A practical treatise on banking

Front matter

A

PRACTICAL TREATISE

ON

Part First.— OF PRACTICAL BANKING. PAGB

I. The Nature of Banking 1

II. The Utility of Banking 2

III. Banking Terms 8

V. The General Administration of a Bank . . ^2 V. The Administration of a Bank with regard to Proceedings on Bills of Exchange . . . . 28 VI. The Administration of a Bank with regard to the

Employment of its Surplus Funds . . . 41 II. The Administration of a Bank during a Season of

Pressure 52

VIII. The Administration of a Bank under the Act of 1844 61 IX. The Administration of the Banking Department of

X. The Administration of Joint-Stock Banks, with an

Inquiry into* the Causes of their Failures . . 99

XI. The Administration of the Office . . . 126

XII. Banking Book-Keeping 150

XIII. Banking Calculations 184

XIV. Banking Documents . . . ; . . . 202

Xll CONTENTS.

Part Second.— OF BANKING INSTITUTIONS

I. The Bank of England . . . . . . 233

II. The London Private Bankers .... 249

III. The Joint-Stock Banks in London . . . 259

IV. The Country Private Banks .... 284 V. The Country Joint-Stock Banks . . . 300

VI. The Banks oe Scotland 311

VII. The Banks of Ireland 352

VIII. The Moral and Religiod s Duties op Banking Companies 387

IX. Ten Minutes' Advice about keeping a Banker . 424

X. Index Beading 431

Appendix

Banks of the United States 440

Index to Subjects in Gllbart's Treatise .... 443 Banks and Banking in the United States . . . 459 Money. By Henry C. Carey 525

A PRACTICAL TREATISE

ON

BANKING

Part. L — OF PRACTICAL BANKING.

Section I. — THE NATURE OF BANKING

" What is it that we call a Banker ? There is in this city a company or corporation called goldsmiths, and most of those called bankers are of that corporation ; but so far as I know, there is not a company or corporation in England called bankers, nor has the business any definition or description, either by common law or by statute. By custom, we call a man a banker who has an open shop, with proper counters, servants, and books, for receiving other people's money, in order to keep it safe, and return it upon demand ; and when any man has opened such a shop we call him a banker, without inquiring whether any man has given him money to keep or no ; for this is a trade where no apprenticeship is required, it having never yet been supposed that a man who sets up the trade of banking could be sued upon the statute of Queen Elizabeth, which enacts, that none shall use any art or mystery then used, but such as have served an apprenticeship in the same." (Speech, delivered in the House of Commons, in 1746. See the London Magazine for that year, p. 120.)

The term bank is derived from banco, the Italian word for bench, as the Lombard Jews in Italy kept benches in the market-place, where they exchanged money and biljs. When a banker failed, his bench was broken by the populace ; and from this circumstance we have our term bankrupt.

A banker is a dealer in capital, or, more properly, a dealer in money. He is an intermediate party between the borrower and the lender. He borrows of one party and lends to another ; and the difference between the terms at which he borrows and those at which he lends, forms the

A Treatise on Banking.

source of his profit. By this means he draws into active operation those small sums of money which were previously unproductive in the hands of private individuals ; and at the same time furnishes accommodation to those who have need of additional capital to carry on their commercial transactions.

Banks have been divided into private and public. A private bank is that in which there are but few partners, and these attend personally to its management. A public bank is that in which there are numerous partners, and they elect from their own body a certain number, who are intrusted with its management. The latter are usually called joint-stock banks.

The business of banking consists chiefly in receiving deposits of money, upon which interest may or may not be allowed ; in making advances of money, principally in the way of discounting bills ; and in effecting the transmission of money from one place to another. Private banks in metropolitan cities are usually the agents of the banks in the provinces, and charge a commission on their transactions. In making payments, many country banks issue their own notes.

The disposable means of a bank consist of, First, the capital paid down by the partners, or shareholders. Secondly, the amount of money lodged by their customers. Thirdly, the amount of notes they are able to keep out in circulation. Fourthly, the amount of money in the course of transmission, that is, money they have received, and are to repay, in some distant place, at a future time.

These disposable means are employed, First, in discounting bills. Secondly, in advances of money in the form of cash credits, loans, or overdrawn accounts. Thirdly, in the purchase of government or other securities. Fourthly, a part is kept in the banker's till, to meet the current demands. Of these four ways of employing the capital of a bank, three are productive, and one is unproductive. The discounting of bills yields interest-; the loans, and the cash credits, and the overdrawn accounts, yield interest ; the government securities yield interest ; the money in the till yields no interest.

The expenses of a bank may be classified thus : rent, taxes, and repairs of the house in which the business is carried on ; salaries of the officers-; stationer's bill for books, paper, notes, stamps, &c. ; incidental expenses, as postages, coals, &c.

The profits of a bank are that portion of its total receipts, — including discount, interest, dividends, and commission, — which exceeds the amount of the expenses.

Section II.— THE UTILITY OF BANKING

In the first place, banks are useful as places of security for the deposit of money. The circumstance which gave rise to the business of banking In this country was a desire on the part of the merchants of London to

The Utility of Banking.

obtain a place where they might lodge their money in security. Every one who has had the care of large sums of money knows the anxiety which attends their custody. A person in this case must either take care of his money himself or trust it to his servants. If he take care of it himself, he will often be put to inconvenience, and will have to deny himself holidays and comforts, of which a man who is possessed of much money would not like to be deprived.

If he intrust it to others, he must depend upon their honesty and their ability. And although, in many important cases, a master is compelled to do this, yet he does not feel the same satisfaction as if the money was actually under his own care. Some instances of neglect or of dishonesty will necessarily occur, and these will occasion suspicion in reference to other parties against whom no suspicion ought to be entertained. Besides, in both these cases the money is lodged under the owner's own roof, and is subject to thieves, to fire, and to other contingencies, against which it is not always easy to guard.

All these evils are obviated by means of banking. The owner of money need neither take the charge of it himself nor trust to his dependants. He can place it in the hands of his bankers. They are wealthy men, and are responsible to him for the amount. If they are robbed, it is no loss to him ; they are pledged to restore to him the amount of his deposit when he shall require it. Whenever he wants money he has only to write an order or draft upon his banker, and the person to whom he is indebted takes the draft to the bank, and, without any hesitation or delay, receives the money.

2. The bankers allow interest for money placed in their hands.

By means of banking, the various small sums of money which would have remained unproductive in the hands ftf individuals, are collected into large amounts in the hands of the bankers, who employ it in granting facilities to trade and commerce. Thus banking increases the productive capital of the nation. At the origin of banking, " the new-fashioned bankers," as they were called, allowed a certain rate of interest for money placed in their hands. The banks of Scotland carry this practice to the greatest extent, as they receive upon interest so low an amount as ten pounds ; and also allow interest on the balance of a running account. Many of the country bankers in England allow interest on the balance of a running account, and charge commission on the amount of the money withdrawn. The London bankers generally do not allow interest on deposits, but neither do they charge commission. All their profits are derived from the use of their customers' money. The banks of Scotland do not charge commission, although they allow interest on deposits ; but then those banks have a profit by the issue of their notes. The London bankers do not issue notes.

3. Another advantage conferred upon society by bankers is, that they make advances to persons who want to borrow money. These advances are made, -by discounting bills, upon personal security, or upon the joint security of the borrower and two or three of his friends, and sometimes upon mortgage. Persons engaged in trade and commerce are thus enabled to augment their capital, and consequently their wealth. The in-

A Treatise on Banking.

crease of money in circulation stimulates production. "When bankers are compelled to withhold their usual accommodation, both the commercial and the agricultural interests are plunged into extreme distress. The great advantage arising to a neighbourhood from the establishment of a bank, is derived mainly from the additional supplies of money advanced in the form of loans or discounts to the inhabitants of the place. This principle is so well understood in Scotland, that branch banks are sometimes established in poor districts, with a view of obtaining a future profit from the prosperity which the bank will introduce. (Evidence before the Select Committee of the House of Commons upon the Abolition of Small Notes, p. 43.)

4. Another benefit derived from bankers is, that they transmit money from one part of the country to another.

There is scarcely a person in business who has not occasion sometimes to send money to a distant town. But how is this to be done ? He cannot send a messenger with it on purpose ; that would be too expensive. He cannot send it by post ; that would be too hazardous. Besides, the sum may be some fraction of a pound, and then it cannot go by post. The post, too, takes a considerable time, as three letters at least must pass on the transaction. If he live in London he may obtain a bank post bill, but he cannot obtain that in the country ; and he may not be able to obtain it in London for the exact sum he wants. How, then, is the money to be sent ?

Every country banker opens an account with a London banker. If. then, a person live at Penzance, and wants to send a sum of money to Aberdeen, he will pay the money into the Penzance bank, and his friend will receive it of the Aberdeen bank. The whole transaction is this. The Penzance bank will direct their agent in London to pay the money to the London agent of the Aberdeen bank, who will be duly advised of the payment. A small commission charged by the Penzance bank, and the postages, constitute all the expenses incurred, and there is not the least risk of loss.

Commercial travellers, who are collecting money, derive great advantage from the banks. Instead of carrying with them, throughout the whole of their journey, all the money they have received, when perhaps it may be wanted at home, they pay it into a bank, by whom it is remitted with the greatest security and at little expense ; and they are thus delivered from an encumbrance which would have occasioned great care and anxiety.

5. Wherever a bank is established, the public are able to obtain that denomination of currency which is best adapted for carrying on the commercial operations of the place. In a town which has no bank, a person may have occasion to use small notes, and have none but large ones ; and at other times he may have need of large notes, and not be able to obtain them. But where a bank is established there can be no difficulty of this kind. The bank issues that description of notes which the receivers may require, and are always ready to exchange them for others of a different denomination. Banks, too, usually supply their customers and the neighbourhood with silver ; and if, on the other hand, silver should be too

The Utility of Banking.

abundant, the banks will receive it, either as a deposit or in exchange for their notes. Hence, where banks are established, it is easy to obtain change. This is very convenient to those who have to pay large sums in wages, or who purchase in small amounts the commodities in which they trade.

6. By means of banking there is a great saving of time in making money transactions.

How much longer does it take to count out a sum of money in pounds, shillings, and pence, than it does to write a draft. And how much less trouble is it to receive a draft in payment of a debt, and then to pay it into the banker's, than it is to receive a sum of money in currency. What inconveniences would arise from the necessity of weighing sovereigns. What, a loss of time from disputes as to the goodness or badness of particular pieces of money.

Besides the loss of time that must necessarily occur on every transaction, we must also reckon the loss which every merchant or tradesman in an extensive line of business would certainly sustain in the course of a year, from receiving counterfeit or deficient coin, or forged notes. From all this risk he is exempt by keeping a banker. If he receive payment of a debt, it is in the form of a draft upon his customer's banker. He pays it into his own banker's, and no coin or bank notes pass through his hands. If he draw bills, those bills are presented by his banker ; and if his banker take bad money it is his own loss.

7. A merchant or tradesman who keeps a banker, saves the trouble and expense of presenting those bills or drafts which he may draw upon his customers, or which he may receive in exchange for his goods. He pays these into the hands of his banker, and has no further trouble. He has now no care about the custody of his bills ; no anxiety about their being stolen ; no danger of forgetting them until they are overdue, and thus exonerating the indorsers ; no trouble of sending to a distance in order to demand payment. He has nothing more to do than to see the amount entered to his credit in his banker's books. If a bill be not paid, it is brought back to him on the day after it falls due, properly noted. The banker's clerk and the notary's clerk are witnesses ready to come forward to prove that the bill has been duly presented, and the notary's ticket attached to the bill assigns the reason why it is not paid. But if any indorser of the bill has given a reference in case of need, that is, if any indorser has written on the back of the bill that, some other party will pay it in case the accepter does not, then the notaiy takes the bill to the referee, and procures the money from him.

This circumstance alone must cause an immense saving of expense to a mercantile house in the course of a year. Let us suppose that a merchant has only two bills due each day. These bills may be payable in distant parts of the town, so that it may take a clerk half a day to present them. And in large mercantile establishments it would take up the whole time of one or two clerks to present the due bills and the drafts. The salaries of these clerks are therefore saved by keeping an account at a banker's. Besides the saving of expense, it is also reasonable to suppose that losses upon bills would sometimes occur from mistakes or over-

A Treatise on Banking.

sights, from miscalculation as to the time a bill would become due, from errors in marking it up, from forgetfulness to present it, or from presenting it at the wrong house. In these cases, the indorsers and the drawers are exonerated ; and if the accepter do not pay the bill, the amount is lost. In a banking-house such mistakes are not so likely to occur, though they do occur sometimes ; but the loss falls upon the banker, and not upon his customer.

8. Another advantage from keeping a banker in London is, that by this means you have a continual referee as to your respectability. If a mercantile house in the country write to their agent, to ascertain the respectability of a firm in London, the first inquiry is, Who is their banker ? And when this is ascertained, the banker is applied to through the proper channel, and he gives his testimony as to the respectability of his customer. When a trader gives his bill, it circulates through the hands of many individuals to whom he is personally unknown ; but if the bill is made payable at a banking-house, it bears on its face a reference to a party to whom the accepter is known, and who must have some knowledge of his character as a tradesman. This may be an immense advantage to a man in business, as a means of increasing his credit ; and credit, Dr. Franklin says, is money.

9. The keeping an account at a banking-house, enables a trader not only to give a constant reference as to his own respectability, but it also enables him to ascertain the respectability of other persons who keep bankers. There are numerous cases in which a trader may wish to know this. A stranger may bring him a bill, and want goods in exchange ; or he may have drawn a bill upon a customer, and wishes to ascertain if this bill would be paid before he gave him any further credit. If this bill is not made payable at a banking-house, he can obtain no information. But suppose the bill is made payable at a banking-house ; even then he can obtain no information, unless he himself has a banker. If he take the bill to the banker's, at whose house it is made payable, and say, " Gentlemen, I will thank you to inform me if the accepter of this bill be a respectable man. May I safely give goods or money in exchange for it?" They will reply, " Sir, we never answer such questions to strangers." But if the holder of this bill keep an account at a banker's, he has only to ask his banker to make the inquiry for him, and he will easily obtain the most ample information. Among nearly all the bankers in London, the practice is established of giving information to each other as to the respectability of their customers. For as the bankers themselves are the greatest discounters of bills, it is their interest to follow this practice ; and indeed the interest of their customers also, of those at least who are respectable.

10. By means of banking, people are able to preserve an authentic record of their annual expenditure. If a person pays into his banker all the money he receives in the course of a year, and makes all his payments by checks, then by looking over his bank-book at the end of the year he will readily see the total amount of his receipts, and the various items of his expenditure. This is very useful to persons who have not habits of business, and who may therefore be in danger of living beyond their means. It is useless to advise such persons to keep an account of their expenses,

The Utility of Banking.

they will do no such thing ; but when short of money at Christmas, to pay their tradesmen's bills, they may take the trouble of looking over their bank-book, and noticing how many checks were drawn for the purchase of unnecessary articles. A bank account is useful, also, in case of disputed payments. People do not always take receipts for money they pay to their tradesmen, and when they do, the receipts may become lost or mislaid. In case of death, or of omission to enter the amount in the creditor's books, the money may be demanded again. Should the payment have been made in bank notes or sovereigns, the payer can offer no legal proof of having settled the account ; but if the account was discharged by a check on a banker, the check can be produced, and the payment proved by the officers of the bank, who can be subpoenaed for that purpose.

11. Another advantage resulting from keeping a banker in London is, that the party has a secure place of deposit for any deeds, papers, or other property that may require peculiar care. Any customer who pleases may have a tin box, which he may leave with his banker in the evening, and call for it in the morning. In this box he might place his will, the lease of his house, policies of insurance, or any other documents he wished to preserve against fire. Stock-brokers and others, who have offices in the city and live out of town, have such boxes, which they leave over night with their banker, for the sake of security, in preference to leaving them in their own office. If a party were going to the country, he might send his plate or jewellery to his banker, who will lock it up in his strong room, and thus it will be preserved from fire and thieves until his return. Solicitors and others, who have deeds or other writings of importance left in their custody, can send them to the bank during the night, and thus avoid the danger of fire.

12. By keeping a banker, people have a ready channel of obtaining much information that will be useful to them in the way of their business. They will know the way in which bankers keep their accounts ; they will learn many of the laws and customs relating to bills of exchange. By asking the banker, or any of the clerks, they may know which is the readiest way of remitting any money they have to send to any part of the country or to the continent. If they have to buy or sell any stock in the public funds, the banker can give them the name of a respectable broker who can manage the business ; or should they be about to travel, and wish to know the best way of receiving money abroad, or be appointed executors to a will, and have to settle some money matters, the banker will in these and many other cases be able to give them the necessary information.

13. Banking also exercises a powerful influence upon the morals of society. It tends to produce honesty and punctuality in pecuniary engagements. Bankers, for their own interest, always have a regard to the moral character of the party with whom they deal ; they inquire whether he be honest or tricky, industrious or idle, prudent or speculative, thrifty or prodigal, and they will more readily make advances to a man of moderate property and good morals, than to a man of large property but of inferior reputation. Thus the establishment of a bank in any place immediately advances the pecuniary value of a good moral character. There

B 7

A Treatise on Banking.

are numerous instances of persons having arisen from obscurity to wealth, only by means of their moral character, and the confidence which that character produced in the mind of their banker. It is not merely by way of loan or discount that a banker serves such a person. He also speaks well of him to those persons who may make inquiries respecting him ; and the banker's good opinion will be the means of procuring him a higher degree of credit with the parties with whom he trades. These effects are easily perceivable in country towns ; and even in London, if a house be known to have engaged in gambling or smuggling transactions, or in any other way to have acted discreditably, their bills will be taken by the bankers less readily than those of an honorable house of inferior property. It is thus that bankers perform the functions of public conservators of the commercial virtues. From motives of private interest they encourage the industrious, the prudent, the punctual, and the honest, while they discountenance the spendthrift and the gambler, the liar and the knave. They hold out inducements to uprightness, which are not disregarded by even the most abandoned. There is many a man who would be deterred from dishonesty by the frown of a banker, though he might care but little for the admonitions of a bishop.

Section III.— BANKING TERMS

Query I. — Is the word Bank a singular or a plural noun ?

The word Bank, being a noun of multitude, may have verbs and pronouns agreeing with it in either the singular or the plural number, yet not without regard to the import of the term as conveying unity or plurality of idea. In the use of this term the following rules are usually observed : —

1. When any operation or feeling of the mind is ascribed to a bank, the verbs and pronouns are placed in the plural ; as, " The bank were anxious to meet the wishes of the public." " The bank have concurred in the measure proposed." " Are you one of the persons who tried the question with the Bank of Ireland, whether they conceived themselves bound to pay in gold at their branches ? " " The Bank of England petitioned against this bill, and were heard by their counsel ; but their representations produced no effect, and the bill having passed through both Houses, received the Royal assent." The following examples, wherein mental operations are ascribed to a neuter pronoun, are violations of this rule : — " The bank allows the party having the cash credit, to liquidate any portion of his debt to the bank at any time that may suit his convenience, and reserves to itself the power of cancelling, whenever it shall think jit, the credit granted." " It is usual for the bank when it gives a cash credit to keep a watchful eye over the person having that cash credit."

2. When a reference is made to a bank merely as an institution, the term is considered to belong to the singular ; as, " The Bank of Scotland

Banking Terms.

continued the only bank from the date of its establishment, in 1695, to the year 1727. In that year a charter of incorporation was granted to certain individuals named therein for carrying on the business of banking, under the name of the Royal Bank ; and subsequent charters were granted to this establishment, enlarging its capital, which now amounts to one million and a half." " The National Bank of Scotland has 1,238 partners." " If this measure be carried into effect, the Provincial Bank must instantly be deprived of any sufficient means of reimbursing itself for the heavy expense to which it has been subject." " Has your bank an establishment at Kirkcudbright ? " " The Bank of England has the control of its issues entirely within itself."

3. When we notice the rules or habitual acts of a bank, the word belongs to the singular ; as, " The Provincial Bank allows interest at the rate of two per cent." u The bank draws bills upon London at twenty-one days after date." " The bank discounts bills at the rate of four per cent." " The bank issues notes payable in gold at the place of issue." " The London and Westminster grants interest upon deposits ; it does not allow its officers to receive Christmas presents from its customers." In reference to cases that fall under this rule, there is, however, some contrariety of practice: — " Do the Provincial Bank issue post bills? They do not." " Have the Bank of Ireland, at their branch in Cork, been in the habit of receiving gold to any amount in payments ? " " Have the Bank of Ireland any deposits at the Cork branch ? Do you know how their notes get into circulation ? Do they pay any interest on their deposits ? They have a great quantity of notes in circulation, — have they not ? "

4. When the word bank is connected with a past participle by means of the neuter verb to be, it usually belongs to the singular ; as, " I am a director of the Bank of Scotland, which is established by act of Parliament ; it does not hold a charter from the Crown, but, in common language, it is called a chartered bank." " Suppose a bank was enabled to take six per cent, on a cash credit, instead of four." " The Falkirk Union Banking Company has been returned to this house as sequestrated in the month of October, 1816." "A new bank was constituted as a fund upon which the sum of .£2,564,000 should be raised, and it was called the Land Bank because established on land securities."