directors did not attend to
any details of business not brought before them by the general manager or the chairman, and the argument
raises a serious question as to the responsibility of all
persons holding positions like that of directors, how far they are called upon to distrust and be on their guard against the possibility of fraud being committed by
their subordinates of every degree. It is obvious if
there is such a duty it must render anything like an
intelligent devolution of labor impossible. Was Mr.
Cory to turn himself into an auditor, a managing direc- tor, a chairman, and find out whether managers, audi- tors, and directors were all alike deceiving him? I can not think that it could be expected of a director that he should be watching either the inferior officers of the
bank or verifying the calculations of the auditor him-
self. The business of life could not go on if people could not trust thosewhoare putintoapositionof trust forthe
82
The English Banking System
express purpose of attending to details of management.
If Mr. Cory was deceived by his own officers there ap- pears to me to be no case against him a^" all. The pro- vision made forbad debts, it iswell said, was inadequate, but those who assured him that it was adequate were the very persons who were to attend to that part of the busi- ness, and so of the rest."
At the same time the law appears to laydown that the trust reposed by directors in others must not be blind or unqualified or to theexclusionoftheexercise of their own
judgment, and they are bound to fulfill the regulationsof their own company.
The dutiesand liabilities of managers are leftin asimi- larstateofvaguenessas far as the lawisconcerned. Like the directors the manager has to account to the company
for anyprofits that may accrue tohim in connection with his position, that is to say, he must not conduct business on his own account and keep the profits for himself, and he is of course expected to use reasonable diligence and
care.
In acaseinwhich abank manager had obtained acom- missionforbringingabouttheamalgamationoftwobanks,
it was stated in the course of the judgment that since he was a manager, bound to consult the shareholders' interests only, he could not retain a pecuniary benefit obtained by him in his character of manager not known
to and not sanctioned by the shareholders who employed him.
It has been shown above that special regulations were
made for the periodical publication of the liabilities of joint-stock banking companies under their note issue.
83
National Monetary Commission
Apart fromthis, thestatementsofaccountswhich banking companies have to produce are, with one unimportant exception, merely those laiddown by thejoint stock com- panies acts; that is to"say, once a year the accounts of every banking company have to be examined by an auditor or auditors. The auditors have to be elected by
the shareholdersonce a year, and have accesstothe books and accounts of the company at all reasonable times. In the case of a banking company, an investigation into the company's position may be ordered by the board of trade on the application of not less than one-third of the share- holders.
A special form of statement of capital, liabilities, and
assets for banking and similar companies was laid down by the companies act of 1862. It provided that every limited banking company and every insurance company and deposit, provident, or benefit society under the act should, on the first Monday in February and the first
Monday in August in every year, make and put up in a conspicuous place in every office in which it carries on business a statement showing the capital ofthe company, authorized, issued, and paid up, and also a statement of assets and liabilities of the company on the first day of the preceding month, drawn up in the following form:
Debts owing to sundry persons by the company—
On judgment.
On specialty.
On notes or bills.
Onsimple contract.
On estimated liabilities.
The assets being divided into 84
The English Banking System
Governmentsecurities.
Bills ofexchangeand promissory notes.
Cashatthe bankers.
Other securities.
This is the only form in which publicity is imposed by lawupon bankingintheordinary senseof thewordasit is
now understood in England. It need hardly besaid that from the form of the statement it conveys absolutely nothing to the ordinary member of the public, and these statutory statements, though they are still put up by the banks in their offices, with more or less modification from the original form, are perhaps the only statements issued
by themtowhich noattentionwhateveriseverpaid. Cus- tomhasmadethe bankspublish the accounts and balance sheetswhichthe law only compelsthemto laybeforetheir shareholdersin generalmeeting. Appendedis aspecimen of the balance sheet and profit and loss account of the Union of London and Smiths Bank, which is selected by
reasonof thefact that itpresentsitsposition with unusual
detail.
THE UNION OP LONDON & SMITHS BANK (LIMITED).
Statementof accounts forthehalfyear endingDecemberji, 1908 General Balance.
liabilities.
£ s. d.
Capital subscribed, £22,934,100, in 229,341 shares of
£100each; paidup,£15 los.per share 3.554>785 10 o Reservefundinvestedinconsols,localloansstock,and
Transvaalgovernment 3 per cent guaranteedstock,
aspercontra 1,150,000 o o
£ s. d.
Current accounts 25,116,492 19 4
Depositaccounts 10,759,370 8 o
35,875,ô63 7 4 85
National Monetary Commission
£ s. d.
Acceptancesand guaranties 3,461,362 2 i
Liabilitiesbyindorsementonforeignbillssold 24,268 11 7
Other liabilities, being interest due on deposits, un-
claimeddividends, etc 563,352 I II
Rebateonbillsnotdue 29,077 5 11
Profitandloss £ s. d.
Balance brought forward 193,839 17 7
Netprofitforthehalf yearending
December31, 1908 174.507 6 3
— 368,347 3 10
45,027,056 2 8 ASSETS.
Cash inhand 3-353.635 6
CashinBankof England 3,528,438 12
52,073 19 o Moneyatcallandat short notice 6,933,965 Investments:
Securities ofandguaranteed by
the BritishGovernment 2,939,312 7 11 India stock and Indian Rail-
waysguaranteed bonds 313,098 6 10 English corporationstocks, rail-
way and waterworks deben- ture and preference stocks, colonial stocks, foreign gov- ernment and railway deben-
ture bonds -_ 1,748,753 4 8 Otherinvestments 94,915 13 o
5,096,079 12 Reserve fund (£567,000 consols;
£515,500local loans stock; £207,- 600 Transvaal government 3 per
centguaranteedstock) 1,150,000 o
6,246,079 i:
Billsdiscounted:
(a) Threemonths andunder 3,978,249 15 i
(6) Exceedingthreemonths 450,511 13 9
4,428,761 8 10
Loans andadvances 15.456.759 15 i
Liabilitiesof customersonacceptancesandguaranties,
asper contra 3,461,362 2 i
Liabilitiesofcustomersforindorsements,asper contra. 24,268 11 7
Bankpremises, chiefly freehold(atcost orunder) 1,455,879 4 i Otherassets,beinginterestdue oninvestments,etc 137,906 7 7
45,027,056 2 8 86
The English Banking System
Profit and Loss Account.
£ s. d.
Interestallowedtocustomers 171,864 6 6
Salaries,contributionstopensionfund,andother expenses
atheadofficeandbranches 215,749 4 9
Rebate onbillsnotdue 29,077 5 11
Dividend on 229,341 shares at15s.6d.per
share, equaltoarate of 10per cent per £ s. d.
annum i77,739 5 6
Balance, being undividedprofitcarriedfor-
ward tothenexthalfyear 190,607 18 4
368,347 3 10 785,038 I o Profitunappropriatedon June30, 1908 193.839 17 7 Gross profit for the halfyear ending December 31, 1908,
aftermakingprovision forallbadanddoubtfuldebtsand
paymentofincometax 591,198 3 5
785,038 I o Felix Schuster,Governor,
John Trotter, DeputyGovernor,
Henry J. B. Kendall, Directors.
J. E. W. Moulding, Manager.
C. H. R. Weidemann,ChiefAccountant.
REPORT opthe auditorsTO THE SHAREHOLDERSOF THE UNION OF LON- DON & SMITHS BANK (LIMITED).
Wehave audited the above balancesheet with the books at the head
officeandwith the returnsfromthebranches. Wehavesatisfiedourselves as to thecorrectness of the cash and have verified the investments held by the bank, the securities held against money at call and short notice and the billsdiscounted. We haveobtainedall theinformationand ex- planationswehaverequired. Inour opinion such balancesheetisproperly drawnupso as toexhibitatrueandcorrectviewofthestate ofthecom- pany'saffairsaccording to the best of our informationand the explana- tionsgiven tousandasshownby thebooksofthecompany.
Wm. B. Peat, C. W.M. Kemp, Arthur F. Whinney,
Auditors.
It will be observed that the above balance sheet shows the bank'sdeposit and currentaccounts separately stated,
87
whereas the other joint stock banks put them together in oneitem. It also states separately cash in hand and cash at the Bankof England, thoughits competitorsgivethem
also inoneitem. It separatesitsloans andadvancesfrom
its bills discounted, though many, but not all, of the other joint stock banks put these items together. Many of the country banks do not even show a separate statement of theircash in hand. In the appended specimen of a north country bank's balance sheet it will be observed that the cash in hand is included with the cash at call and short notice, that is to say, cash that has been loaned, and, though probablyeasily recalled if required, is notactually in the bank's possession.
LIABILITIES.
£ S. d.
Capital 300,000 o o
Reserve fund 305,000 o o
Notesincirculation 5.520 o o
Unpaiddividends 204 5 o
Amountdueby thebank oncurrent accounts, deposits,
draftsonLondonagents, etc 3.837,794 9 3
Rebate onbillsandinterestondeposits 11,838 14 10
£ s. d.
Balanceofprofitandlossaccount 39.738 16 4 Lessinterimdividend paidinAugustlast- 15,000 o o
24,738 16 4 4,485,096 5 5 ASSETS.
£ s. d.
Cash onhand,atcall,andat short notice 815,846 12 o
£ s. d.
£250,000consols 207,500 o o
OtherBritishgovernmentsecurities 215,660 7 6 Colonial government, English railway
debenture,andotherstocks 381,099 10 7
804,259 18 I
88
The English Banking System
£ s. d.
Billsonhand 657,423 12 2
Advances oncurrent accounts, loans, etc 2,165,566 3 2
BankpremisesatHalifaxandbranches 42,000 o o 4,485,096 5 5
Custom has also induced many of the chief joint stock banks to issue a monthly statement of assets and liabili- ties, which is more or less based upon the statutory form referred to above, though amplified and made to some extent more informing.
Appended is a summary and analysis of all these state-
ments taken from the Times newspaper in the form in
whichit publishes themonce amonth. These statements give the position of the various banks on one day at the end of each month. The day in question is chosen by each of the banks, and the dates on which they make up
their statements range over the last week or ten days of each month.
Banks'monthlystatement.
a
Banks' monthlystatement—Continued.
Bank.
London andSouthwest- ern
London and Westmin-
ster National
National Provincial Parr's
Unionof London and Smith's
WilliamsDeacon Total
Ayearago
Deposits, etc.
14,S9I. 267 22,346.851 12,S03, 210 57.294,363 29.S90, 810 34,465.600 13.301, 799 429,158,771 397.312.472
Accept- ances,
etc.
£
27.770 1,282, 281 1.396,937 721, 113 2,863, 163
3,503,806 662, 925 24,176,855 24,685, 002
Cashin
handand atBank
of England.
£
2.174.837
2,901, 403 1.710,515 9.134.694 4,846,446 5,565, 248 2.134.745
Cashat calland notice.
£
I.417.330
s.275.375
2,004, 880 4,006, 461 4.826,38s 6.542,785
I,062,424 67,360,26855,221,148 61,639,80245,795.482
Pro- por- tion of col-
umn
3 to col-
umn
6.
Pro- por- tion of col-
umn
3to col-
umns
Iand
P.cl. P.ct.
14.9] 14.9 13
The English Banking System
ofwhatiscommonly spokenof in Lombardstreet as"win-
dow dressing."
It is commonly urged that these statements would be
much more valuable and give a much truer idea of the position of the several banks if they showed the position, not on any one day, but gave the average figures for the preceding period. It is, however, very difficult to bring about reform in this matter, because the banks which publish these periodical statements naturally retort that they see no reasonwhy they should give further publicity as long as many of their competitors issue no such state-
ments atall.
None of the private banks make these periodical state- ments, and a great amalgamation of them which was converted into a joint stock company in 1894 has not joined the ranks of those which produce monthly state- ments. So far the only effect of the agitation has been that the London and County Bank publishes the daily average of its cash holding, as well as its cash holding on the day on which the statement was made up, and it
seems unlikely thatanything further will bedone until all
the other banks in England have been induced to agree to give a similar amount of publicity.
The specimen of a country bank balance sheet given above shows that even at the end of the half years when
alljoint stock companies do make apublic statement, the important item of cash in hand is not separately given.
There is only too good reason to believe that the many
country banks which thus conceal the most important item in their position make use of this concealment to
work on an extremely narrow cash basis. The following
91