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Maps, plates, charts, etc., may be filmed at different reduction ratios. Those too large to be entirely included in one exposure are filmed beginning in the upper left hand corner, left to right and top to bottom, as many frames as required. The following diagrams illustrate the method: Les cartes, planches, tableaux, etc., peuvent Atre filmfo A des taux de reduction diff4rents. Lorsque le document est trop grand pour Atre reproduit en un seul cliche, 11 est filmi A partir de i'angle supirieur gauche, de gauche A droite. et de haut en bas, en prenant le nomhre d'images nicessaire. Les diagrammes suivants illustrent la mithode. 1 2 3 1 2 3 4 5 6 THE INTKRJfAL MANAGEMENT OP A COUNTKY BANK; IN A SERIES OF^TTERS ON THE FUNCTIONS AND IJ^TILS OF A BRANCH MAI^AGER. BY THOMAS BULLIOiV. WITH NOTES AND O^ERVAHONS BY A CANADIAN ^ ^^^J^K MANAGER. " Tho ( 1110 every.,lay cares and autlps wi.i,.i, and counterpois.. of the .U.Zi:TtZr V""' "" ''" ^«'«''*' and Us hauu. a regular moUou. "-toii'aKr "'"'"" " ' i-LOW'S Kavanagh. true vibration TORONTO: f w WILLING & WILLIAMSON. ^ 1874. I J I . \ r t ! HUNTKR, ROSK & Co., PrINTRRS. TORONTO. y-'' , PEEFACE. The internal affairs of a bank are usually conducted in accordance with certain regu- lations laid down by it for the guidance of its officers, and necessarily conceived in a style more imperative than explanatory. In the following Letters, I have essayed a familiar exposition of the x>rinciple8 from which these regulations are deduced : and I publish them in the hope that they may assist the junior officers in banks in acquir- ing that scientific knowledge of their pro- fession which, next to experience itself, best •qualifies them for offices of trust and re- -sponsibility. But there are certain subjects discussed in the work which have a more general interest, and address themselves to a wider M PREFACE. circle of readers than, I apprehend, they are likely to command. I allude more particularly to those principles which guide a hanker in his dealings with the public — a subject, I should suppose, of as lively interest to the commercial community as to the banker himself; and concerning which I think it not impossible that, even in the following pages, the community in question might hear of something to its advantage. Had the author of the well-known Prac- ticjjl Treatise on BanHng followed the subject into the department particularly treated of in these Letters,, it is superfluous to observe that they would never have been written, and that the subject would have been handled by an able and experienced pen. As it is, I experieDce some encou- ragement from the fact that my production has already received the stamp of his ap-' proval.* I have only to add, that a majority of the Letters have appeared, from time to time, during the last three years, in the pages of * Vide a Practical Treatise on Banking, by J. W. 3 INTRODUCTORY. a .1 I amount, on the other hand, will annually be refused by you to applicants for advances ; and here again will it rest with you, whether, amongst the applicants, there are not those who are fairly entitled to assistance, and the refusal of which may subject them to unmerited incon- venience or distress. In your dealings with your clients, the abne- gation of all personal bias is essential to the exercise of your duties with strict justice and impartiality. It is a grave dereliction of duty on the part of a bank manager to allow a par- tiality for the customer to permit him to look with relaxed stringency upon the customer's account ; but it is wrong and unprincipled in a manager to gratify a personal dislike for a client through the medium of that client's account. In banking transactions there is no scope for " the feelings." Banking is not a matter of sentiment but of business merely. The " sentiment of bills," I apprehend, would be an arduous subject for the most versatile of es^yists. To your directors you will stand chiefly in the character of trustee, for the safe custody and investment of the comparatively enormous sum which they must place at your disposal — a sum, recollect, not limited to the amount of your advances and discounts outstanding and current at any given date, but measured by the ^ggi'6ga>te of discounts and advances which you may transact during the time you continue to act as their manager ; and seeing what this aggregate may reach in the course of a pro- longed service, it can only be by the exercise of L ' .".liwiBaanHB 4i LETTER I. an active vigilance and a wise caution that you escape a series of losses to an amount altogether incalculable. And in fulfilling the duties you owe to your clients, on the one hand, with undeviating fairness, and to your directors on the other, with invincible rectitude, you best fulfil the few duties you owe to yourself. The reward of a good conscience, if of nothing else, will be yours in the one case — a more substantial acknowledgment will probably be your reward in the other. Beware of the notion that what you chiefly owe to yourself is an earnest seeking after salary — an idol in high worship amongst the undeserving. It may and will come as an effect of good conduct — never seek it as a cause. And next in importance to a duty itself sometimes is the manner of its fulfilment. You will not invariably be the messenger of glad tidings from your directors to your clients ; but an unpleasant communication need not be em- bittered in its effects by harshness in the mode of its delivery. You have to intimate, perhaps, to Mr. Smith, that the trifling accommodation applied for by that gentleman, and transmitted to the directors for approval, cannot be granted. The fact very probably is, that Mr. Smith is not trustworthy for the advance, but there is no absolute necessity that you should tell him so. Without impugning his credit to his teeth, the refusal will be galling enough to a man of san- guine disposition — and of this description I should say are all who apply for impossible advances. But perhaps Mr. Smith demands a reason 1 If he does, there are certain well- INTRODUCTORY. 5 kno »vrn excuses — ^privileged fictions (so to speak) always at hand. It is not " convenient " to make the advance. But that is a fact, and no fiction : It can never jump with the conve- nience of a bank to make an advance, the re- payment of which is more than problematical. Or, " You are a stranger to the directors, Mr. Smith, and they do not know enough of your circumstances to warrant them in making the advance." Another fact, and only an indirect way, perhaps, of intimating that they do know enough of Mr. Smith's circumstances to war- rant them in not making it. Or again, "It is your rule to make no advances without se- curity." The greatest fact of all, and I should apprehend in most cases conclusive. This must suffice by way of introduction. In our next we shall proceed to business.* * The old fashioned rule — and many of those old fashions ai*e good to last — is, not to give a reason for refusing an advance. There is a reason for thus declining to give a reason. A rianager may offend a customer by calling his standing in question, he n^y do an endorser harm by questioning his suffi- ciency, he may injure an acceptor by objecting to his name, and finally he may bring trouble on the bank itself, if he bases the refusal on inability. Dis- cretion is required in this, as in every other bank- ing matter, but it may safely be said, that nothing requires more judgment than stating a reason why a discount is refused. The only case where a banker can speak freely is that in which he knows his cus- tomer's business thoroughly, and is able to give him confidential advice. In such a case he may safely say " I am really doing you a service in declining the transaction. Your endorser, I know, is a man you had better keep clear of — or, the man you have f !l ! I i LETTER t. drawn upon, I tell you in confidence, is little better than a swindler. Or — in refusing you money for this speculation, I am acting as your best friend. One thing, however, a bank manager should re- member. He is not bound to speak — but if he does speak — he is bound to speak the truth. The foundation of banking is confidence, and confidence rests on mutual honour. Young bankers should beware of acquiring a character for deceit. An old discount-clerk of the Bank of Upper Ca- nada had a humorous way of quieting the com- plaints of those to whom he handed back paper when refused by the Board, "You can't complain, said he — if you get hack your own!" Letter II. OVERDRAWN ACCOUNTS.* THE PEE .ANEXTLY OVERDRAWN ACCOUNT OBJECTION- ABLE ON FINANCIAL GROUNDS — ITS OPERATION IN THE CASE OF AN INDEBTED TRADER. In a certain letter, to which I shall have occasion frequently to refer in the course of this correspondence, you desire to be informed, amongst other things, what objection, financial or otherwise, should exist to your customer, Mr. Timms, the grocer, being allowed an over- * To understand this chapter, it should be remem- bered that in the North of England (from whence the experience of the writer is evidently drawn,) bankers are accustomed to make loans, by permitting an overdraft on current account . The same transaction in Canada would be arranged by placing to a cus- tomer's credit the proceeds of a promissory note. This, too, is generally the method adopted in Lon- don. The custom of overdrawing a current account to a certain amount by arrangement regularly made, and on giving security, has long prevailed in Scotland, under the name of " cash credits," and in some exceptional cases has been also introduced here. But the custom of discounting promissory notes has two important advantages. It fixes a period for the termination of the loan — and it makes it perfectly evident who is responsible for the debt. The last is no unimportant matter. It was on this very point that the protracted litigation between the late Commercial Bank and the Great Western Eailway turned. The advances were made ^fffT LETTER II. I ! draft upon his account to the amount of one thousand pounds, — the transactions upon the account being £20,000 annually (chargeable WT.th the full 5s. per cent, commission), and the overdraft itself being guaranteed by parties fully responsible for the amount ; it being obvious, you add, that such an account returns to the bank a gross profit of ten per cent, per annum, viz. : — Interest on overdraft £1000 (say 5 per cent.). . .£50 Commission on £20,000, at 58. per cent 50 £100 I must, at starting, do you the justice to by overdraft on current account, and the headings of the ledger as made by a clerk, as he carried on the account from folio to folio, were often so in- definite as to leave room for endless dispute. Had the advances been on promissory note, no possible questir n could have arisen, for the note would have spoken for itself. Bankers in the North of England, in arranging an overdraft, always stipulate for a certain turn, over in the account, on which they charge a commission of Jth to ^th per cent. And prudent bankers also- stipulate that the advance shall be paid off at least once a year. In fact, they judge of a customer's position and safety very much by the state of hi* overdraft from time to time. If always up to the Umit, he is considered to" be too much stretched, and^ to bft watched accordingly. It should be remembered too, that in addition to' advances by way of overdraft, English and Scotch bankers discount trade bills for their customers. Bu,t they must be legitimate trade bills ; anything; of the nature of ar accommodation bill being con- sidered little better than a forgery. OVERDRAWN ACCOUNTS. 9 admit that you do not stand alone in your views on this matter. On the contrary, I will admit that "highly operative accounts" that may be secured by allowing overdrafts upon them, appeal strongly to the feelings of branch managers in general. Your views, moreover, are cordially shared by that large section of the public who sometime in their lives find an overdraft a convenience or a necessity, and who appear to have come into the world, and pro- mise to go out of it, with the idea that a bank- er's capacities of lending are altogether indefi- nite, and sincerely believe that the refusal of an advance, as a general principle, is blindly to throw business away. The ambition to do business — to see the vol- ume of operations upon accounts current swell- ing to a stupendous total, and to tax this total with a full quarter per cent, commission, and carry the result to the credit of profit and loss, and to one's own credit as well, is, I confess, a strong temptation, and therefore figures rather frequently amongst what may strictly be termed a banker's sins of commission. Nay, more, there are directors and chief managers of banks, or there at least have been, in this country, who hold, or have held, what I believe to be errone- ous doctrines on this subject, and with very lamentable results, as you and I and others in general know, and their co-proprietors in partic- ular both know and feel. I beseech your pati- ence, therefore, whilst I endeavour to explain, as briefly as I can, what I conceive to be the nature and operation of overdrawn accounts ; and you will not be the less disposed to listen to me, per- A* I ■i .1 10 LETTER It. \ t haps, when I state, that I once thought with you upon the subject, but have had the most con- vincing reasons for changing my opinion. And first, as respects the very common plea founded upon the safety of the overdraft. Un- doubtedly one of the main considerations with a banker when he makes an advance is the cer- tainty of its repayment, I take it for granted that no one in the possession of his ordinary senses would lend money without this certainty — without a conviction that he would be repaid his loan to the uttermost farthing. But with a banker there is a consideration beyond and above this. The safety of any particular account is one thing, and the safety of his bank is quite another; and it is quite possible for a bank not to have an unsafe account on its books, and yet to be in an extremely unsafe position itself. Now, for a bank to be in a perfectly safe finan- cial position, it should be able at all times to meet the demands that may be made upon it without notice by its depositors, note holders, and others. If its position is such that in case of any sudden and heavy drain upon its more active liabilities it must depend largely upon its overdrawn ac- counts to meet that drain, then I do not hesitate to assert that its position is a perilous one. It is true that the bank may have granted the whole of its overdrafts on the express under- standing that they might be recalled at any time, and without notice. But to recall an overdrawn account, and to obtain payment of it, are not exactly synonymous operations. Betwixt the act of recall and the act of payment there always lies an uncertain interval, extending over weeks, !l 'i m OVERDRAWN ACCOUNTS. 11 months, or years, as the case may be — the dura- tion of the interval being determined very much by the use the borrower has made of his over- draft. If he has accustomed himself to make use of it only now and then — to meet an accidental and temporary excess of engagements over his im- mediate means to meet them — then repayment will be speedy, and very much a matter of course. If he has used it as permanent addition to his floating capital, he must await the result of re- ducing the more active portion of his business to a smaller compass, and consequently repayment will be a more tardy process than in the former case. But if he has fixed it in his trade—in buildings or machinery — in dead stock or book debts, (and which, by the way, as far as my ex- perience extends, is the rule rather than the exception,) then the time of repayment will be altogether indefinite.* You will remind me that there are the sureties to fall back upon ! Granted. Granted also that the sureties are safe for the amount of their lia- bility. But this in nowise proves their ability to pay the overdraft on demand. I apprehend that no sane person puts his name down as surety for * Since the above was written, there have been three great panics in England and the United States, and two in Canada. Bankers have learned lessons by sharp experience during this period, and amongst others that of enquiring rigidly for what purpose a loan is wanted. If it is for erecting buildings, or buying machinery, they have found that, however good the names are, the transaction will be a bad one. Next to a bad debt, the worst thing a banker has to fear is a lock-up. m .n LETTER II. V I a thousand pounds who has the remotest idea that he will ever have to pay the money. The natural consequence is, that a security no more thinks of providing for such a liability than he does for paying off the National Debt. It is the nature of sureties, thertfore, to be uniformly un- prepared to meet such liabilities. Overdrafts of a permanent character then, are obviously deficient in that first requisite of a banker's resources — viz., immediate convertibility into cash in case of need. An ordinary drain upon a bank whose business was chiefly confined to the discount of legitimate business bills, could be met by simply contracting the volume of its discounts ; but you do not necessarily diminish your existing overdrafts a single pound by refus- ing to grant fresh ones. Or, if the drain was too sudden and heavy to be met by a mere contrac- tion of the discounts of the bank, a portion of its bills OP hand might be converted into cash. In the worst of times (October, 1847, only ex- cepted) good bills could be re-discounted at a price : but the re-discount of your current account ledger is a process, you will confess, which would be surrounded with difficulties in the easiest of times.* And is the privilege of overdrawing a banking account of such advantage to the party possessing the privilege as is commonly believed i Rightly t' I * Here is indicated another advanttige of the pro- missory note over the overdraft. Re-discounting is a most undesirable process, but should a sharp emergency arise, it would be possible for a bank to obtain advances on the promissory notes in its bill case. t OVERDRAWN ACCOUNTS. 13 f 1 and sparingly used, the privilege is doubtless a valuable one, and has carried many an honest trader through a difficulty that might otherwise have been insurmountable. But for one who so uses the privilege there are many who misuse it, and to their own certain injury in the ond. Take a case for example. Patrick Twist, draper, has enjoyed an uninterrupted overdraft for so many years, as practically to have ceased to re- gard it as a liability. It has, in progress of time, become as mvLch. fixed in hib trade as the XlOO with which he boldly started on his own account ten years ago. A fatal ambition to out-draper all Huggleton has brought him a large business, certainly, but it has at the same time swollen his book debts to a formidable amount. Instead of being in a position to clear off his overdraft on demand, therefore, he is at his wits' end to meet his current liabilities. Not improbably, at the time you intimate the desire of your directors that his overdraft be now paid up or heavily re- duced, he is on the eve of applying for its further enlargement. Now, were Twist addicted, at such a crisis to looking the length of his yard measure before him, he would see the impossibility of gratifying the wishes of your directors within any reason- ble period. The amount of his overdraft, and much more, is sunk in book debts, the collection of which would involve a world of expense, loss, and delay. His obvious course, therefore, should be, to call his creditors together at once, tell them plainly the position of his affairs, and throw him- self upon their forbearance. But the first impulse in the mind of Mr. Twist is, to screen his difficulties from his sureties. He 14 LETTER II. accordingly puts his "travellers" off till next journey, on various pleas ; and if he has any acceptances to meet, he gets them renewed if he can. He thus places himself in sufficient funds to effect such a reduction of his overdraft as may appease the demands of the bank for a time. Thus Mr. Twist accomplishes his First Act in that well-known commercial piece. The Road to the Gazette. He cannot have proceeded very far before he discovers that the reduction of his overdraft has not reduced his liabilities, as a whole, a single shilling. It has simply altered their distribution. His friends, the travellers, begin to come round again with harrassing punctuality ; and if he had difficulty in fencing them off the previous jour- ney, the difficulty is now enhanced four-fold — for, whilst their demands have doubled in amount, his excuses for non-payment have lost half their force. Christmas is still distant a few months. Twist, therefore, draws upon as many of his debtors as will accept his bills [and, if sorely pressed, will even draw upon an imaginary debtor of large amount, in the person of his shop-boy.] With these bills and a sprinkling of cash, backed by promises of extended orders, payment in full next journey, and certain stereotyped fictions touching the badness of trade, and his con- stantly-enlarging stock. Twist struggles to the end of Act Second. Early in the Third, the bank is again thun- dering at his doors, and certain of his renewed acceptances are rapidly approaching maturity. Still faithful to his principle of dealing with his difficulties as they arise, without a thought for OVERDRAWN ACCOUNTS. 15 the morrow, sanguine as to his own resources, and believing indefinitely in " luck," Twist de- termines upon a vigorous move. Accordingly, in a circular chiefly remarkable for an ill-regu- lated use of the pronoun "which," a discerning public is invited to observe tlie ruinous prices at which Mr. Twist is prepared to sacrifice, without reserve, for ready money, the whole of his unparalleled assortment of spring goods, just arrived, &c., &c. The lovers of cheap bargains, of course, flock to the shop, and a sum is realised sufficient to enable Twist to tide on, but only towards accumulating difficulties for a few weeks longer. A heavy creditor, living at a distance, exas- perated at last by repeated delays, and becoming apprehensive as to the safety of his debt, issues a writ. This is by far the most formidable diffi- culty poor Twist has had to encounter. A mere " traveller" he could manage — the bank he could stave off" — an acceptance he could renew — but a WRIT ! that is quite another aff'air. It inspires him with a degree of ignorant terror that haunts his very dreams. By any means, at any sacri- fice, it must be got rid of. Money, however, he has none; but, to his inexpressible relief, he finds refuge in a cognovit, with a total ignorance of its nature ; and so terminates the Fourth Act of his career. The writ has barely been discharged, when the bills drawn by Twist upon his customers begin to return upon him. The bills vvere pro- bably accepted on the understanding that he was to protect them — the acceptors agreeing to pay their accounts without reference to the bills M I' I I ■ i 16 LETTER It. at all. His own acceptances, too — further re* newals being now denied him — are, for the first time, dishonoured. The bank, taking alarm, be- comes urgent ; creditors at a distance, not find- ing their bills taken up by return of post, take alarm also. Thus, beset on all sides, an assign- ment for the general behoof is wrung from him at last. Several of the creditors, however, find- ing how he has been dealing with his estate, decline coming in under the assignment ; and so the affair terminates in bankruptcy and sixpence in the pound.* * The story of Patrick Twist will be recognised as having not a few counterparts amongst ourselves. We are afrai i, however, that the wholesome dread of a writ is not so common here as it is in Eng- land. Would that it were ! A higher commercial tone would bring it about. A cognovit is equivalent to a confession of judg- ment. After all, Patrick's banker was a good deal to blame for his troubles. He appears to have allowed his overdraft to run on for years without requiring payment, and to have nourished the delusive ideas that ruined the poor draper at last. A man of business can have no worse enemy than an over-indulgent banker. On the other hand, the best friend he can have is one who will, while giving every reasonable facility for business, strictly carry out sound princiijles. ■i . Letter III. OVERDRAWN ACCOTJl^TS— Continued. FURTHER OBJECTIONS TO PERMANENT OVERDRAFTS — TEMPORARY OVERDRAFTS EXPEDIENT IN CERTAIN CASES — PROFITS AND INCIDENCE OF OVERDRAFTS. The story of a draper, sent you in my last, is not a mere figment of the imagination. Of my own knowledge, the narrative is true in the main of half-a-dozen cases in one little country town of my acquaintance. I do not mean to assert that every one is like Twist, and makes the like improvident use of a permanent advance from his banker. There are numerous instances of parties, who, starting with a fair capital of their own, have turned to profitable account the additional capital procured by them in the form of an over-draft. Never- theless, it should be borne steadily in mind that overdrafts are recalled almost invariably in a time of monetary pressure and low prices, and consequently at a time when the trader must realize at a loss. The majority of applicants for overdrafts rarely think of this ; therefore you ought to think for them, and rather en- counter their present displeasure than their fu- ture maledictions ; because it is nothing unusual for the man to whom you have unhappily lent your money, and who has paid you a trumpery dividend, to turn round and charge you and 18 LETTER m. your advances with his ruin. I grant that, under all the circumstances, particularly if you are smarting under the loss of a thousand or two, such an accusation is peculiarly intolerable, the more so because a banker ordinarily con- siders that he confers a favour by an overdraft, and entitles himself rather to gratitude than to abuse ; but as the ingratitude of insolvent debtors does not fall strictly within the scope of my present subject, I pass on. And how, think you, that very important class of your customers, — those who conduct their business with a capital of their own, and whose banking accounts always show a balance in their favour, — how, think you, do they relish an upstart being thrust into business by means of the overdrafts you allow him out of their deposits ] It is neither a fair nor a courteous answer to reply, that it is none of their busi- ness, provided they get their interest upon the deposits, and may have the deposits themselves when they choose to call for them. I think they have a right to complain if competitors in trade are raised up against them by means of undue facilities, and their business by conse- quence reduced both in extent and profit. I know that it is often asked, by way of rejoinder to this, how the man who has to pay for his capital can undersell the man who is working with his own ? But Twist did, and thousands do ; for Twist, with all his ignorance of many things, saw very clearly this, that his only chance against his long-established competitors, was to drive " a roaring trade " on the principle of "small profits and quick returns." He ar- I c- pp OVEllDRAWN ACCOUNTS. Id gued. shrewdly enough, that twenty shillings are as good as a pound ; and, therefore, that twenty transactions, which realized a profit of a shilling each, were as good as one which realized a pound. You will tell me, perhaps, that a man — leav- ing Twist aside — who uses other people's money, will be more cautious how he lays it out (not knowing when he may be called upon to repay it) than if it were his own. This may be the case with some, but I suspect that in the main the contrary is the fact. A man who has worked for, and acquired his capital by laborious indus- try, will have a truer appreciation of its worth, and will be more cautious how he disposes of it, than the man will who borrows his capital for the purpose of speculation merely. It is too much the case, moreover, for the parties to re- gard an advance from a joint-stock bank, or any public body, in a light different from that in which they would regard money borrowed from an individual. " To an individual, the loss of the money would be ruin " — so runs the argu- ment — " but to a joint-stock bank, you know, it is only so much to each proprietor, — a mere trifle, which he will never feel." And the argu- ment does not always stop here, particularly with your " fast " men. Banking, they will tell you, is a trade, and interest and commission simply the premium for which the shareholders, or the directors for them, underwrite the risks which they undertake. Advances to gentry of this description, are what all prudent branch managers will regard as "doubly hazardous." I was once told by a customer, through whom ?. 20 LETTER III. we lost upwards of .£1,000, a man of fair intelli- ge!ice and average honesty, that we needn't be so very savage with him ; for if we would add together the interest and commission charged upon his account for the last seven years, we should find that we had lost by him little or nothing I An overdraft, if granted at all, should be tem- p&rary only, limited in amount and duration by the occasion which it is required to meet ; and there is no trade or business, however well con- ducted, or whatever the amount of capital em- ployed, in the course of which such occasions may not arise. The detention of a ship, for example, — the non-arrival of a mail, — the mis- carriage of a letter, and other such mishaps, are clearly occasions for the interposition of the banker with a timely advance. So likewise when the farmer is augmenting his live-stock, before he has brought his crops to market : or when the manufacturer is enlarging his stocks in anticipation of the spring or winter demand : or when the retail dealer is laying in his sup- plies for any one of the four seasons, — the banker is justified in aiding such operations to a moderate extent. The draper who goes to market with £750 of his own, we shall say, to lay in his winter stock, but extends his pur- chases to £1,000, might not unreasonably draw upon his banker for the odd £250. So of the farmer ; and so also of the manufacturer, and all others, in proportion to thtir known means, the magnitude of their transactions, their habits of business, and the circumstances of the case. If these four points are intimately known to EJ TffPj OVERDRAWN ACCOUNTS. 21 you, you will rarely make an imprudent ad- vance ; if they are not known to you, you will rarely make a wise one. You will tell me that men of undoubted means, high character, and extensive business, would not submit to the catechising necessary to inform you on the points suggested ; and that sometimes the first intimation you have of an overdraft being required is the presentment of the cheque which creates it, and that conse- quently your only course is to honour the cheque or lose the account. No doubt there are people in the world of excellent means and imperfect understanding, whose notions regarding the extent to which they may overdraw their accounts with impuni- ty are governed by no fixed principle, even in their own minds, and who would treat the dis- honour of their cheque as an unpardonable affront, or an enquiry into the probable period of its repayment as an incredible impertinence. It might be wise to humour such men to a moderate extent, if their known character and means are perfectly undoubted, and you know that the overdraft is either accidental or tem- porary ; but if you do not know this, and you honour the cheque, you should instantly honour its drawer with a note or a call upon the subject. If your respectful statement of the rules by which you are compelled to act is treated with scorn — if your calm but firm persistence in the propriety of your course is listened to with im- patience, and the account closed in a storm of indignation — you will at least have the consola- tion of reflecting that you have done your duty, 22 LETTER III. and that Mr. is a most unreasonable and i ^! violent person. But there is a class of customers of a different stamp, whose accounts have also a lively ten- dency to become overdrawn ; and who will trespass upon your indulgence, not to the ex- tent of their means, which would be easy of estimate, but to the extent of their audacity, which is incalculable. In dealing with such people you cannot too promptly act on the of- fensive. Do not calculate on their forbearance. So long as you will permit them they will draw. Refuse their first cheque, therefore, when they draw in excess ; for your only chance against their style of play is instant cheque-mate. Of course they will bluster, and threaten and bully ; but these modem Pistols, these ''fustian ras- cals," are not deserving of serious notice. Their wildest, and, as they believe, their most wither- ing threat, is the immediate withdrawal of their accounts to other establishments ; a calamity which you will be able to contemplate, I trust, with tolerable resignation and serenity of mind. The case which you have supposed, however, or rather, which I have supposed for you, of parties seeking to overdraw their accounts with- out a previous understanding with you to that effect, is an exceptional one. The majority of business men have character and credit to lose, and will not readily peril both by passing an untimely draft that may be returned upon them with the ignominious inscription, — " no funds." And the majority of men in business will also understand and appreciate your objections, on principle, to steadily overdrawn accounts ; or, OVERDRAWN ACCOUNTS. 23 at all events, you will find no great difiiculty in explaining and vindicating your objections to such advances. But if your customers under- stand neither from their own knowledge of busi- ness, nor can be made to understand through the medium of yours, why you object to allowing any account whatever to be permanently over- drawn, you have always a powerful practical de- monstration at command. You can refuse the ad- vance, and so clinch your argument to the compre- hension, I should suppose, of the meanest capacity. And watch well the temporary advances upon open account which you may, from time to time, see fit to sanction. Record the date of their pro- mised repayment, and see to the punctual fulfil- ment of the promise. Laxity in this respect is contagious. Be careless on your part in the exaction of such engagements, and rely upon it your customers will not be slow to profit by your example. Promise, recollect, is effected by mere words ; — performance by act and deed. The world is full of the one, and lamentably de- ficient, I regret to add, of the other. Beware, then, of allowing your clients to conclude that they may obtain advances on the strength of promises which they may never be called upon to perform ; otherwise your temporary advances will require no lengthened space of time to be- come fixtures in more senses than one. And now to revert to, I think, your only un- answerable plea — the apparent profit derivable from a permanently overdrawn account. I think the example you quote is hardly a fair one, if I am to regard it as an average. If I mistake not, the usual calculation is, that the operations upon I ! i i 24 LETTER III. an account warrant an overdraft to the extent of one-tenth their amount, or one-half the amount you promise on behalf of your friend Mr. Timms. But I will take your estimate as the correct one, and Mr. Timms, in consideration of your lend- ing him £1,000, shall turn over upon his account £20,000 annually. Now, if a party were to stipulate for an occa- sional advance upon his account to the same amount, but only for three months in the year, I presume that you would consider him bound to turn over in his account, at the very least, £5,000 in the twelve months. I believe that your stipulated figure would be something con- siderably higher, but take it at this. If, then, with a thousand pounds advanced to four par- ties in succession in the course of the year, you secure four different accounts, the aggregate operations upon which would be £20,000 annu- ally, it is obvious that in this way you lay your money out to as great advantage in point of profit as if you advanced the money in perman- ence to Mr. Timms. You will argue, perhaps, that all four might require each his thousand at the same time, and consequently that a sum of £4,000 would be re- quired to effect the operations. Then do not so arrange. The acceptance or rejection of an overdraft is entirely in your own hands, and ought in some measure to be governed by your convenience. If those accounts which are drawn upon most heavily during the autumn months, for example, are already numerous enough for the state of your finances, take no more engage- ments for that season. But if your spring or Tt OVERDRAWN ACCOUNTS. 25 winter engagements are comparatively light, an accession to their amount (always, however, with a steady eye to your general instructions from head-quarters) might be worth your considera- tion, with the view of giving a better balance to your financial position, and a more equable movement to the general course of your business. But this is fencing with a shadow. It is not probable — the probabilities run quite against the supposition — that in the ordinary course of things all men require advances at the same period of time. As the manufacturer sells, the trader buys ; as the farmer sells, rents are dis- charged ; as the trader sells, the manufacturer is paid, and so on, — one series of accounts being in process of reduction whilst another is in course of expansion, — the fall and the rise, in the long run, pretty nearly counterbalancing each other. And there is another point worthy your best attention before we dismiss the subject, as dis- tinguishing the temporary advance from the permanent loan. I will take the average dura- tion of permanent overdrafts at the moderate period of three years ; and I will contrast the jeiOOO thus advanced to an individual with a like amount advanced every three months to a succession of individuals. By the one process it is obvious that you assist one man only to the extent of £1000 for three years, whereas by the other you assist a dozen men to the extent of £1000 each within the period. In other words, by means of that amount of your capital which you can with safety invest in temporary advan- ces upon open account, you can effect as much for the body of your customers, and the trade of B ■'•I 1 20 LETTER III. li i^ your district, in a single month as you could effect in a whole year by means of permanent overdrafts, — just as a quantity of guano depo- sited upon certain square yards of ground will cause a rank and unhealthy vegetation over the particular spot, whilst all around it is left in sterility ; whereas the same quantity, by judici- ous scattering over a wider surface, will produce tenfold, and a healthier crop to boot. And whatsoever tends to stimulate healthily the trade of Huggleton cannot fail to stimulate the profits of your branch, for a growing trade is accompanied by enlarged operations and aug- mented profits ; the one result giving increased activity to your accounts, the othv; • tending to swell the aggregate of your deposi«d. To sum up : the permanent overdraft is in- convertible in case of need, and therefore ineli- gible as a banking asset : it is, generally speak- ing, an unwholesome prop to the trader who requires it; it inflicts injury, indirectly, upon the trader whose capital renders him independ- ent of it; it is not more profitable than the temporary advance ; and it prevents the banker from giving that legitimate assistance to the monetary wants of his district which he other- wise might aflbrd.* ■^Canadian bankers, after having placed the proceeds of promissory notes to a customer's credit, are not unfrequently annoyed by the presentation of cheques which overdraw the account. Few things are more unbusiness-like. and no man has a right to complain of the return of a cheque under such circumstances. If a banker agrees to advance $1 ,000, to draw for more is simply an attempt to borrow without notice .,___. .^«.,.,:^„..^jtAi: OVERDRAWN ACCOUNTS 27 «r, m tact, any one who keep, a banking IZZ Letter IV. DISCOUNTS. THE MEANS AND BESPECTABILITY OF OBLIOANTS ON BILLS A PBIMABY CONSIDBBATION — A CUSTOMEB's ACCOUNT A CLXJE TO HIS FINANCIAL MEANS AND POSITION. When your friends, Messrs. Potts and Co., the paper manufacturers, offer for discount their draft for £256 13s. 4:d., at months' date on Booker and Co., of Birmingham, wholesale sta- tioners, they tender you a document rather pro- lific of suggestion to the mind of a banker, how- ever unpromising the subject may appear to the general reader. Whilst you are figuring the bill, then, with a grave countenance, ostensibly bent on inquiry as to the validity of the stamp, the regularity of the endorsements, the absence of erasures, and other points essential to the legal accuracy of the bill, you will be revolving in your mind, no doubt, considerations of far graver weight and importance. I shall take it for granted that it is convenient for you to discount a bill for the amount ; and, consequently, that the bank measure of 1844, commonly called Peel's Act, is, for the time, in- operative. In monetary phrase, then, you are " open " for discounts, — the offer of a few good bills, would be rather acceptable to you than otherwise. DISCOUNTS. 29 This settled, the question that will naturally arise next is — whether the bill now oflFered you is a safe one % And in determining this point, it is not always enough that the world at large, yourself included, should have a high opinion of the means and character of the drawers. Very high opinions, indeed, were entertained, up to the last moment, of certain firms in England, who have of late repaid the misplaced confidence of bankers and the public after a fashion that should be instructive, — the dividends upon their estates very generally bearing an inverse ratio to the degree of confidence placed in them. Your opinion of parties, therefore, should be subject to frequent revision ; because, for one reason, incidental reverses are constantly aris- ing, which although too slight to effect our com- merce as a whole, may nevertheless bring disaster and ruin to particular branches of industry. You are not justified, therefore, in awaiting the advent of a general panic, before (mentally at least) you commence a review of your Character Book : otherwise you may find a few of your friends in the Gazette, before you have passed your pen through records touching their wealth and re- sponsibility of the wildest description. Now one of the best practical guides to the progress a party is making in the world, is his banking account. To the uninitiated, the ac- count, as it appears in your ledger, is an aggre- gation of figures, which, if it gives rise to an idea at all, is painfully suggestive of the processes of multiplication and addition. All the sense or English they discover in it is an endless repeti- tion of the terms By and To cash, bills, or dis- i| 30 LETTER IV. count, as the case may be. The cohimno headed, " Balance," " Days," " Interest," with their dense legions of figures, are mysteries to the mass, which they would rather take for granted than seek to fathom. But to the eye of the banker, this same account, habitually and carefully per- sued, exhibits a man's financial history. As an illustration of this, refer to the account of Philip Barnes, in your books for the years 1834-9. Philip, I have heard you state, started in business in 1834, with a capital of £5000 ; and, for the first year or two, drove a cautious trade, limiting himself, as your books will show, pretty much to his own means. But in the third year, Philip, becoming ambitious, began to "extend ;'* became still more extended in the fourth ; and in the fifth year ('39), reached such a degree of inflation that explosion became inevitable. The considerable balance which stood at his credit during the whole of the first two years, becomes diminished, you will see, in the third, disappears totally in the course of the fourthj and in the fifth is replaced by a balance against him. Refer now to his bill account for the same period, and you will find a progressive and startl- ing increase in the amount of his bills un«1er discount. Look, finally, at the debit side of his account for the total of his acceptances retired, (a tolerably correct index of the credit he is obtain- ing from the public,) and you will find that they also have shared in the general tendency of Pliilip's affairs towards expansion. You find, in fact, that in the summer of 1839, when the Directors first took alarm, he UUBIUaiilb^MtllUMMM DISCOUNTS. 31 had got to that point at which they had to choose betwixt " carrying him through," or let- ting him drop ; — either they must continue to discount his bills, to enable him to meet his acceptances, or his acceptances must go to dis- honour, and he to the Gazette. They chose the former, and, as far as their information went, the wiser alternative of the two ; but as matters ultimately turned out, an unfortunate one. Now the fault here lay, not so much with the Directors, as with W , the Manager at Hug- gleton for the time being. It was his duty to have foreseen the dangers into which Barnes was hurrying, and to have acted accordingly ; and if W had watched the account with ordinary vigilance or judgment, his suspicions would have been aroused long before Barnes got into that involved condition, from which extri- cation became impossible. The enormously increased activity of the ac- count, an increase in the proportion of five to one, ought first to have suggested to your pre- decessor the propriety of looking to the state of Barnes's liabilities ; and finding them augmented in an equal ratio, he ought to have become doubly cautious, at least as to their character and safety. The bills drawn by Barnes upon Wiggles and Co., for example, ought at once to have challenged attention. True, Wiggles and Co. were in a trade which it was the business of Barnes to supply ; and you will see that his bills upon that firm, at firsts averaged such an amount as might legitimately arise in the course of busi- ness : — from £300 to £500 : whereas towards the end of the account, these bills have risen to i I II li i '% 32 LETTER IV. the monstrous sum of £3000. But even if the sum itself had failed to raise a doubt as to the legitimacy of these bills, the singular regularity with which, for a lengthened period, one of them is discounted a few days before another of simi- lar amount is becoming due, ought to have opened W 's eyes to the fact, which was staring him in the face — that the paper upon Wiggles and Co. was being kept afloat by a series of renewals. To render the case, as far as your predecessor is concerned, altogether inexcusable, there will be found, amongst the bills retired by Barnes through his account, a series of his acceptances to Wiggles and Co. — clearly indicating the ex- istence of cross paper betwixt the parties. That is to say, whilst Barnes at Huggleton was bolster- ing up his credit by drafts upon Wiggles and Co. they, in their turn, were imposing upon their bankers by drafts upon Mr. Philip Barnes. Now, it appears to me that it required no extraordi- nary degree of sagacity to have read from these circumstances, exhibited on the very face of Barnes's account, the actual fact, that Barne& and the Wiggleses were engaged in some specu" lation altogether extraneous to their legitimate- business, — as the result showed rather forcibly in the end to those interested in the respective? estates. But apart from these very glaring facts, there were others equally indicative, to a shrewd ob- server, of the irregular and dangerous course into which Barnes had plunged. Refer to the account again. On January 5, 1839, you will find a debit of extraordinary magnitude : — " To A. B., £1,500." Now, seeing that the other debits in '"'"-' ■"■"■ DISCOUNTS. 33 the account average about XI 50 each, the debit in question might have suggested, and would fairly have justified the inference, that it did not arise, at all events, out of the regular course of Mr. Barnes's business : and the truth was that it did not. It was found to represent an invest- ment by Barnes in a certain mining company, which he and his co-adventurers fondly believed would prove a second Wheal , and which ended, as nine-tenths of such schemes do, in the impoverishment or ruin of all concerned. It might also have struck your predecessor, looking to Mr. Barnes's account, that his bills latterly were paid in either the very day they were drawn, or as soon as they could by possi- bility reach his hands accepted — an infallible sign of restricted means on the part of the drawer, which you will do well to note. Now, in the earlier stages of the account, the bills, you will see, were paid in at all dates, — Barnes, from his then easy and unembarrassed position, being en- abled to keep them by him, sometimes for a month or two, before he passed them to his account, or had occasion to discount them. It is likewise observable throughout the latter part of the account, that many of Barnes's drafts upon his customers were dishonoured. The entry, <* To 's acceptance and charges,^^ recurs with a frequency sufficient to have warranted the suspicion, that in extending his business Mr. Barnes had exercised, to say the least, an unfor- tunate selection of customers. An acceptance will be dishonoured sometimes through sheer accident ; but no conceivable amount of blunder- ing will explain sat'sfactorily the number of dis- B* I SSSSS^^S9 34 LETTER IV. honoured bills passed to the account, during the first five months of 1839. The rule with Mr. Barnes's customers would appear to have been to dishonour their bills — the exception to meet them. Finally, I would draw attention to the fact that the rates of discount levied latterly upon Barnes's bills were exorbitant, as compared with the pre- vailing rates of the day. I infer from that, that upon this point he had become indiflferent, — a deadly symptom of incipient insolvency. When the customer becomes regardless of the interest on his account, let the banker look well to the principal. No man doing a business which ren- ders him largely dependent upon procuring dis- counts can well become indifferent to the rates of discount, until he has reached that point when the question with him is not one of discount and commission, but of mercantile existence. When a man asks you, therefore, in ordinary times, to discount certain bills for him, and to " charge what you like," be sure he is tempting you, by a higher premium than ordinary, to a more than ordinary risk. I believe I entertain as hearty a dislike to the whole tribe of " screws " as I have heard you frequently and vigorously express ; but better endure a half-hour's huxtering over the discount on a good bill, than a whole year's remorse over the lost principal of a bad one. •^t..,.^.- J*J:.-»f- — . :■ Letter V. DISCOUNTS— Con^mued -i- i 'I 1 1 i THE HABITS OF A TRADER TO BE CONSIDERED — BUT AN INSPECTION OP HIS BOOKS THE ONLY SURE INDEX TO HIS ACTUAL POSITION. In my former letter on this subject, I endea- voured to show, that a customer's account fre- quently and carefully studied, is one of the best practical guides to the progress he is making in his business. I chose to illustrate this position by an examination of the account of M *. Philip Barnes, because it abounded in nea'ly every species of banking transaction sympto natic of a trader in distress, and therefore, supplied me with data wherewith to lay down upon your banking chart, so to speak, the rocks and shoals, which you will do well, at all times, to avoid, in steering your branch towards next dividend. I could select another account, the exact con- verse of that of Mr. Philip Barnes, and show, at equal length, how a customer's account proceeds when he is doing well ; but this is less requisite. A branch managei pays his official regards neces- sarily to the accounts of the more speculative, and less wealthy of his customers. He feels no anxieties, and need encourage none, for the busi- ness prospects of parties who owe him nothing, or by whom it is an impossibility that he can sustain loss. Let it suffice, then, to state gen- 36 LETTER V. I erally, that the account of a man who is really prospering in the world exhibits none of those symptoms of rapidly accumulating difficulties which are obvious to the most cursory observer in the account of Mr. Philip Barnes. Next in importance to a study of his account, the habits and character of a client are deserv- ing of your attentive consideration. If a man's style of living, for example, becomes extrava- gant, and he gives himself over to excess, you cannot too promptly apply the curb, however regular the transactions upon his account may seem, because years may elapse before mere irregularity of living will make any impression upon his banking account, whilst irregularity in business will exhibit itself immediately ; and for this reason, — that whereas improvident habits of living involve a continuous waste in small sums, spreading over tolerably long periods, improvi- dence in business may involve in one swoop the loss, perhaps, of thousands. I hold, then, that you are not warranted in all cases in feeling satisfied of a man's perfect re- sponsibility, until his banking account exhibits indubitable evidence to the contrary. When a man in business notoriously gives himself over to "sporting" propensit'- 3, for example, and becomes more intimate with the prices at Tatter- sail's than those in Mincing Lane — more fami- liar with the course at Epsom than the course of the Exchanges ; and more prone to take the odds on the Derby, than be even with his banker — you are bound to watch his account with more than ordinary vigilance. Not that I would put DISCOUNTS. 37 such pursuits down ; I merely stipulate for their being followed in season and moderation, and not to the neglect and detriment of one's busi- ness. Unquestionably, however, the most unerring guide to a trader's actual position would be found in his hooks, were they at all times open to the inspection of his banker, which, with all defer- ence to the prevailing prejudices to the contrary, I think they ought to be. A man lays bare his constitutional ailments with candour to his physi- cian, because in the absence of a correct know- ledge of his case the physician might apply improper remedies : for the same reason, a man should be candid with his banker, because if he will conceal from you the real state of his affairs it is just possible that you may ply him with stimulants when severe purging would suit him better, or bleed him to death when a little strengthening, by way of assistance, would save his existence. What should there be offensive or unreason- able in your stating to a person who comes to borrow money from you, at the miserable pre- mium which banking profits afford for banking risks — that before you take his account, and disc junt his bills, and lend him money, you require to know his trading position by a glance at his books 1 You may with a clear conscience assure him, that if his position is satisfactory, matters would go on much more comfortably for him and for you, than if you are left to guess at his position, and to have no data wherewith to 11 38 LETTER V. rebut any rumour to his prejudice that may reach your ears at a future time. I am perfectly aware that this sort of confi- dence betwixt the banker and his client is the exception, and not the rule ; and that, too com- monly, the first acquaintance made by the banker with his customer's books, is in the Court of Bankruptcy, or at the first meeting of creditors. I am also aware how difficult it will be to render the custom general, until there is something like unanimity amongst the banks respecting it. It will hardly answer for the manager of the " Union " to become suddenly solicitous as to the affairs of his customers, while the manager of the " Alliance " continues all confident and indifferent upon the subject — otherwise there soon would be a very gener?^ '•ansfer of accounts from one bank to the otht But this much, I think, ts practicable in some of our smaller towns, where the banks are few in number, and a friendly and liberal intercourse exists amongst them. An understanding might be come to, that from and after a certain date every bank should, as a rule, require an exhibi- tion of the books of any party proposing to open a new account with it, should the account be of a description to require advances, by way of discounts or otherwise. This would give the practice a commencement, and once commenced it would spread. I do not doubt that such a proceeding as this would give rise to a loud and general outcry on the part of those who had the gravest reasons for keeping the condition of their affairs literally a sealed book. But the prudent substantial man f -^ — ■"■ DISCOUNTS. 39 of business, I firmly believe, would hail the opportunity of laying the position of his affairs confidentially before his banker — conscious that by so doing, he would assure to himself against times of difficulty, distress, and panic, a larger measure of confidence and liberality than by any other course he could adopt. If I am asked on what grounds I claim exclu- sively for the banks a privilege, the exercise of which would save them from losses to an incal- culable extent, I would answer, that in the first place, the profits of bankers are greatly less than those of other traders. Let a banker turn over his entire capital once every month, at five per cent. |jer annum, and his profits at the end of the year are only X50 at last on every XI, 000, plus his commissions, which you may set down at £30 more, in all £80. But in the case of a trader turning over £1,000, once every month at a profit of five per cent., (a low rate, it will be admitted, for an average,) his profits upon the £1,000 at the end of the year, are £600. But, in the second place, were it customary for banks to insist upon being thoroughly acquainted with the actual trading position of a party, not by mere hearsay, but by actual inspection of his books, before opening an Ibcount with him, protection would thereby be insured to liis creditors at large. There is no taunt more com- mon amongst angry creditors, as you may hap- pen, perhaps, to know by experience, than that but for your reckless advances to so-and-so, (the insolvent) by means of which you bolstered up his credit, and made him reckless too, they would never have trusted him to the extent they did. IH. Mil M ■ waMm 40 LETTER V. And it is hardly to be conceived, that certain advances, which of late years have come to light, and are the scandal of our banking system, would have been countenanced had the banks who made them had an accurate knowledge of the trading position of those to whom they were made. It may be said, perhaps, that the constitution of Joint Stock Banks offers a serious impediment to that free interchange of confidence betwixt bankers and their customers, which would be so greatly to the advantage of both : that the directors of a bank being for the most part en- gaged in business themselves, the customers of the bank have an insuperable dislike to making a disclosure of their transactions to parties who may be in the same business as themselves, and who might use the knowledge so obtained to their own advantage. But there is no necessity that the disclosure should be made to " the board." It need go no further than the manager ; because his report could be made in those general terms, which would enable the board to come to a sound and proper decision upon the subject, without his disclosing a single fact that the customer would object to having repeated. Whether the sul^gestion here thrown out shall take root, I know not ; but were this exchange of confidence betwixt bankers and their clients universal, it is beyond doubt, that many rash and ruinous speculations would be nipped in the bud ; numberless creditors saved from loss and their debtors from the Gazette ; many deserving men spared the indiscriminate rigours now una- voidable in times of panic ; and many banks saved from irretrievable disaster. Letter VI. ;j| mSCOVl^TS— Continued. i.ii THE CURRENCY ON BILLS — BILLS At LONG DATES OBJECTIONABLE ON FINANCIAL GROUNDS — RECA- PITULATION. Thus far we have considered the means at the disposal of a branch manager, of ascertaining the position and circumstances of his immediate customers only, viz., the last indorsers of, or the parties from which he receives, the bills dis- counted at his branch. As regards the respon- sibility of acceptors, or others living at a distance, you have not, of course, the same means of judging for yourself. You must in a great mea- sure, rely upon the judgment of others, in most cases upon the report of the party's banker. Now, I do not say it offensively, but a banker's « opinion in confidence " is not always to be taken as a sure guide to the actual means and position of his customer. Before Mr. Twist, for example, went the way of improvident drapers, what would your opinion in confidence have been of " his standing and responsibility, in the way of business, for X200 1 " Why, undoubtedly, that he might safely be trusted for the amount named. And your opinion would have been a conscientious one : you trusted him yourself, un- happily, for a great deal more. But this circum- stance you could not properly have divulged. li! wmmm 42 LETTEll VI. even in confidence. If you had, it would have tended greatly to qualify your favourable report of Mr. Twist in the minds of inquirers gener- Instead, therefore, of ascertaining the trust- worthiness of a party living at a distance, for a given sum merely, it would be well, at the same time, to procure specific information as to his character. Even in these times, there are men a banker may safely trust " to any amount they will accept for," as the phrase is, simply because there is a law in the nature of such men which prevents them from entering into any engage- ment which they cannot righteously fulfil. To men of this stamp, character is capital, and justly so ; for the sterling qualities of some men offer a safer guarantee to the banker against loss, than the sterling pounds of others. Here I quit for the present that large section of our subject which has had reference more particularly to the sa/ett/ of a bill, and shall proceed to discuss a point not without its weight at all times, but of very grave consequence iu certain states of the money-market. I allude to the currency of bills. Now, whatever the state of the money-market may be, a banker will prefer a short-dated bill to one of longer currency — • and for obvious reasons. In the first place, the risk is less. In the ordinary course of things, more firms will give way in six months than in three. I say it with respect ; but there is al- ways a better chance of the first house in Eng- land standing for three months than for six. In the next place, the banker could, for every bill DISCOUNTS. 43 at six months' date, discount two at three months' date within a given period ; and so make his resources doubly available to his cus- tomers. If you have a certain sum that you can prudently lay out in discounts, and you select for this purpose bills not exceeding three months' currency, it is obvious that, at the ex- piration of the three months, you have the same amount to invest again ; whereas, if you were to lock it up in the discount of six months' bills, double the space of time would elapse before you were in a position to repeat the operation. The result for the year would be> supposing your capital available for discounts to be £50,000, and that you invested it in the shorter-dated bills, that you would turn this capital over four times within the year ; whereas, by selecting the longer-dated securities, you would turn it over twice only. In th*^ one case, your discounts to parties would amount to £200,000 per annum ; in the other, to only half that sum. But, as I have said before, there are states of the money-market which render the currency of a bill of very grave importance. In the face of a growing tightness of mo »y, for example, no banker can prudently lock up any portion of his funds in the discount of bills having six montlis to run. As money becomes scarce, the rate of interest rises, and the value of all securities and property falls. An inducement is thus afforded to parties having moneys lying in the hands of bankers to seek investments for their funds : and thus arises a drain upon the deposits in banks, of more or less severity, according to circumstances. i 44 LETTER VI. Now, speaking generally, a drain upon your deposits must be met by a contraction in your discounts. To continue to lend as much as usual, whilst your deposits are rapidly leaving you, would be to pursue a course which would find you some morning with a well-filled bill-case, perhaps, but an empty exchequer. Let us suppose, then, that you have £50,000 of bills under discount when yon perceive the commencement of a drain upon your deposits, and have reason to suppose that the drain will be of some continuance. Let us also suppose that you find your deposits leaving you at the rate of £5000 per month. Now, if your bills are all at six months' date, about .£8000 a month only will reach maturity. To meet the supposed drain, therefore, you would require at once to restrict the amount of bills usually dis- counted by you from £8000 to £3000 per month — a process sufiicient to break half the firms in Huggleton, I should suppose. But if your bills were of shorter currency — say three months' date — then £16,000 of your total dis- counts would mature monthly ; in which case, you could meet the drain upon your deposits, and would still be able to continue discounting for a time at the rate of £11,000 per month, or to nearly four times the extent you could pru- dently ^o were your dealings confined to long- dated bills. Of course I do not presume that any banker's bill-case is filled exclusively either with three or six months' paper. There will always be found in such repositories a mixture of both, but vary- ing greatly in the proportions held of each de- DISCOUNTS. 45 scription. What I wish more particularly to insist upon here is, the inferiority of the longer- dated bills in a financial point of view ; and what is true in this respect of a bill-case full of six months' bills, would of course be true, to a certain extent, of a bill-case only partially filled with such instruments. Nor am I to be understood as laying it down as a rule absolute that every diminution in your deposits must instantly be met by a correspond- ing diminution in your discounts; for, frequently, your deposits will be diminished one week, and increased the next ; or whilst the deposits at your branch are falling off, those at another branch may be increasing — and conversely. Speaking generally, however, a permanent diminution of your deposits must be met im- mediately or ultimately by a corresponding diminution in your discounts ; but this is purely a head-office question, which we may have oc- casion to discuss at more length hereafter. I think I have now glanced at the main points for your consideration, when such a bill is offered you for discount as that with which, by way of illustration, we opened the present subject. Let me recapitulate very briefly. It is possible, then, that at the date the bill is offered, the amount of bills already under dis- count to Potts and Co. may be quite up to the mark authorised by your Directors as a limit. Or it may happen, supposing you have no fixed limit to their discounts beyond the merits of each bill, that their drafts already afloat upon Booker and Co. are of an amount beyond which I I M I' ), 46 LETTER VI. you may be unwilling to go. Or, again, although less likely, it may be that you find a bill for the same amount upon the same parties just about due, and so, not unnaturally, infer that the bill now offered you is a renewal. Or, finally — and, I trust, least probably of all — your eye may have detected among the bills retired by Messrs. Potts and Co. a stray acceptance of theirs to their friends Messrs. Booker and Co., which would indicate the existence of cross-paper be- twixt the firms, and rouse your liveliest suspicions as to the solvency of both. Any one of these several objections would, of course, be fatal to the bill being discounted, at least without the most clear and satisfactory explanation, and fresh instructions from your Directors. " But how," you exclaim, " is all this pro- longed and complicated effort of memory, per- ception, comparison, and logic, to be got through in the few seconds permitted me to say whether I will take the bill or refuse it 1 " Simply, I answer, by making the effort beforehand. If at the moment the bill is presented, you have allowed your information respecting the house of Potts and Co., their connexions, character, and account, to run into arrear, that is your fault, not theirs. They are entitled to, and you ought to be able to give them, an answer there and then, without hesitation or doubt, whether their bill will be passed to their account, or not. You do not hesitate, at a glance, to pronounce judgment upon a picture, a poem, or an edifice, as a work of art? Now, a tithe of the mental labour which enables you to do this without conscious effort, will enable you to pronounce, with pro- DISCOUNTS. Priety and decision, the fnfo 4^ ever. The facuItyVdltfL?!^^^^ ^"^ ^h^t- W an indifferent one &'^'^^ ^ ^^^^ bill I'M I: I I I, il fi I Letter VII. DISCOUNTS— C7oti«mued OF THE COUNTRY BILL, OK LOAN NOTE, AS DISTIN- GUISHED FROM THE COMMERCIAL BILL OF EXCHANGE — RENEWALS — OVERDUE BILLS. The bill of Potts and Co. on their customers, Booker and Co., of Birmingham, which hasformed the text of my last three letters, would be ranked at your head office as '* marketable " paper. In case of need, such a bill could be re-discounted in any ordinary condition of the money market. It represents value, and arises out of a bond fide business transaction. It is drawn by the manu- facturer upon the vendor of a certain commo- dity. At the expiration of a stated period, the acceptors undertake to pay the drawers of the bill a certain sum " for value received," and the presumption is, that the sale of this value re- ceived will place the acceptors in funds to meet the bill when it becomes due. But you will hardly have disposed of this transaction, perhaps, when your faculties are summoned to the consideration of a bill of quite a different .stamp ; but of a class of considerable amount aiic prevalence in country banking — par- ticularly in ^he more s»;gricultural districts. John Bowdler, then, has called to borrow a hundred pounds for a few months ; he is not particular to a month — John never was — and he DISCOUNTS, proposes to draw fm. ^ i. and neighbour, DavM iri"' "P"" ^i* friend tor the amount wiffc^ll* XI ™'' 'o "go bail" , tK>n, and w„ul*d ro fh^,^ *! „»"f te«t cf^^l ten fames the amount Th?* ^^" "^^ it for that Mr. Bo^dler Tm sein ,*?* '»' P^haps' ^?^^Ti^. '" the lai and hr?:""S '»' »? p^a^thtrtitx^^^^^^^^^^ »an. Heha^ran/hlte "! » ^batantial Jenf *" *, ^^"-^tocked form " ^"t at »'ere,t : " rent, and a moderate 7^' "^ i'^*' «* a low count somethine 1^1 .*?*"««• Throw out n1^ P«rdiem, and/ohn ? :^er£:'^' S^O'^^fe Starkoj, too, is a man If . '^S^^'^iow man one mfirmity—a fetoT. O' excellent means an^' Ws nei hb„y, titht'^^r^ »? .acoommirte ,t--^»--imJ:'ttrn;ottXh-r~ But "bill" ,-f • »f the term. A geSl'" *»«<=' acceptation represent commerS v»l """^mewial bill must b"t_Mr. BowdkHrar "f J'™n «'«' received W's.good nature for7h«TP'^ "P^" Mr. Star' due time to pay the Ml i.*"""""' and means in eeived, so fa? J ^r S It""?''^ ' ""e vatere P-rely fictitious '■ ^^^"^ « """cerned, being ^'-™e that the instrument has the appear. 60 LETTER VII. ance of a biU. It is formally dated from Mr. Bowdler's place of residence, drawn at three months' date, and humourously accepted by David Starkey, payable at his banker's in Lon- don — David, however, being as innocent of " keeping a banker " in London as the banker thus honoured is of the faintest knowledge of Mr. David Starkey. I admit, then, that it has the appearance of a bill of exchange — just as a bad shilling has a spurious resemblance to a good one. But do not hope to palm off such a docu- ment in the money market as a bill representing an actual business transaction, be it ever so dex- terously "got up." Let it be drawn, if you will, for an amount much less than the stamp will cover (a rare case with this class of bills). In- stead of an even sum in pounds, let it be drawn up for a sum in pounds, shillings, and pence (a case equally rare) — let even the value received be an express one, (flour, bullocks, or malt, for example) — in a word, draw as you will, it is still Bowdler upon Starkey — "Pig upon Bacon " — to the comprehension of the meanest capacity in the bill-market. If you doubt this, and ever have occasion to send a batch of bills to your broker for discount, just try the experiment of inserting here and there, in the remittance, (quite promiscuously, of course,) a few choice bills of the Bowdler species ; and they will be picked out with a certainty and cunning amounting to intuition, and either sent back di- rect or civilly " set aside to wait your further instructions." There is as little hope of the^'r es- caping the detection of a practised eye, as there is of one of her Majesty's light sovereigns DISCOUNTS. 51 passing muster at her Majesty's receipt of cus- toms. Not that the class of bills now under review is never re-discounted. In easy times, when money is abundant, and country banks and Lon- don bill-brokers are at their wits'-end how to find employment for their funds, such bills wUl find discounters at a price, provided the endorse- ment of your bank is in tolerable credit. But it is neither respectable to give the price, nor pru- dent to rely upon such a chance ; because the first blast of discredit that crosses the money market will teach you that the day of kite-flying for the moment has gone by. If up to this time you have been going before the wind, so to speak, with all sails set, in the shape of " safe country paper " under re-discount, and are sud- denly taken a-back by one of those squalls not • unfrequent in these high monetary latitudes of ours, one of two things inevitably follows — either you founder and go down at once, or you cut your rigging and let everything go by the board, and so swamp any chance of profit or di- vidends to your owners, for that voyage at all events. If you would avoid either extremity, you will let your funds out with a cautious and sparing hand to the Bowdlers and Starkeys of your district. But, independently of the " unmarketable " character of the bills in question, they are obnox- ious to another objection. If there is one thing more than another essential to the bill of ex- change as a banking security, it is the certainty of its being paid the day it falls due ; but it is pre- cisely upon this point that Mr. Bowdler is incor- li'l I ' ii I tf 1 I J 52 LETTER VII. rigible. When he puts his name to a bill, he determines its currency by what he calls a rough guess. If you can't let Mm have the money for four months, he thinks he can " manage " it in three — a month either way being, in John's eye, of no consequence to any living being. His pro- mise to meet his bill he gives as loosely as he would a promise to visit a relative in the course of the summer. The necessity which a mer- chant feels to meet his acceptances to the day, or hopelessly blast his credit, is an unknown sensation to Mr. Bowdler. The processes of presentment, dishonour, and noting for non-pay- ment, are mysteries to his mind as profound as the order of procedure in Chancery. He cannot comprehend why there should be so much ado about nothing, and will ask you, with something like indigation, if you fancy he means to dispute the bill, that you make such a noise about it 1 and, further, if you supposed he was likely to make a purposed journey to Huggleton to pay the bill on a particular Monday, when he was coming to town the Friday week following, whether or not? Not that it will always be so with Mr. Bowdler. On the contrary, it is just as likely that he pays the bill a week or so before it be- comes due, as that he pays it a fortnight after- wards, and meanwhile lights his pipe with your notice of dishonour. But the serious fact re- mains, that in looking forward through a file of such bills becoming due, you have no certainty how or when they will be met. Some, you guess from experience, will be met before, some at, some long after date, others not at all ; but what par- ticular bills will be so met, and to what amount, DISCOUNTS. 58 you know as much as you know of the yield of next harvest. m Not a few, perhaps, of this class of bills you may be called upon to take renewals for. Parties who have undertaken to meet their bills faith- fully at the end of three months, now find, or pretend to find, that they have miscalculated, or been disappointed, or have had some unex- pected demand to meet, or haven't effected sales, or — something else. You have to choose therefore, between allowing the bill to run up^n your dishonoured list, or taking a renewal of it. If you are satisfied that the man's inability to meet his bill arises from circumstances unfore- seen and unprovided for, your better course, perhaps, will be to accede to a renewal of the bill for a short period — provided, of course, that you know, or are convinced, that no change for the worse has occurred meanwhile in the circum- stances of the respective obligants to the bill ; but if there is the slightest reason to doubt this, you will not be justified in agreeing to a renewal, unless either fresh security is given, or the re- newal is drawn for a portion only of the original bill, the difference being met in cash. But in all possible cases, let the first renewal be the last. The occasion must be an unusual one that would justify your taking a second or third re- newal of the same bill. Miscalculation, delay, disappointment, are reasonable excuses enough for once ; but they are not to be listened to a second time. A man may innocently enough, perhaps, mistake your purse for his own once, but the mistake will not bear repetition. So a II. I 'i! ( : ! tl .11 I' 54 LETTER VII. man, once for a time, may " due " his accept- ance in May instead of April, but that he should immediately repeat the blunder, is not to be to- lerated. You will find it a sound principle, also, to decline a fresh transaction with any party who has required a renewal of a former one. You have no reason to suppose that he will be more punctual this time than he was on the previous occasion ; on the contrary, the very fact of your entertaining a fresh transaction with him, would justify him in the conclusion that your anger and threats on the occasion of his former irregu- larities, were mere talk, made to order, and all very fine, perhaps, for — the marines. If, pre- suming upon this, he should lead you a dance through half-a-dozen delusive renewals, and into a desperately bad debt at last, call him a knave if you will, but reconcile the transaction with your duties — if you can. If the conditions upon which alone you are justified in allowing a bill to be renewed, in whole, or in part, are not fulfilled, or are im- practicable, and the bill is allowed to go to dis- honour, your steps for its recovery cannot be too prompt or vigorous. If your notice of dishonour does not bring the cash within a reasonable number of days, 1 would favour the parties with three days' further grace in a special and pe- remptory epibtle, containing a brief but unmis- takable expref.sion of your sentiments and in- tentions : th^s failing, let your solicitors make application for payment forthwith j failing all three, a writ is your only resource. DISCOUNTS. 55 I am prepared to hear you exclaim against this as " sharp practice." My answer is, that the case demands it. By dishonouring the bill, the parties to it have, to all intents and pur- poses, suspended payment, and judgment cannot overtake their personalties, if they have any, too rapidly. Pursue a milder ^nd more hesitating course, and a less scrupulous and more vigilant creditor will step in before you ; or the parties themselves, perhaps, will abuse your indulgence by making away >vith what little property they may have. Even if the parties were incapable of this, if their affairs are in a bad way, the sooner they are wound up the better. In a word, delays are dangerous in the matter of overdue bills under any circumstances, and you cannot too vigo- rously purge your branch of them — amicably if you will, but by compulsion if necessary. So long as they continue on your list, they are a loss and a discredit to your branch — an eye-sore to your Directors and Manager ; a pest to your- self ; and the plague of your accountant's life, who has probably returned them as outstanding until they have become stereotyped on his me- mory, and he can run you them off by rote, — numbers, dates, names, sums, payments and all ! * The transaction with Bowdler is remarkably like many of these that come before Managers of branches in Ontario. But such transactions are not discounts, properly speaking, and a banker who desires to keep his transactions clearly before him, will take care to separate such from the dis- count of commercial bills. Bowdler, however, was perfectly honest with his banker. He did not I ; I. 1 I i< II 56 LETTER VII. bring the bill and try to palm it off as representing a bona fide commercial transaction between himself and Starkejo There are, however, people who will condescend to this kind of meanness. They seem to imagine that the proverb about all being *' fair '* in war, applies to their dealings with a bank. But no greater blunder could be made. Openness and straightforward dealing is the only possible ground in the long run. And it is worth while to earn such a character, even if it be only from policy. A banker here, if at all equal to his business, leamu to discriminate betM^een such loans as Bowd-> ler required, and the bill presented by Potts & Co., and would certainly throw out the former, if at- tempted to be palmed oflf upon him as a hona fide discount. If a loan is required, it should be asked for as a loan, with security and time named, and the pur- pose for which the money is wanted. If renewal is required in whole or in part, let it be honestly named as such. The bank can then judge whether to take the transaction or not : but for a customer to cheat a manager by giving a written promise to pay in three months, when he has no intention to do anything of the kind, is anything but business-like, to say the least of it. The remarks in this chapter about dishonouring a bill, are admirable. To dishonour a bill is to com- mit a dishonourable act. It is a stain on a man's character to break a written promise, and the law here is far too lenient in dealing with it. The practice in Scotland is better, and it would be an admirable piece of commercial legislation to assimi- late our law in this matter to that of Scotland. The writer properly observes that to dishonour a bill is to suspend payment, and asserts that judgment cannot overtake the party too soon afterwards. The Scotch law proceeds on this principle, and after the lapse of a very few days, a protest operates as a judgment, and without any law process what- : .■} DISCOUNTS. 57 ever the sheriff can enter into possession. This may seem "sharp practice," but it is not so in reality. Such a law would make men punctual, provident and cautious ; would prevent rash bor- rowing and foolish speculation, would put a stop to a good deal of that ridiculous crediting which has been the bane of business in Canada, and introduce an order of things as far in advance of what obtains at present, as our present system of business is upon the mode when twelve months' credit was universal. ■ 11 I I i ,i; :i ! V- I ij l' I a* I Letter VIII. m^COVlHTS—Condvded. OF THE VARIOUS DESCRIPTIONS OF ACCOMMODATION BILLS -AND THE BILL SYSTEM EXPOSED BY THE COMMERCIAL FAILURES OF 1847. The mass of banking transactions in the country districts, then, arises out of two great classes of bills — the one consisting of bills of a business character, and based upon and repre- senting actual business transactions, such as the sale of timber, iron, or other produce or com- modities ; the other class consisting of bills representing no real transaction betwixt the parties to the bills, beyond the lending of his name by A. to B., or conversely. The one bill is drawn for value actually given and received as betwixt the parties to it ; the other for a value neither given nor received, but fictitious only. To the one class we assign the name of bond fide " commercial " bills ; to the other, the term " kites " or " accommodation bills " is usually assigned — but not, I think, with very exact discrimination ; or, if so, the degrees of quality amongst accommodation bills must be admitted to be extreme. The draft of Bowdler upon Starkey, for example, is not to be placed upon an equality of demerit with the bill of Mr. Barnes upon his friends Whiggles and Co. In the case of Mr. DISCOUNTS. 59 Bowdler you knew the transaction perfectly, and there was no attempt at concealment : or, if there had, it would not have succeeded. But, in the case of Mr. Barnes, there was conceal- ment, and something that would be deemed fraud under any less mild dispensation than the present bankrupt laws of England. Barnes knowingly drew and foisted upon your too easy predecessor, what purported to be hond Jide bills of exchange, whilst he was lending his name, as acceptor, to the very parties upon whom he drew, and for transactions equally imaginary, and enabling them to plunder their bankers as well. This was " kite-flying " if you will, and of the worst description : and, as a country, we have had rather too much of it of late years. The October panic of 1847, laid bare a bill system of a nature and magnitude cufiicient to strike bankers dumb. Compared with the scale on which the leviathan houses of that period drew upon each other and were drawn upon, Barnes's offence dwindles to petty larceny. You would have seen, for example, in the recent bankruptcy reports, that one house starts in January, 1846, with a capital of £13,000, pays off old debts to upwards of je50,000, and, in less than two years, sinks under liabilities to the amount of a quarter of a million sterling ! The marvel is, not that the house should have come down so soon, but that it should have stood so long and grown so great. Now, if the position of the affairs of this house had been known, no matter how roughly, to its bankers, is it credible that the liabilities 'I ■ M / 60 LETTER VIII. of the firm could ever have reached an over- growth so monstrous? But, as it was, their paper passed as " first-class " long after their capital must have dwindled to a mere speck in the aggregate of their engagements. The credit obtained by this and other houses was not that gradual, sure, and legitimate extension of credit, which is based upon a thorough knowledge of the parties themselves, their mercantile abilities, and resources. It was of a character more aeriform than solid. Its rapid expansion resembled more the generation of a gas than the slow erection of a structure : and thus matters will remain so long as the engagements which a firm may come under be- yond the amount of its capital, are practically subjected to no control or limit beyond what a firm may impose upon itself, — which, with sub- mission, I contend to be no check at all. Which of us has not a higher opinion of himself than the vast majority of our neighbours would con- sider warrantable ? Is there, absolutely, any limit to the sum one would trust himself with 1 The same principle that warrants our borrow- ing £100 — viz., a reasonable prospect of paying it back again — may warrant our borrowing £100,000. But is it reasonable — is it strictly honest — that any man should constitute himself the sole judge of the extent to which he shall borrow and apply the money of other people 1 The natural right of prescribing the limits of credit should clearly rest with the lenders, not with the borrowers of money — for it is the lender's property that is to be put into the lottery of .. DISCOUNTS. 81 speculation ; and if the drawing shall prove a blank, the loss is usually the lender's, not the borrower's, for he cannot well be said to have lost what was never his to lose. Limits are assigned to our incomes. We are amenable to the law for our very words. A man may not appropriate his neighbour's watch, neither may he repudiate his own acceptance. The very fashion of our coat-tails is determined by a law more binding than the statutes ; in a word, society is a labyrinth of checks, counter- checks, and limits ; but to mercantile credit there is absolutely (as things are managed at present) no practical check whatever. Unseen and un- suspected it may expand and spread until it pervades the whole vast extent of our commer- cial system; and, like the fire-damp, become known only by explosion. If the acceptances or other liabilities of any particular firm were to centre in one bank, and thus become known in the aggregate to its bankers, doubtless the present system of blind credit would receive a merited and mortal check ; but this is impossible. The engagements of our greater houses must of necessity be scattered over the face of the country as at present — here a little, there a little, each banker knowing how much he himself holds of their paper, but of their aggregate engagements knowing nothing ; laying the while the flatter- ing unction to his soul, that his few thousands upon a house worth its plum,* are as remote from hazard of non-payment as the bank note^ in his till. * t.e., £100,000. Ill tl li 62 LETTER VIII. I repeat, then, that as far as I can see, the best corrective of an evil which has been produc- tive of losses, misery, and mischief, beyond the reach of estimate, would be found in an occa- sional inspection by bankers of the books, or balance sheets of their customers. But we have digressed slightly from the direct course of the subject : let us return to the point at which we diverged. I said, then, that the draft of Mr. Bowdler on his friend Starkey — inasmuch as the nature of it was perfectly known to you — was hardly to be placed in the same category with the counterfeit drafts of Mr. Philip Barnes upon his correspondents the Wiggleses. Still less is Mr. Bowdler's " bill " — indifferent as it may be, in many respects, as a banking security — to be confounded with the paper of those benevolent individuals whose lives are devoted to the relief of traders in dis- tress, and who, for the merest trifle, will send you by return of post the acceptance of the eminent house of Doem Broiun & Co., in lieu of your own, for any given amount. The bill, Bowdler on Starkey, in fact, is drawn to re- present a temporary loan or advance, as much as the promissory note is, which individuals some- times draw, and bankers sometimes discount, with or without security. Although such in- struments, therefore, are not strictly to be classed as bills of exchange, still less are they deserving of the classification, " kites." An intermediate term — " bills held for advances," for instance, — or, for the sake of brevity, " loan notes," would better express the nature of such instruments, and, at the same time, preserve an intelligible DISCOUNTS. 03 distinction betwixt them and the actual com- mercial bill. Some such distinction is necessary, if a country banker would at all times know the exact position of his resources; because, in a financial sense, these " loan notes " are, in all essential respects, tantamount to so many over- drafts, or advances upon open account. The difference is, that the overdraft is represented by cheques ; the advance by promissory notes or bills. The cheque leaves undetermined the date of repayment, that being fixed by mutual consent. The loan note certainly fixes the date of repayment, but does not insure it. Practi- cally, perhaps, it will be found that in dealing with a client of strict honour and sound busi- ness habits, the repayment of any temporary advance to him, to the very day, will be as certain as if you had bound him to the date by a promissory note ; but where you have your choice, which usually you will have, you will of course give the preference to a note or bill, invariably ; because, indifferent as the loan note is, as a banking asset, it is nevertheless prefer- able, as such, to an overdraft. We must now, at least for the present, quit the subject of discounts. I have not touched upon the foreign bill of exchange ; because such instruments rarely find their way, I presume, to Huggleton, or if they did, would be extremely difficult of negotiation amongst your tradesmen, particularly if conceived in Portuguese, or high Dutch, or Danish. I have purposely abstained also from entering upon the law of the subject, not because I undervalue the importance of your lU !l i, 64 LETTER VIII. having at least an elementary knowledge of the law of bills of exchange, and of the law as it concerns banking transactions generally, but simply because T am incompetent to direct this branch of your studies, even if my inclinations ran that way, which however they do not, but very much the contrary. I must, therefore, re- fer you to Mr. Chitty, and trust that by the time you have reached the 962nd page of the 8th edition of his able and elaborate treatise, (including all the marginal references, foot-notes, and cases in small type,) you will have a much clearer conception of the law of bills of ex- change than I had under like circumstances. But do not rely upon your legal attainments over much. Trust rather to their enabling you to keep out of scrapes, than to their getting you out again when once in ; or you will find that a little law, like something else, is a dangerous thing. In every case involving a legal difficulty, give yourself " the benefit of the doubt " in- variably, and throw the onus upon your head- office, or local solicitor. One of the most trouble- some Managers we ever had in the , was afflicted^with a conceit of his legal acumen, which assisted him to practical conclusions now and then, which, if they did not make the angels weep, certainly made his Directors storm.* * The business referred to in the two preceding chapters is confined within a very narrow^ range compared with that which has to be dealt with by the executive officer of a bank in Canada. The managers of branches, even in our smaller towns, will generally have to judge with respect to, and DISCOUNTS. m advise a Board of Directors upon, at least, the following classes of transactions : — (1.) Advances applied for by millers, commission merchants, produce dealers, &c., who propose to buy grain, pork, wool, &c. These advances some- times reach very large amounts, and the carrying through of such loans successfully, requires a know- ledge of markets, a care about storing and insur- ance, a watchfulness of margins, and a firmness in insisting on proper security and fulfilment of con- tracts, which are not always easy to find. Such advances are sometimes secured by pledge of grain, &c., sometimes by mere endorsement. (2.) Drafts drawn against grain, pork, wool, &c., on consignees or purchasers in Isdceboard or sea- board cities in Canada or the United States. These drafts are sometimes secured by Bills of Lading. (3.) Advances applied for by persons engaged in the manufacture of sawed lumber. This business requires a large capital to carry it on successfully, and bank advances occasionally reaoh very heavy sums. (4.) Drafts drawn by the same on consignees, or purchasers of the lumber, generally on firms in the United States. (5.) Advances applied for by persons manufac- turing heavy timber. This trade is entirely dis- tinct from the last, though both operate on the same raw material — viz., the standing trees of our forests. In this case, the trees are simply hewn in- to square lengths and rafted down the lakes or River St. Lawrence to Quebec, for shipment to England. (6.) Acceptances, generally of houses in Quebec, given in payment for rafts of such timber. (7.) In addition to the above, the manager of a bank will be applied to for a vast variety of mis- cellaneous loans, legitimate or illegitimate. Loans to the municipality or its treasurer, pending collec- tion of taxes ; loans to contractors, pending the IB I?- 66 LETTER VIII. granting of certificates ; loans to manufacturers, for the purpose of adding to their buildings or buying machinery ; loans to farmers, to tide them over a period of bad crops, or to enable them to hold grain for a rise. These are samples of the applications which will be made to him, some of which may be legitimate and others not. But he will also be asked for loans on various pretences by needy speculators, briefless barristers, tradesmen bordering on insol- vency, gentlemen living by their wits, and numbers more that it would be vain to attempt to particularize. This class of miscellaneous loans requires un- common judgment and firmness on the part of the manager, who, if at all open to either wheedling, flattery, or buUying, will find plenty of people ready to ply their arts upon him. Nothing is easier than for the manager of a branch to lend money, and nothing easier than to get his bill-case filled with a pile of promissory notes, which might as well be made payable at doomsday for any chance of collect- ing them within reasonable time. There are, how- ever, some simple principles which, if kept in view, will at least save a manager from serious mistakes. Questions like the following are apropos to every class of transaction : — (1.) Is the party applying for the loan a careful borrower ? The most satisfactory customers to a bank are not those who are worth the most money, but those who will never borrow what they cannot repay at the time promised. (2.) Will the transaction provide the means of its own repayment 1 Obviously some transactions will, and it is equally clear that some will not. If a grain dealer, having already spent $5,000 of his own in the purchase of grain, borrows $16,000 or $20,000 from a bank to add to his stock, there is, as a rule, the means of repayment readily at hand in the sale of the wheat. Even here, however, we have to distinguish. For DISCOUNTS. 67 if a person spends his ^,000 in purchasing grain in a high and rising market, and, when it is at the very top, persuades a foolish manager to lend him $50,000 to buy more, there is the most imminent danger of a bad debt. If markets go down, the dealer is unwilling to sell, and before a banker can compel a sale to be effected, markets may have dropped to the point where all the capital of the customer is swamped, and nothing but a loss can possibly close the transaction. But some transac- tions evidently do not furnish the means of their own repayment, and this from the very outset. If a miller has all his capital invested in building and machinery, and, desiring to add a new story, or to make a new dam, or buy a new engine, applies to a banker for a few thousands for the purpose, it is evident enough that a long time must elapse before such a loan can be repaid. For it is only out of the savings of business that it can be done, and such savings may be impossible for years together. The manager, therefore, once having foolishly said yes, when he ought to have said 'iio, has the mortifica- tion to find that he has locked up the money of the bank, and made a very permanent investment , if not a bad debt ; for it is very possible that there may be no chance of repayment at all, from the fact that the interest on the loan will swallow up all that can be made out of the outlay, while the property bought is constantly deteriorating. (3.) A third and very pertinent question is — Is the security offered a good one ? that is, is it such as can be made available if required ? I^othing requires more care than in judging this point, but as the question of security is fully discussed in the ensuing chapter, no further remarks on this section are necessary. In addition to such transactions as are indicated in the preceding paragraphs, the managers of bran- ches or of the head offices of banks in cities, have a ti 74 LETTER IX. largest property and responsibility now and then. Have you fairly taken this consideration into account ? Say, for example, that for a gentle- man of " visible means and unquestionable re- sponsibility," you discount his promissory note at three months' date for £1000, without se- curity, as you propose. Taking all the expenses of your branch into account, your clear profit upon the transaction will be limited to your commission upon it — ^that is 5s. per cent, for dis- counting the bill, and a similar rate for retiring it when due, (if it shall happen to be met,) in all £5. Now, should this bill become a total loss — and likelier instruments become so daily — it follows that you will require to discount two hundred fresh bills of £1000 each, or encounter fresh risks to the amount of £200,000, to make up your loss. Now, in grave earnest, are the chances 200 to 1 in favour of any individual whatever, that he will meet his promissory note when due ? Out of any 200 advances made to individuals, how- ever responsible, without collateral security, is it a moral certainty that all will be faithfully re- paid ? And yet, if but one fail you — if out of a couple of hundred different advances made without security, even 199 are punctually repaid and one not, you have run this enormous amount of risk for nothing — the 200th part of the prin- cipal, if lost, swallows up your entire profit upon the transactions.* *The view of profit here laid down, restricting it to the two commissions and leaving out the interest, will probably be a surprise to many. le SECURITIES. n !"■' The only safe course, therefore, is never, in any instance, to depart from the principle. It is not enough that you have done so, in a variety of cases successfully, because one solitary reverse swallows up the entire fruits of your successes. What would it comfort you that a broken-kneed horse had carried you a long day's journey, and only came down in sight of your resting-place 1 And yet the principle which you advocate, of making advances in certain cases without se- curity has broken down so often, and so miser- ably, that those who trust to it merit, for their temerity, the bruises and mud which inevitably await them. It may, as you state, be a trial to your feelings to have to refuse au advance to a gentleman of The profit of a banker is generally considered to include the interest on a transaction, as well as the commission. Reflection, however, will show that the view taken by the author is strictly correct. A banker can always secure mere interest on his funds, and that without incurring risk, by accept- ing a lower rate than he can obtain by discounting. The inducement to discount, therefore, is the difierence between this mere interest rate, and the amount that can be made by discounting a note or a line of commercial paper. This difference may be in the shape of a commission on a draft, or the profit on circulation of notes, or a considerable balance constantly left at credit ; or, in the absence of any of these, it may be in the shape of a higher rate of discount. The true profit of a banker, there- fore, consists of this difference, however it may be caused. This is his profit as a banker, and any calculation of risks should be on this basis. 11 76 LETTER IX. excellent family and disposition, with whom probably the previous day you have dined, and with whom you are in the habit of constant and friendly intercourse. But this is on the hypo- thesis that a banker is entitled to Jmve feelings, which, however, the best authorities distinctly deny. "Business is business," they will tell you ; and there is no more occasion for the exercise of " the feelings " in declining to lend a gentleman money without security, than in de- clining to make a bet, or go a voyage, or make a tour with him, or anything else that is simply inconvenient. It may be an amiable weakness to think and act otherwise ; but if a bad debt, or a series of them, is to be the price of this amiability, the sooner your disposition is soured the better. I would remark, further, that the gentleman who places you in the unamiable position of having to refuse his cheque, is him- self the aggressor. And, as by that act he shows no respect for your feelings, it does not appear upon what ground you are called upon to show any unusual tenderness for his. When a gentleman of property obtains a loan from a private individual, (to view the subject from another point,) the usual basis of the loan is a mortgage upon the property of the borrower — an instrument attended with an expense which renders the terms of the loan always heavy, oftentimes excessive.* If the private Note by the Author: * Since this was written, happening to enter into oonversatiou with a legal gentleman on the subject, he informed me, by way of illustration, that he had just received for perusal on behalf of a client of his a mortgage deed for £160, extending over Sve skins of parchment, and that the probable cost of the instrument will SECURITIES. 77 lender, then, obtains security for his loan from men of the best property in England, not only without a grudge but as a matter of course, upon what ground is the banker called upon to make advances without security ? His money is as precious to him, I apprehend, as money gene- rally is to other people ; although, certainly, to hear some persons talk — and sensible people enough in other respects — you might be led to suppose that this were not so, but, on the con- trary, that a banker's resources were inexhaust- ible; and that losses were of little or no ac- count to him, because of some mysterious agency whereby he can create money to any amount at will. They fancy that we have got the gift of Midas, but innocently give us credit for having got his ears as well. But it will be argued that there is a material difference betwixt a temporary advance, such as is usually obtained from a banker, and the per- manent loan which is usually obtained on mort- gage. There is this difference, certainly : there is less chance of any one wasting his pa- trimony in three months than in three years ; and whatever you can make out of this differ- ence in favour of advances without security, you may. But bear this in mind — the moment your money goes, you have only left you a promise in its stead — a promise that may or may not be I'; be £25 ! The money bears 5 per cent, interest, and is re-payable at six months' notice. Consequently, if the unfortunate borrower has to pay the money at the end of the First year, he will have paid for his loan, equal to interest at the rate of 21§ per cent. If at the end of the secoTid year.. . . 13| " If at the end of the third year .... 10 6-9ths. >i» 78 LETTER IX. fulfilled, aocording to circumstances : but, in the case of the mortgagee, he has not only a promise, but a something besides, which, generally speak- ing, will render that promise eflfectual. Once your money is advanced, for whatever period, the risk is taken; and the question is, not whether the risk shall be taken for days, months, or years, but whether it shall be taken at all ? If a banker in his business capacity stood ex actly in the same position as any other individ- ual of the community, there could be no objec- tion to his lending out moneys without security, (if such was his humour,) on the principle that a man has a right to do what he likes with his own j and in the case of a private banker, we cannot reasonably object to his disposing of his own capital to its full extent, in any manner he may consider most conducive to his own inter- ests. But as one of the managers of a joint- stock bank, you cannot claim even this extent of latitude, because even your capital proper is not the private property of your directors and managers, but of other persons as well; and therefore constitutes a trust as much as the moneys do which lie in your hands and consti- tute your deposits. I hold, therefore, that the same principle which recognizes trust-money as sacred to the purposes of the trust, is not less applicable to the entire capital and resources of a joint-stock bank ; and as the safety of the principal in the matter of trust funds is always paramount to the question of interest, so the safety of your pro- prietors' capital and customers' deposits should SECURITIES. 79 i be paramount at all times to the question of the dividends upon your stock. If the principle of requiring securities for ad- vances, in all cases, without respect of persons, had been adopted from the outset of joint-stock banking in England, and rigidly adhered to, less business, perhaps, would have been transacted by the banks, and lower rates of dividend de- clared, and paid ; but the business done would at least have been more legitimate, and the di- vidends declared less fictitious. Many persons of sanguine dispositions would have certainly been deprived of the means of speculation, but at the same time numerous families who had staked their all in bank shares would have been saved from ruin. It would be a curious and instructive calcula- tion (were it possible) to ascertain what has been the exact cost to joint-stock banking in England, of advances made without security In one scale place the total amount of profits realized, and in the other, the total losses sustained upon uncovered advances, and who shall doubt which scale shall instantly, and with a vengeance, kick the beam 1 The losses arising out of uncovered advances, within very recent memory, indeed, have been of a magnitude sufficient, one might suppose, to impress upon the minds of bankers, one and all, with a force that should be irresistible, the dan- ger of such advances, and the necessity of rend- ering security henceforward a tdne qua non for money lent or advanced. To give to this principle immediate and gene- ral eflfect would no doubt require a greater de- ^ i :ll rH IMAGE EVALUATION TEST TARGET (MT-3) // '«// v*-^ .* ' % 1.0 I.I Uit2M |2.5 ■50 ^^" ■■■ us lii 2.2 1 — V^ \¥^ ^ 6" ► V ^^^ I%)togFaphic Sciences Corporation 33 VfHT MAIN STRUT WiUTIR.N.Y. MSM (7U)I79-4S03 ? 80 L£TT£K IX. gree of concert on the part of banks through* out England than at present exists : and it is unquestionable that no bank can act upon the principle rigidly, whilst its imnicdiate competi- tors play fast and loose with it, without sustain-- ing a considerable diminution of business. But against the loss of revenue consequent upon a diminution of your business, place the losses that may be attendant upon a continuance of the f>resent system, and the probability is, that in the ong run the loss would prove a gain. That section of the public who have acquired the habit of drawing cheques with a comfortable indifference as to the state of their balances, and who have come to regard an overdraft less as a favour, apparently, than as a matter of custom and right, would natually exclaim against the adoption of a principle that would bind them down to a more rigid system of business and a diminished laxity of credit ; but once the princi- ple became general, and was understood and re- cognized as a fundamental rule of banking, the cry would subside, as many a stronger and bet- ter-founded cry has done beLro. ■•»^a^f Letter X. SECURITIES— C(w** 92 LETTER X. property is fluctuating, and depends entirely on the condition of trade in the locality. It is generally, also, estimated far beyond it" selling value. Bankers in Canada will doubtless remember that a deposit of deeds, with a letter such as is referred to in Finchant's case, does not now constitute an equitable mortgage in Canada, unleaa registered. Letter XI. SECJIBITIES— Continued. DEPOSIT OF MORTGAGE — DEPOSIT OF BONDS — ASSIGN- MENT OF STOCK — ^JUDGMENT, ETC. — POLICY OF IN- SURANCE — BILL OF LADING — MORTGAGE OF VESSEL. Before proceeding further, it may be as well for me to state, with reference to that section of the subject now in hand, that I do not profess to discuss it in all its bearings. As in the matter of bills of exchange, so in that of " securities," I purpose leaving on one side, as far as I can properly leave it, the mere LAW of the question, and for a reason which you will appreciate ; for if Mr. Chitty, upon the single subject of bills of exchange, produced a volume of 1000 pages, how many volumes of 1000 pages each could any equally able and eru- dite compiler produce upon the vast subject of " securities V* I shall confine myself as much as possible, therefore, to a discussion of fir^st principles as regards your selection of proper banking securi- ties, with now and then a passing hint of the snares and pitfalls which await you in law and in fact, if you deviate, even temporarily, from Note by the Author : * In a little work, entitled " Chapters on Country Banking," published by Mr. Effingham Wilson, you will find a brief but very lucid and useful compendium of the legal requiremtnta of nearly every description of banking security. RM 94 LETTER XI. the coarse which those principles render obvious and necessary. Akin, then, in all material respects, to a de- posit of title-deeds, is your next sample — the Deposit of a Mortgage. The deposit of the deed gives you an equitable title to it ; and what the nature of this title is, we have discussed with sufficient fulnesR already. There is no necessity, therefore, for our going over the same ground a second time. It will suffice to state that the deposit of a mortgage is obnoxious to all the objections that apply to a deposit of title-deeds. An assignment of the mortgage would certainly place you in a safer position; but you could not act even through the assignment under six months' notice ; and if at the end of that time the mortgagor was unable to pay the money — ^a circumstajice by no means incredible — ^your only resource would be the tedious and uncertain one of a sale of the property mortgaged. Proceeding down your list, I find several other deposits of securities : one of a Personal Bondf another of a Turnpike Bondf and a third of a Canal Bond. The personal bond, I presume, as is usual with this description of instrument, is subject to six months' notice previous to repayment ; conse- quently it is at all times six months further removed from the date of payment than a proper banking security onght to be. With respect to the turnpike and canal bonds, you do not state whether they are redeemable or not, nor if there is a market for them, nor the price. So long, however, as you have merely a SECURITIES. 95 deposit of the bonds in question, it matters little whether there is a market for them or not, seeing that, however good the market and brisk the demand may be, you are not in a position to sell. As 1 would attach some weight to this circum- stance, I think the sooner you obtain regular assignments of all three bonds the better ; be- cause, if you do not, the possibility is, that you may have to procure a title in the first case, and a power of sale in the other two, through the intervention of the Court of Chancery, at your own expense. "Assignment of Stock, Furniture^ and Booh Debts, by P, B. to secure balance of Banking Ac- cotmt." The value of the stock, &c., you set down at £3000 ; but if you had added another cipher to the amount, the security would nevertheless be one of the worst in law, and the most disrepu- table in character that you could have taken. It is one of those securities which are technically known "not to hold water." Like an Act of Parliament, you may drive a coach-and-four with great ease and success through any part of it. A security over machinery, or live or dead stock, implements, or other articles which you must iden- tify, but which may be exchanged to infinitude without your knowledge, is next to no security at all. If the party executing the assignment becomes bankrupt within three months, the deed becomes worthless, and your rights under it nil. On the other hand, if it shall survive the three months, it has become a security over a variety of things probably which have no longer any '< 1 1 ^Hi^HII 96 LETTER XI. existence. Besides, unless you are in continual and actual possession under an assignment, a judgment creditor or the Court of Bankruptcy may come in any day and snap their fingers at you. Beware, therefore, of assignments of stock ; and place little more reliance on Cognovits, Judges' OrderSy Bills of SaUy or Registered Judgimnts as securities ; and be sure that the trader who de- scends to such means to extend or prolong his credit, is in desperate circumstances, and utterly reckless of his character."" m " Policy of Insurance /or £3000 on the life of Methuselah Hanrdy, to secwre balance of banking accownt to the amount of ^61000." This would be very ample cover for the ad- vance if Mr. Hardy were certain to drop down dead the moment you called up his balance ; but the inability to repay a balance of banking account is not always, nor even generally, de- structive of the life of the defaulter. Reverses of fortune do sometimes have the effect of causing a man to lay violent hands upon himself ; but this is a consummation not to be desired in the present instance ; because, if Mr. Hardy should make away with himself the mo- ment he found it impossible to satisfy your debt, the value of your security would shrink to a. mere fraction of its nominal amount. * The security referred to is the same in effect as a Chattel mortgage, and the very sound and judi- cious remarks under this head apply exactly to suoh a security, as many a creditor in Canada can testify. SECURITIES. 97 But, if suicide is a contingency too remote to be worthy of consideration, what if Mr. Hardy, finding that he cannot succeed in this country, goes to seek his fortunes abroad — to California, for example 1 This is a case of almost daily occurrence ; and yet, according to the rules of the office in which he is insured, the effect would be, absolutely, to cancel the policy beyond the power of redemption. The fact that punctual payment of the pre- miums on the policy is guaranteed by a third party, is much in favour of the security, no vioubt, provided it shall run its natural course, and the assured shall die a natural death in his native country, and the guarantor continue sol- vent for the next five-and-twenty or thirty years, which is the average period gentlemen of Mr. Hardy's years may be expected to live, but rather a lengthened currency, I submit, for any bank- ing security to run. If Mr. Hardy were to offer to you a bill at six months after date for discount, even in the pre- sent lax and easy state of the money market, T apprehend you would either decline the trans- action altogether, or take it with unmistakable reluctance, and as an exceptional case ; and yet, in agreeing to make him advances on the security of his life policy, you virtually discounted for him his draft at six months after death. I take it for granted that you hold a regular assignment of the policy; and that this has been duly recognized by the Insurance office ; for if you have not done this, it would be as easy a matter to square the circle as to find the actual present n 98 LETTER XI. value of the security which you hold for Mr. Hardy's account. " Bill of Lading {with policy of Assurance) of hides, ex AjaXj (present market value £525,) to secure a temporary advance of £450 to A. P." On the presumption that the good ship Ajax, will arrive safely in port, and that there will be then no just cause or impediment why the hides cannot, in case of need, be placed in the hands of a broker for immediate sale, and proceeds handed to you entire : and on the further presumption that the hides are of a quality to realise the quoted market price — al- though it is nearly the height of presumption to assume all this — you appear to hold tolerable security to cover your advance ; but it is clearly the business of a broker, not of a banker, to make advances on the security of bills of lading. To make such advances with safety, requires an amount of mercantile knowledge which only ex- perienced brokers possess : and the custom of merchants, and the technicalities of mercantile law are branches of intbrmaiion which vio not come by instinct, even to Branch Managers. Place even an experienced broker behind your counter for a day, and he would find himself considerably out of his element, and his cash- book and cash-balance in irreconcilable derange- ment at the close of the day's business ; but he would not, I apprehend, be a whit more out of place than you would find yourself were you to step into his shoes for four-and-twenty hours. "Mortgage of Vessel— (6/iy Rapid,) edi- hi SECURITIES. 99 mated value .£1000, to cwm- advances to L. M., to the amount o/£700." To a ship-owner or ship-broker, to any one, in short, who is thoroughly conversant with this description of property, and can look after it — making it his business so to do — a mortgage on a vessel is a fair average security, if he take margin enough ; but to a banker it is difficult to imagine a less eligible description of cover. Speaking generally, we bankers know little or nothing of shipping. We are neither ship- builders, ship-owners, ship-brokers, nor master mariners. One-half of our number, I verily be- lieve, would find it hard to tell the stem from the stern-post, the bowsprit from the mizen, the larboard from the binnacle, or the cutwater from the cat-o'-nine tails. Any cabin-boy in England might smile at our ignorance. And if it shall be your misfortune to have to realise your mort- gage, the probabilities are that you will find yourself very much at sea in spite of yourself, and heartily sick — of shipping securities.* * Here we must diflfer from the conclusion arrived at by the author. A bill of lading representing goods actually shipped to market is certainly as good a security — if properly assigned — as the name of an average merchant. And though no banker can be expected to have such an accurate know- ledge of goods as would justify his buying and selling them, supposing that were within his sphere, . he certainly should have such a general knowledge of the value of the commodities his customers deal in, as will enable him to make advances upoa them with judgment. A banker, of course, will consider the character and means of his customer ; whether 1 I « I i 100 LETTER XI. he is good for a deticiency should the proceeds of the goods fall short of the advance ; whether his representations as to quality are to be relied on, whether he is likely to borrow more than the goods are worth, &c. Bills of lading, in Canada, are generally attached to drafts, and in many cases, the bank retains a lien on the property until the draft is paid : even after acceptance. As a general rule, banks in Canada have found transactions on bills of lading the most satisfactory part of their business. With regard to mortgages on vessels, they are equally forbidden with mortgages on real estate, and for reasons which are even more conclusive. I i ! Letter XII. SECVRTTIES— Concluded. TBANSFBKS AND DEPOSITS OF RAILWAY SHARES — SHARES IN COMPANIES — MINING SECURITIES — SUMMARY. Beyond comparison the best security on your list is that which I now proceed to quote, viz. : " Eailway Stock — Ten shares of ^100 each, London and North Western Eailway, standing in the name of our registered public officer, to cover advances to C. D. to the amount of £1000." These fulfil the conditions requisite in a sound banking security : that is to say, if C. D. fail, at the proper time, to repay his advance, you can instantly reimburse yourself, independently of him, by a sale of his shares ; for, startling as have been the fluctuations in railway property of late years, and prodigious the depreciation in its value since the famous '45, the circumstance of North Westerns at par has only been wit- nessed once, and that temporarily. Apply this test to any one of the securities which we have already passed under review, and it will be found defective. Absolute conver- tibility, at will, into cash is a quality which obvi- ously pertains neither to personal guarantees nor to deposits of title deeds. Under the most craftily drawn assignment, the power in question 102 LE'JTER XII. is not absolute — neither is it so in bills of lading, nor in mortgages of vessels — it is far less so in policies of insurance. As your advance to C. D. stands at present, indeed, you are actually his debtor. Were he to become bankrupt to-morrow, you could, by a sale of his shares, not only reimburse yourself the money which you have advanced upon them, but have a surplus besides to hand over to his estate. The paid-up stock of any honestly man- aged railway company, indeed, with a good mar- gin to cover any probable depreciation in its value, is equivalent as a banking security to a transfer of Consols, or a deposit of Exchequer Bills ; because you have the same ready market for either, the same absence from liability, and the security in the respect of each is undoubted. In several instances, I observe that you con- tent yourself simply with a deposit of railway shares or certificates, accompanied by a transfer iu blank. Where you are- dealing with parties quite undoubted for the advances, irrespective of the shares, this is perhaps a justifiable risk to run, but not otherwise. Your transfer in blank will not avail you against certain contingencies that may arise, if your debtor shall happen to become bankrupt before the transfer has been filled up, and the shares actually transferred in- to the name of some one on behalf of the bank. Should this precaution not be taken before the fiat is issued, you may have to hand the shares over to the estate, and take your dividend with the rest of the creditors. i " One hun. 'red shares Eastern Grand Tnmk i .'- . 1 ■'^ ^ ^ ■■_' . : ' ^ > , " i -, , • Tl . . ■ \ -\ ' • "" •*■_ i -,,•..--/•-, - i ■ ■ ■ SECURITIES. 103 Extinction Ka/ilway, ('£25 paid) on account of the debt of W> ." Your history of this security is instructive. "The debt of W becoming doubtful in the autumn of 1845, we took from him, in lieu of cash, such securities as he could give, and the above amongst others. There were then only £2 10s. paid up on each share, and they stood at £5 premium. As it was considered certain, however, that they would go very much higher, a sale was deferred. Then came the great scrip panic of '45, after which it became impossible «ven to give them away. Call after call was paid without in the slightest degree enhancing the value of the shares — no more than if the money had been paid upon some totally distinct line, or thrown into the sea. The present value of the shares is about <£5 each, so that, in fac(, %ve have lost upon them by delay, £2500." Any comment upon this would be superfluous. But unfortunate as the "Extinctions" have proved, your next example is still worse. " Fifty Shares in the United Inexhaustible Flag Qtbarry Company,^^ also taken, it would appear, for a doubtful debt, after the manner that drown- ing men catch at straws. You have already, you state, paid £45 a sJiare upon these since they came into your hands — no dividends have been declared for years — the concern is heavily in debt, two-thirds of your co-partners are bank- rupts, and the extent and end of your liability no man can tell. Now, even in the " Extinc- tions" there was a limit to your liability ; you knew the worst from the first, and there was a grim satisfaction even in that ; but who shall : I 104 LETTER XII. say what amount of contribution will liquidate the debts of the " United Inexhaustible 1" It would, therefore, seem to be a very neces- sary precaution on the part of a banker to be^ ware that in grasping at a security, he does not elutch a liability instead. You have, doubtless,, witnessed a tyro learning to swim by the aid of bladders. The risk the would-be-swimmer runs is in the bladders slipping down to his midriff, and elevating that region of his person to the position which his head ought to occupy ; and this is unhappily your present position with the debt in question ; you let your opportunity slip, and now your debt is where I trust your head will never be — considerably under water. Proceeding from bad to worse, we arrive at — " Lease of the Wheal Ruinall Copper Miney* —another security, held for another doubtful debt. " We are w^orking the mine on our own account," you remark, "but, I believe, to little advantage, until we can find a purchaser." It would be impertinent to inquire, perhaps, how far the working of the mine on your own ac- count has enabled you to reduce the original debt ; but there is one remark with regard to this description of " security" that I would have you lay seriously to heart, and it is this : that when a bank takes upon itself the working of a factory, a mine, or any other concern which has ruined the original adventurer, it is a tolerably fair inference that the bank will not make a for- tune by it. If a man cannot succeed in his own business — the business which it has been the study of his life probably to master — it is incon- SECURITIES. 105 ceivable how another person, or body of persons, totally unacquainted with the business, can hope to do so. There is about the same chance of a banker succeeding as a manufacturer or miner, as there is of his properly commanding a ship, working the mail, or conducting the practice of surgery. Nor is the direct loss which he usually sus- tains in such undertakings all -, because in look- ing after them, his attention is distracted and withdrawn from his legitimate business to an extent more or less damaging, according to cir- cumstances ; and thus, instead of following one or the other vocation singly and well, he follows both by turns, and both badly. Once fairly embarked in the adventure, more- over, the necessity for " going through with it," becomes more urgent with every fresh thousand sunk — and a banker's "alacrity in sinking," under such circumstances, will be generally con- ceded. " One shaft more — one very little drive — a few yards more to the main level, and fresh leather to the pumps — and then " And then, in ninety-nine cases out of a hun- dred, you are precisely where you were, pltts your fresh outlay : " But what could we do ? " you ask. " If we had allowed the mine to fill with water and run waste, the penalties of the lease are positively frightful j and as for a pur- chaser after that, we should have had to pay a handsome bonus to any one to take the concern out of our hands. In short, we had either to pump or sink, although, of course, we would much rather have done neither." As you appear so averse to the pumping, and E* , mmmm 106 LETTER XII. probably entertain a still stronger disrelish for the sinking, and furthermore, as you ask my opinion, I would respectfully suggest that your belter course would have been — never to have got into the dilemma at all. This must conclude your " sample." I have passed over certain of its contents, because they are referable to one or other of the various des- cription of securities which I have already com- mented upon, and therefore do not call for special remark. I find, then, that these securities require from you a variety of information, which you will ex- cuse me for doubting that you possess. You are a railway proprietor — that, however, may pass : but you are in danger of becoming a landed proprietor as well, which is quite another matter. You are a quarrier, by proxy, of the United In- exhaustible Flag — a handicraft in which your friends may wish you unbounded success, but will be prone to fear the worst, notwithstanding. You. are working a copper-mine, from which, by your own confession, you are realising " more kicks than coppers." Then you are the mort- gagee, and in due time may become the registered owner of the brig Bapid ; although I could have wished, without disparagement, that she had fallen into better hands. As general broker, you do a gentle stroke of business in hides ; and if misfortune should overtake P. K., we shall have a sample of your qualities as a green-grocer. Banker, railway proprietor, land-owner, quarrier, copper miner, broker, ship-owner, and green- grocer ! Why, the Admirable Crichton himself SECURITIES. 107 had not a versatility of talent like this. In your single person, you aspii-e to conquer as many difficulties as certain vendors of patent quacker- ies do to subdue diseases — and, it is to be feared, with about equal success. You meet this by the sweeping disclaimer that three-fourths of the securities were taken after the advances had been made, and to save the debts from becoming total losses. But why have made advances which compel you at last to take securities of which, as a banker, you are ashamed 1 It is an indifferent excuse for a ragged coat and dubious inexpressibles, that the previ- ous excesses of the wearer have left him noth- ing better. Is it any better excuse for a dis- creditable list of securities, that the previous imprudence or folly of the banker left him no better choice 1 We are, therefore, you see, driven back again to the point at which we started. Arguing from cause to effect, we laid it down as a rule that a banker ought never to make advances uncovered by security : arguing from effect to cause, we arrive inevitably at the same point. Proceeding a step further, our next proposi tion was — that the security taken should be such as to render certain the punctual repay- ment of the advance which it was meant to cover. The proposition is a simple one, and about as obvious as, that things which are equal to the same thing are equal to each other ; and that I have dwelt upon it at such length is to be at- tributed to the necessity I found myself under, not so much to demonstrate its accuracy, as to convince you that half-a dozen was not equivu- 108 LETTER XII. lent to six dozen, nor any quantity of ciphers to half-a-score. Glancing back over your list of securities, and considering their multifarious and, in too many cases, dubious character, and the prodi- gious tax upon your time and talents which they have been, and must continue to be — T would say to you, get rid of three-fourths of them at once, without a sacrifice if you can, but at all events get rid of them. This done, take especial care to saddle yourself with no such rubbish again. Eeject as a banking security everything that is not readily convertible into money. In short, turn over a new leaf, and mind your OWN BUSINESS.* * This chapter is worthy of careful study by bankers here. The principles laid down have a wide application, and unfortunately they could be illus- trated by some very bitter Canadian experience. Some banks in this part of the world have had their " Ruinall Mine" in the shape of distilleries, saw- mills, woollen mills, breweries and what not, and have shown as great an aptitude for sinking ad- ditional capital to an irrecoverable depth, as would satisfy the most envious cynic. It is certainly an unpleasant business to face a loss by selling property at a price which must leave a bad debt behind it, but it is a far more bitter pill to swallow when thousands in running expenses have been added to the original advance, and the property is sold after all for less than might have been obtained for it at the beginning. This, how- ever, is the common experience whenever banks attempt to work a business themselves, Letter XIII. ^ CIRCULATION. A BA.NKBR'S liabilities generally — CIRCULATION OF DRAFTS AT VARIOUS DATES, AND AT SIGHT- CIRCULATION OF NOTES. My last letter brought to a conclusion our dis- cussion of that section of the subject which has had specihc reference to the series of accounts which constitutes your Assets. Let us now proceed to examine the nature and operation of your Liabilities, a subject which will more readily be disposed of ; for it will be generally admitted, that if a banker will but properly look after his Assets, he may with great safety ailoirv his Liabilities to look after themselves ; indeed, his depositors and note holders manage that sec- tion of the business for him with singular watch- fulness and assiduity. Striking out the minor headings of Bills Jor Collection, and Credits from Branches and Agents, both of which are Deposits in effect — the bills as they fall due and are paid, the credits as they are opened — and which do not, therefore, call for special remark, you divide your Liabilities under the following heads of account : Drafts on London in Circulation, Notes in Circulation. Deposits. 110 LETTER XIII. Now, the distinguishing feature of a banker's liabilities would appear to be this — that he must give cash for them when demanded, whether convenient or otherwise ; whereas with regard to his assets, he has the power of refusing to discount bills or make advances, when he choses to exercise it. A run upon your deposits and notes, therefore, and a run upon you for dis- counts, are not synonymous in effect ; the one must be met j the other need be met by nothing but a flat refusal. Your deposits and circulation are increased or become diminished by causes over which you can exercise no direct or effectual control ; they are governed in amount wholly by the opera- ions of your customers. On the other hand, the control of your advances or assets rests solely with yourself. But how far your advances should be regulated by the movement of your deposits and circulation, is a question which be- longs to a higher range of banking science than we have ventured upon in the present "Course." When you attain to the style and dignity of General Manager, I may be induced, perhaps, to enter upon the higher course reterred to, and to which this present correspondence may then serve as an introduction. There are some observations, however, which may have place here without exceeding the scope of our present theme ; and first, as re- gards — Drafts on London. When you issue a draft on your London agents, at twenty -one days' date for XI 00, your remuneration is presumed to arise from the use of the money from the time CIRCULATION. Ill 'i you receive it until the date you have to pay it back in London. Now, it depends entirely upon circumstances, whether even a draft at this date brings you a profit. If your cash re- serve, for example, is at its usual maximum, and the money is paid to you in specie, then the sum lies in your hands useless, probably for weeks together, until other transactions shall have increased your reserve to an amount suffici- ent to warrant the transmi,5sion of a portion of it either to the head office or to another branch. Or, if the money be paid to you in the notes of other banks, you transmit them to London ; and it will depend upon the state of your London account whether they will be of much or any profit to you, even then. But whilst the profit of such transactions is purely conditional, your expenses in respect of them are absolute enough. In the first place, there is the transmission of the money — a cer- tain expense, whether you remit through the post or by messenger. Then there are the risks of transmission, which a high percentage only would safely cover. Again, so long as the draft continues in circulation, there is a weekly per- centage in the shape of stamp duty to be paid upon it. And again, there is the commission to pay your London Banker for cashing the draft. And to all these fall to be added the expense of book-entry, engraving of forms, letters of advice, postages, &c. lu k t^ue that some banks issue drafts at so short a currency as even seven and ten days' date ; and to some banks it may be a gain to do so. If, for example, the local exchange was t 112 LETTER XIII. against your branch — that is to say, if the dis- trict in which your branch is located was sub- ject to a constant drain of specie from other districts, which you had to rectify by frequent supplies from your head ofl&ce — and such cur- rents in the specie circulation are in constant action in various parts of England — ^it would probably be more advantageous for you to strengthen your reserve of specie, by taking gold from commercial men at seven or ten days' date, than by incurring the expense of sending to your head office for it. But if the local exchanges are steadily in your favour, which is the rule in country districts, and you have continually to remit specie to head office, instead of having to receive specie from it, then clearly the issue of drafts at seven, ten, or even fourteen days' date is a losing business. And it occurs to me, that if you were to put the matter on this simple and obvious basis, and show that it may be of greater advantage to some banks to draw at seven days than for others to draw at one-and-twenty, you would have much less annoyance in your dealings with commercial travellers than you continually complain of hav ing. They are by no means, as a class, devoid of acuteness, or deaf to reason ; nor would they be backward in ascertaining from what points they could remit to the best or least advantage to London, and in making their calculations ac- cordingly. And if the banks generally throughout Eng- land would be guided more by their own actual requirements than by the custom of their neigh- bours, in determining the date at which they CIRCULATION. 113 would draw for cash on London, they would eifectuate in some measure a freer and less ex- pensive movement of the metallic circulation, and commercial men would become the means of conveying specie from those districts where it was overabundant to those where it was in de- mand, by inducements at least, commensurate with the expense and trouble of conveyance. A traveller, for example, collecting in an agricul- tural town would rarely prefer a draft from thence at twenty-one days, when the same, or next day's journey would bring him to a point where he could obtain a draft at seven days' date. When you draw on London at sight, the usual charge is 5s. per cent. ; and it depends, of course, upon the current rate of interest for the day, whether it is more profitable for you to draw at sight, in consideration of the above charge, or at twenty-one days' date free of charge. There are those, however, who believe, or profess to believe, that this rate of charge is too high, and that a commission of 2s. 6d. per cent, would be ample remuneration. I have already stated that it may be of more advantage to some banks to draw on London at seven days' than for others to draw at twenty- one days' date. On the same principle, 2s. 6d. per cent, might be very ample remuneration as a commission to some banks, whilst twice the amount would be inadequate to fairly remune- rate others for remittances of money. I will not again go over the various items of cost involved in the transmission of money from place to place by the banker ; but would those [ > it I' 114 LETTER XIII. who consider 2s. 6d. per cent, an ample remune- ration — would they even insure the safe trans- mission of the money from one place to another for the rate they propose ? Be robbed by the way eveuof a small banking parcel of gold — say £1000 — and to make up that loss, at 2s. 6d. per cent., you must run the risk of transmitting eight hundred similar parcels, containing a total of £800,000 sterling. The receiving of money at one place for pay- ment at another is one of the most useful ser- vices which a bank renders to the community, particularly in remote districts ; but relatively it is a department of business for which it is worse paid than for any other whatsoever. There are those, I am aware, who think dif- ferently, and believe that by sending bank notes through the post-office in halves they remit on their own account quite as efficiently as through the medium of a bank, and at much less expense. And this belief will continue until the miscar- riage or loss of an entire remittance suggests the calculation whether all that the party has saved up to the date of this incident, by being his own remitter, counterbalances all that he has lost ] If the loss has been even £100 only, it must be an exasperating reflection, that for a few shillings paid to a banker he could have absolutely insured himself against it. ' Circulation of Notes.— This question, as well as that of deposits, addresses it? jlf more particularly to the Head Manager than to the Manager of a Branch. As far as regards the latter, his dealings both with his deposits and circulation are almost mechanical : but as re- CIRCULATION. 115 i; gards the Chief Manager, the deposits and cir- culation are facts which give continual exercise to the best faculties which he may happen to possess. When I say, however, that your dealings with your circulation are mechanical only, I presume that that amount of judgment is exercised in the matter which shall prevent your notes being issued to a loss. I presume, for instance, that you would not issue your own notes in exchange for gold, free of charge, to a party who you have reason to suspect would instantly cut them in halves, and send them off by next post as a re- mittance to London or elsewhere. This would be to encourage him in a habit which, if my views are correct, is not to his ultimate advan- tage, and is clearly of immediate and considera- ble disadvantage to you. You have received £100, let us say, in gold, for which, in the great majority of cases, you will have no immediate use — very probably the first use you can make of it is, at the risk and expense of transmission, to send it to your head-office, or to another branch. In lieu of this £100 you have given £100 in your own notes, ivhich will go to your debit in London the day following. You will have a commision to pay your London banker for cashing the notes ; you will then have to reimburse him for the postage of the notes when he sends them back again ; and these iden- tical notes will be returned to you at your own risk. In the meanwhile, you lose the interest upon the gold until you can find employment for it. It is obvious, therefore, that under these circumstances you had better at once have given 116 LETTER XIII. the party a letter of credit on London at sight, without charge, for the gold, rather than your own notes — because, by giving these, you not only incurred all the expense that a letter of credit or draft would have cost, but the expense and risk of getting the notes back again in ad- dition. I further presume that you would not issue your own notes in exchange for those of distant banks, free of charge, to any one who might take them to your competitors, next door, and procure gold or Bank of England notes for them : because, in effecting the usual exchange or "clearing" with your rivals the following day, you will have to redeem these very notes either in cash or by payment in London. By an ope- ration like ^this, the party simply makes you a cat's-paw, to provide him with cash for the notes of distant banks, at your expense. The legitimate circulators of your notes will be found chiefly amongst your own immediate customers, who will receive them and pay them away in good faith as money — not for the pur- pose of mutilating them first and transmitting them afterwards to other parts, but in order to pay rents, wages, or book debts — or purchase live or dead stock — or arrange any other species of transaction which requires the use of money for its settlement. The only strangers to whom it is expedient to issue your notes are those who periodically visit your fairs or markets as buyers, and who find your notes a more current medium of interchange than those of distant banks. The payments made by these parties, if they do not give a prolonged, give at least a legitimate cir- I il CIRCULATION. 117 culation to your issues, and their custom is therefore to be encouraged. As respects the prevalent custom of cutting notes in halves, I cannot share in the indigna- tion which you express on the subject. You consider the offence tantamount to depositing £5 with your tailor for the safe return of a dress coat, and giving the garment up torn in two when you go to claim your money again. But you overlook the fact that the coat was intrinsi- cally worth the money : whereas, the note is intrinsically worth nothing. A note cut in halves may be deserving of all the epithets which you heap upon it — " a divided responsibility — a severed tie — a half and half liability — a breach of promise, &c." But it is better to submit with a good grace than with a bootless anger to a custom which has taken too deep root to be now eradicated. li i^ :!• Letter XIV. DEPOSITS. EXPEDIENCY OP SBPAEATINO DEPOSITS INTO ACTIVE AND PASSIVE — NOTICE OP REPAYMENT — MANAGE- MENT UNDER A "run." You seek to distinguish betwixt deposits which are of a permament and those which are of a fluctuating character, by dividing them into two classes, viz. : — Deposit Receipts, and Balances on Current Account. It is not possible in every case to determine beforehand in which of the two classes above- named you will rank moneys deposited in your hands; and it will sometimes happen that moneys placed to current account will prove per- manent deposits, whilst others placed on deposit receipt will prove of a much more active des- cription than you bargained for. But an ap- proximation to the result sought for, viz., a division of your deposits into active and passive, is undoubtedly within your reach. On Deposit Receipt, as a general rule, you would place the deposits of parties who are gradually accumulating sums in your hands for certain purposes, whether of investment or payment. To deposit receipts, also, would generally belong the deposits made by farmers, pending the DEPOSITS. 119 arrival of their respective rent-days. Sums awaiting the completion of title-deeds — or con- tracts of any description — or sums awaiting dis- tribution by way of legacies, or otherwise — in short, all deposits of specific sums for speciut; purposes — you would, as a rule, place on deposit receipt. To Current Accounts, on the other hand, you would place the floating balances of merchants, traders, and all others in active business ; be- cause these will fluctuate, even from hour to hour. And to current accounts, also, you would, as far as practicable, place all deposits of an avowedly temporary and fluctuating description, as well as those of which you can obtain no description at all : for, not knowing when such may be called for, it is desirable that you should at all times be in readiness to meet them. This separation of your deposits into two classes is necessary, less for your own guidance than for the information and guidance of your Directors or Chief Manager, to whom the dis- tinction is of great financial importance. The subject of deposits, indeed, as I have already stated, is mainly a head-office question ; but in several respects, which I shall proceed to notice briefly, the subject addresses itself directly to the Manager of a Branch. I need not dwell upon the reasonableness and expediency of your requiring, as a general rule, that a certain term of notice be given before any deposit is withdrawn, particularly if it is of large amount. I refer, of course, more parti- cularly to that section of your deposits for which you grant " receipts; " but the rule should be ex- 1 M: •1 120 LETTER XIV. I tended, as far as practicable, to that other and more fluctuating section of your deposits — the Balances on Current Account ; or, if not applied as a rule, there should at least be a tacit under- standing between your clients and yourself, that no floating balance of large amount shall be withdrawn short of two or three days' notice. There are very few individuals, having large sums passing through their hands, who could not always give at least this term of notice ; there are still fewer who would regard it as an un- reasonable stipulation ; and, for my part, such persons might take their deposits elsewhere, and welcome. Nor need I do more than allude to the fact, that by having the great bulk of your deposits subject to notice, you are enabled to employ or invest a far greater proportion of their amount — or, in other words, to work, your branch with a much lighter cash reserve — than if the mass of them were payable on demand. But the chief advantage of having the bulk of your deposits rendered subject to notice is, that you thereby in a manner render yourself proof against sudden and unlooked-for demands of embarrassing amount. A " run " upon his de- posits is to a banker what we may suppose a general conflagration to be to our Fire Offices, or the Asiatic Cholera to our Life Companies. It naturally inspires him with a degree of con- sternation, commensurate with the heaviness of the run and the extent of his means to meet it — and meet it he must, or sink under it for good ; for the instances are very rare of a bank surviv- ing the suspension of its payments — particularly a bank with branches. DEPOSITS. 121 'M ulkof that proof ids of de- 30se a )ffices, )anies. con- ess of aeet it good; urviv- ularly The only individual in the community, indeed, who cannot with impunity request a creditor to call again to-morrow, is the banker. Not that he gets payment of the debts owing to him with less trouble than other people ; on the contrary, the banker is about the last person that a trader — particularly if he is in contemplation of bankruptcy — thinks of paying. Nevertheless, custom so rules it, that the banker shtJl pay his debts, principal and interest, whenever called upon so to do ; and if he shall fail to do this, the Gazette is too good for him. It is in vain that a thousand channels of in- telligence have again and again conveyed to the public ear the fact, that you and all other bankers do not hold the whole of your deposits, in the shape of bank notes or gold, in your tills ; and that to enable you to pay interest upon them, you have lent out the greater portion in making advances, and discounting bills, in the support and development of trade of your district. The answer will be, that this may be all very true ; that they, your depositors, are particularly sorry, but that — they want their money, and must have it. But never despair, nor exhibit the slightest trepidation during the fiercest run, because nothing could be more fatal. If those who come first see that you are excited and alarmed, they will not fail to conclude that there is grave cause for your alarm, nor will they fail to tell their neighbours so wherever they meet them ; and thus possibly a run, that a little coolness might h&ve averted, may be turned into a rush that will overwhelm you. , F I'" 122 LETTER XIV. But there is another advantage to be ganied by your remaining perfectly cool and collected under such circumstances. The run may have come upon you unawares, and when your cash reserve was comparatively low. Probably you despatch your accountant by daybreak to head- office, for fresh supplies : and it is during the hour or two immediately preceding his return, that your tact and ability will be put to the severest test. Your object is to gain time — nothing more ; but in seeking to gain this you are consulting the interests of those panting out- side your counter as well as your own : for if they don't get paid that day, it becomes a highly speculative question when they will be paid. Your cashier* being away, and your being consequently short-handed, will be a reasonable excuse for any slmvness that you may exhibit in clearing your counter of your creditors. That you should count out the notes and specie neces- sary to settle each successive demand, with unusual care and deliberation — not hesitating now and then to count them over several times — would be a precaution quite excusable under the circumstances. That before paying any cheque whatsoever, you should go round and consult your ledger as to the state of the ac- count against which it is drawn, is likewise ex- cusable ; and if you should encounter some difficulty, and spend some time in finding the folio of the account, and in satisfying yourself by a reference to the day-book that it has been fully posted up — who shall blame you ? * " Cashier" in England is equivalent to "Teller" in Canada. DEPOSITS. 123 aUer" In the case of Deposit Receipts presented for payment, you would necessarily check the cal- culations of interest in person, and avoid exhibit- ing any unusual haste or celerity in that process, lest persons might fancy you were labouring under excitement ; so in that of letters of credit drawn upon you, and elaborate comparison of the letter with its corresponding advice, is not to be omitted. You would, of course, begin to pay every de- mand in your own notes : by which means you would subject your creditors to the painful ne- cessity of inventing a series of fictions on the spot, as reasons why they would rather have gold — a choice, however, which you would in- stantly meet l3y a mild but reproachful com- pliance : re-counting the notes before you return them to your till, and slowly replacing them by the species of currency required. For killing time under the circumstances supposed, an occasional dash at politics and the weather would be found of considerable service. If, in addition, you should conceive an impromptu interest in the private well-being of your credi- tors generally, their wives, families, and farms ; and keep up a well-directed fire of questions on these interesting topics, and manifest a lively sympathy in the replies, it is incredible what an amount of business you might seem to do com- pared with the business actually done. Mr. Pecksniff's horse, you may recollect, by a simple display of high and extraordinary action, in- spired those who knew him not with a lively hope in his powers of speed. These hints for conduct under a run will \-\ 124 LETTER XIV. appear to you, perhaps, of an over-bold and questionable character — thrown off more in jest than in earnest, probably. I care not how you take them, provided you baffle, by other and better means, any blind and causeless run that may assail you. And there are those, if I am not misinformed, who have not hesitated to meet such emergen- cies by resistance of a more positive and effec- tual character than the comparatively mild and passive course which I have sketched above. During the panic of 1847, the Manager of a remote branch of a joint-stock bank called his accountant aside, after the close of business one afternoon, and addressed him in terms some- thing like these : *' Now, Mr. you see how matters stand. I am off to head-office for more cash. You must work the branch through to- morrow somehow — I give you carte blanche." And he did wisely. His accountant had just that sort of coolness, with a dash of audacity in it, fitted for such emergencies. There was a great rush of depositors with their receipts for pay- ment the next day. He told them (quietly mending his pen the while), that he was very sorry, but a recent order of the Directors was imperative — "No deposit to be taken or paid short of ten days' notice." The Manager, if he were at home, which he would be to-morrow, might, perhaps break through the rule ; but as for himself, he was only a clerk, and couldn't afford to lose his situation. And he didn't. During the same panic, a cashier in the head- office of one of the banks which were then run upon, had a cheque presented to him for payment DEPOSITS. 125 n of an amount which he actually had not funds in the till to meet at the moment. He, there- foie, with a daring humour, wrote in the corner of the check " no funds," which was true enough in one sense — seeing there were no funds in the bank to meet it — and dishonoured the check. The transaction caused the withdrawal of a fine account, but it saved the Bank. One other anecdote, and relative to the same period, and I quit the subject. The Manager of a certain branch found himself, at the close of busi- ness one arduous day, with little over £50 in his till, whilst it was impossible, before the afternoon of next day to increase his reserve. His accountant, a quick-witted fellow, before starting for head- office, quietly locked the cash-safe, (keeping the fact to himself,) put the key in his pocket, and took it with him, rightly judging that it would be better for the Manager next day to meet his depositors with no money and a good excuse than with a beggarly £50 and no excuse at all. The ruse succeeded. The Manager had no diffi- culty in showing what he really felt, viz., a good deal of uneasiness, and the locksmith vainly labouring for hours to pick the impracticable lock, completed the illusion. The depositors, full of sympathy for the Manager, with one accord agreed to call again in the afternoon, which they did, and their demands were satisfied. (I trust the accountant has long since received either promotion or a substantial addition to his salary.)* * The reader is at liberty to believe these amus- ing stories, or part of them, as may suit his fancy. •H i 1 126 LETTER XIV. Like old fashioned works of fiction, they are doubt- less founded on fact ; and they are singularly like stories that have been current in Canada of the manner in which "runs" have been met, such as that friends of a bank would agree to crowd round a counter and draw out gold, keeping the rush of de- positors back meanwhile, the whole being returned after business hours, &c., &c. Another ruse to gain time was to make all pay- ments in one dollar gold pieces, the most incon- venient coin perhaps that the wit of man ever devised, and which might have been specially con- trived for the purpose. These expedients are all very well when it is a primary object to gain time. But it is folly to employ them otherwise, for the most effectual me- thod of " killing " a run is to meet it promptly and coolly, paying demands quickly, as if they were not of the slightest importance. It is, however, desir- able to have a good show of gold on the counter. Letter XV. REVENUE OF A BRANCH. THE BATE OF BANK INTEBEST NECESBABILT HIOHEB UT THE COUNTBY THAX IN LONDON — THE CIBCXJM- STANCES WHICH USUALLY DETEBMINE THE BATES OF DISCOUNT ON BILLS — AND OF INTEREST ON CUBBENT ACCOUNTS. The revenue of a branch naturally divides itself into two principal sources, viz., Interest and Commission ; and each of these again has its particular sub-divisions, of which more here- after. In the meanwhile, it would seem neces- sary to disabuse some of your clients of certain erroneous and embarrassing notions which they appear to entertain on the subject of banking profits in the abstract ; and, first, as regards the question of bank interest. Your rates of interest and discount, then, will fluctuate to some extent, in accordance with the fluctuations of the money market. A rise or fall in the value of money in London is instantly felt, and generally followed, throughout the country ; because the metropolis is the market sought universally by the country banks, whether they desire to lend or borrow money. Towards London, therefore, as to a common centre, are flowing continually from the agricultural dis- tricts those banking funds which are found to be in excess of the monetary wants of the locali- ties where they have aqcumulated) and from <-^ If, It * ii I 'I ir 128 LETTER XV. London, as continually, are these funds being distributed over the mercantile, manufacturing and mining districts, where money is usually in demand, and where such funds, therefore, can generally find ready employment : London, in short, is the great monetary heart of England, and its pulsations are felt to the farthest extremi- ties of our banking system. But in one respect your rates of interest will be invariable — they must invariably be above the London rates. You will follow the London rates, but it must be at a respectful distance — particularly if the tendency is downwards — ^be- cause you must at all times maintain that differ- ence betwixt the London rates and your own which will make a reasonable compensation for the relatively greater expense upon which your business is conducted. You state, however, that you find the greatest difiiculty in making your customers understand this. " I could manage the majority of them tolerably well," you add, " but for a pestilent little tailor — Clipps by name — ^who neglects the little business he has to bestow an immensity of thought on the currency. His * turn over ' in his business is the merest trifle, but he has a theory of currency which he turns over with wonderful pertinacity and vigour. In short, Clipps is an oracle amongst the tradesmen here, and ne keeps them in a continual ferment about the iniquity of our money laws in general, and the extortion practised under them by myself in particular; the difference betwixt the London rates and our own being his constant theme of invective." [The origin of Mr. Clipp's hostility REVENUE OF A BRANCH. 129 to the present system of banking and currency in England, you attribute, I observe, to your predecessor having, many years ago, refused to discount for him a small bill upon a dubious acceptor.] Now, if you discounted the same amount of bills in Huggleton that a London bill-broker does in the course of the twelve months, that might be a good reason — other things being equal — for your adhering to the London rates of discount : but what are the facts ? On the average you have under discount bills to the amount of £20,000. Say that your gross profit upon that sum is even as much as 2^ per cent. : this would amount to £500 a year. A bill-broker, however, woula not consider a few millions an overwhelming s am to have under discount at one time. But say a single million, and instead of 2^ per cent., let the profit be only ^ per cent, upon the amount ; nevertheless the result would be £5000 a year. It follows, on this estimate, that a London bill-broker, although he charged five times less profit than you, would nevertheless realise ten times your revenue.* Nor does the expense of his establishment ex- ceed youTH in anything like a corresponding ratio. For every £50 bill which you discount, he will probably discount one for £5000 ; and the same number of book«ntries, the same amountof calculation, time, trouble, and expense generally will suffice to pass through your books * The profit is estimated, it will be noticed, on the principle laid down in the note on letter ix. ki' 1^ 130 LETTER XV. the one bill or the other. But your profit upon the £50 bill, if at three months' date, would be 6s. 3d. only; whereas upon the larger bill, at the same currency, the profit of the broker would be £6 5s. The case is different in Manchester, Liverpool, and other great marts, which are second only to London itself in the magnitude of their com- mercial and banking operations. In these places there are mercantile accounts, the transactions upon any one of which exceed in volume the trans- actions on all the accounts of your branch put together. In Manchester and Liverpool, therefore, and in other great towns similarly circumstanced, the enormous amount of business transacted enables the banks to assimilate their rates of discount more closely to those of London than an possibly be done in remote country places, where banking transactions are comparatively few in number and trifling in amount. Should you, however, find these arguments to be above the comprehension or beneath the no- tice of Mr. Clipps, there is another ground on which to put the matter. You are established in Huggleton, then, with all the ^eans and appliances for conducting many times the amount of business which you transact; but which, notwithstanding, are requisite to enable yon to transact the business which you actually do. You have brought to the very doors of the Huggleton people an establishment, small in one respect, but equal in all others to a bank on the largest scale of mag- nitude — that is to say, you are prepared to under- REVENUE OF A BRANCH. 131 take and to carry through any banking trans- actions whatsoever that any other bank out of London can, and, in most cases, on the same scale of charges. But change the position of matters, and say that Huggleton shall be without a bank, and its inhabitants compelled, therefore, to travel twenty miles to the nearest town for every bank- ing operation which they have to transact. Will even Mr. Clipps assert, under these circumstances, his fellow-burghers should conduct their banking business on the same terms that they now do 1 Will Mr. Clipps himself, to bring the matter still nearer home, part with a yard of bioadcloth on precisely the same terms that you can pur- chase the same article in the mart whence he brought it ] If you were to suggest such a thing Mr. Clipps would not be slow to assure you that there was a material difference betwixt selling wholesale and selling by retail ; that for one yard he sold, the "house" would sell a thous- and : that they could go on the principle of small profits and quick returns ; but his returns being exceedingly slow, his profits must be pro- portionately large. If Mr. Clipps cannot see the application of this, he must be labouring under mental derangement. From the general principle, viz., that the rates of interest in country places must necessarily ex- ceed those of the metropolis, let us now enter briefly into detail : and first, as regards the rates of Discount on Bills. These will vary in accord- ance, first, with the character of the bills. A first-rate commercial bill, drawn by a first-rate if. ill I, 'ii *' I i 132 LETTER XV. house, upon a first-rate acceptor, for example, is obviously of a higher character than such a bill as we have described as being drawn by Mr. Bowdler on his friend David Starkey ; and, ac- cordingly, the rate upon the former will be much lower at all times than that upon the latter. Again, there is always a market for first-class paper : you can always sell such bills, or re-dis- count them, which is nearly the same thing : but for infeiior bills the market is always uncertain, and sometimes closed altogether. The first-class bill, moreover, you can rely upon being met to the day — not so as regards the other. By dealing in the former, therefore, you have at «>11 times the absolute command of your financ* osition. Cease to discount them, or reduce t amber which you discount, and your reserve of cash instantly begins to enlarge ; but cease discounting Mr. Bowdler's paper, and you are not absolutely certain of thereby aug- menting your cash reserve at all, inasmuch as his bills are met with singular irregularity. For these reasons, the first-class bill always commands a higher price, — or, what amounts to the same thing, it can always be turned into cash at a lower rate of discount than any other description of bills.* * " The first-class bill commands a higher price." This remark is suggestive of thought. The dis- counting of a bill is really the purchase of the acceptor or promissor's obligation, generally with the right of recourse against the customer in case of its non-fulfilment. Viewed in this common sense and practical light, it can be understood at once that rates of discount •. REVENUE OF A BRANCH. 133 Your rates of discount will vary, secondly, in accordance with the currency of bills. You can- not discount a bill at six months' date for the same rate at which you could discount a bill at two months' date. By investing your funds in the former class of bills, it is obvious that you would turn your capital over only twice within the year ] whereas by investing your funds in bills having an average currency of two months to run, your capital would revolve six times within the year. If, for example, your current rate of discount were 5 per cent, and the usual 5s. per cent, com- mission, and you regularly invested £20,000 in vary with the character and means of the parties to the bill. Bills to a banker, can be classified as accurately as wheat to a miller, cotton to a dry goods merchant, or vessels to a shipowner. In the London money market there are numbers of bills discounted, drawn by a Bank upon a Bank, and endorsed by two responsible wholesale houses in addition. These are the bills that are discounted at so low a rate by the Bank of England, and it should be remembered that the Bank rate is for hilh of this clxiss. We have no such bills for discount in Canada. Our very best bills are of a much lower grade ; hence the average rate of discount is always higher ; that is, the bills sell at a lower price. If it were customary to buy bills, as is sometimes done, at a certain price for the bill — say, a bill of $1,000 for $9 SO, it is evidently reasonable, that if a first-class bill were worth $980 ; a second-class bill would be worth less — say $970 ; and a third-class less still, or perhaps only $960. Laws which attempt to pre- vent the free play of bargain and sale in bill trans- 134 LETTER XV. ! 'I bills at two months' date, the result would be for the year — 6 f cent, on £20,000 £1000 Six commissions on do. 5s. f cent, each, 300 £1300 Now to invest the same amount to equal advan- tage in six months' bills, your rates would require to be G per cent, interest and \ commission. For £20,000 at 6 per cent. __. £1200 Two commissions of J each __ 100 ... u«. . £1300 And this is on the supposition that none of the bills are retired or paid through you when actions are as surely inoperative as laws would be to regulate the price of grain or cotton. Poor cot- ton is not worth as much as good ; neither is a poor bill worth as much as a good one. And again, whereas the same quaUty of wheat is sometimes worth only $L per bushel, and sometimes $1.50, so a bill of the same quality is sometimes worth more than at other times. In technical language we say the "rate of discount" varies, but what really varies is the price of bills, according to the plentifulness or otherwise of money to buy them with. The method of quoting bills by their selling vahie, is well established in the case of foreign bills. No one dreams of making objection to the fluctuations of the market for sterling exchange, as bills on England are called, or to the different rate for a banker's bill and a private one, but precisely the samB principle apphes to bills whose currency is wholly inland, or which are drawn on a foreign country, payable in the same currency as our own. Legislators, however, are not always overburdened with intelligence in commercial matters. 1 EEVENUE OF A BRANCH. 135 due. The probability is, however, that a con- siderable portion of them may, and if so it is almost superfluous to observe that you would have three bills to retire under the short-date system for every one which you would have to retire under the other. On Current Accownts overdrawn, the rate of interest charged is determined as much by the nature of the account, as by the existing state of the money market. Other things being equal, the interest charged will be at a higher rate iq)on an account always overdrawn than upon an ac- count the balance of which fluctuates from one side to the other. And again, the interest will be higher upon the balance of a comparatively inactive, than upon that of a highly operative account. The country banker, in fact, does not much regard the interest upon current accounts as a source of profit. The value of these accounts in this respect he estimates by the amount of operations upon them, and the consequent com- mission accruing to him from these operations. And this explains the apparent anomaly of a higher rate of interest being sometimes charged upon bills than upon the balances of overdrawn accounts. It is different in the case of accounts which have ceased to be operative and assumed the character of dead loans. The commission charge- able upon an account ceases, of course, with the operations upon it : hence, upon dormant ac- counts, the interest, being the sole revenue derivable from them, must necessarily be charged at a higher rate than upon those which are active. ■j I 136 LETTER XV. On certain of your less active accounts, you tell me that you charge by arrangement a com- mission on the sum that mtfrht to have been turned over upon them, — that is to say, upon an account regularly overdrawn £1000", you charge commission on five times that sum every half- year, whether the operations have reached that amount or not. This may be a remunerative charge — but it is an unsound description of business to countenance : and unless the over- draft is covered by undoubted banking security, an unsafe and perilous description of advance. It is a safe inference that if all the money passing through the hands of a trader in the course of six months does not exceed the advance upon his account in the proportion of five to one, you are lending him by far too much, and that he is trading on your capital, — little to his own ad- vantage, it may be, and still less to yours. No rate of commission, therefore, justifies the con- tinuance of such advances. They ought to be recalled or reduced, and the money advanced to parties who will make more legitimate use of it and at the same time pay you as well or better for it. Letter XVI. REVENUE OF A BB,ANCR— Continued. THE COMMISSION CHARGED BY COUNTRY BANKS THEIR PRINCIPAL SOURCE OF PROFIT — BANKING PROFITS LESS THAN THOSE OF OTHER TRADES — LONDON PRINCIPLE OF CONDUCTING A BANK AC- COUNT — SCOTTISH SYSTEM. In treating of interest as one of the two main sources of the revenue of a bank, incidental allu- sion was made to the other great branch of the income of a country bank in England, viz., the Commission usually charged by it on transac- tions with its customers, in order to explain why the interest upon advances, apparently similar in character, varied sometimes materially in rate. But the subject of commission is large enough to merit more formal consideration. With very few exceptions, then, the country banks throughout England charge the uniform rate of 5s. per cent, for transacting the banking business of their customers; and it is not an unusual estimate, that the revenue derived from this source represents the net profits of the bank — the difference betwixt the rate of interest allowed and that charged to its customers being required to cover the expenses of the establish- ment. The estimate will not, of course, hold good in all cases. In some instances more, in others less than the difference of interest will be required to cover these expenses, but as an aver 1:;^ ^ 138 LETTER XVI. age, the estimate may be regarded as a fair one, and as showing, consequently, the importance of this branch of the income of a country bank. There are those, however, who gird at the charge as exorbitant, and who, therefore, take every means, directly and indirectly, to evade it — (little to their own advantage, I may observe, by the way — ^but of that more hereafter). But if the banker's profit is exorbitant, what shall we say of the profits of trade, which range from £5 to £20 per cent. — or from twenty to eighty times the rate of banking profit ? True, the banker has a greater volume of transactions passing through his hands, and consequently his aggregate profits may be as great as those of some other traders on the amount of capital em* ployed ; but that the profits of a bank are the reverse of extravagant, the average rate of divi- dend paid by joint-stock banks to their proprie- tors, will testify to the satisfaction of any rea- sonable person. But you will be told that the London bankers do not charge commission. Neither, however, do they allow interest on current account bal- ances ; and if they do not charge a fixed rate of commission, they expect that you will not quite forget their clerks at Christmas time.* There- fore it depends entirely upon the nature of a banking account whether it will be more profit- able to the holder on the London or the Country * There arn a few exceptions to this rule. Several of the Joint- stock banks in London allow interest on balances above £200, but the rate allowed is comparatively low, and even its being allowed at all is hampered with restrictions which render it in many instances, quite nominal. The joint-stock Vtanks, moreover, do not permit the acceptance of Christmas gratuitt«s from the customers o( th« YK^nk.— AuTQoa, REVENUE OF A BRANCH. 139 principle. By being charged with commission, but credited with interest, may be quite as ad- vantageous as to escape both. There is another point of view, however, from which to regard the respective advantages of the London and the Country principle of conducting a banking account. The London principle is, that you shall not only receive no interest upon your account, but that you shall never reduce the balance below a certain sum ; and this sum will be regulated in some measure, by the number and magnitude of the operations upon the account. In opening an account with a London banker, therefore, you in effect per- manently sink or invest a certain portion of your capital. You may certainly, at any time, withdraw the money, but if you do, you must close the account ; and it is not a slight consid eration for any man in business to change his banker. But in opening an account with a country banker, no such investment of a portion of your capital is necessary. Whatever your bal- ance is, it is at your command, and the under- standing is, that you may withdraw it at any moment. Now, according to the country system, is the customer invariably restricted to drawing only the sum standing at his credit. To the London banker " over-drawn account " is practically an unknown term. To be called upon to pay a cheque for £1000, against an account having only £500 at its credit, would, probably, sug- gest to his mind a happy illustration of the height of impudence. But the country banker, by a pretty long course of experience, has be- > M 140 LETTER XVI. come habituated to his custom — probably as eels are said to get accustomed to being skinned. In the country, therefore, a party might not only retain the command of the entire balance at his bankers, but might feel tolerably secure of being permitted to draw for something more, if his credit were sound, his means good, and the occasion required it. Nor, to any one engaged in business the question is simply this —will not the absolute command of the balance at his bankers, and something more, enable him, in the ordinary course of things, now and then to take advan- tage of the market, and, by the use of this money, realize a profit, compared with which the total commission charged upon the account for the twelve months would be a mere baga- telle ? They must be singular times indeed, in which such occasions do not arise ; and he must needs be a dull fellow who lets them slip. But, again, there is the Scottish system, under which you aie charged no commission, but yet are credited with interest on your account. You will probably be asked, probably, with an air of triumph, to get over that if you can ? The readiest, and perhaps the most conclusive answer to this would be, to suggest to the gen- tlemen in waiting for a reply, whoever he may be, the expediency of his at once emigrating to that portion of Her Majesty's dominions, and trying his fortunes where " the extortion " of which he complains is happily unknown. Or, if this reply smacks too much of petulance and discourtesy for general use, there is another REVENUE OF A BRANCH. 141 of which I take it to be quite as conclusive in its way, although less portable. The Scottish banks, then, as a body, enjoy two things which the English country bankers do not, viz., the unlimited confidence of the public, and the privilege of issuing one pound notes. It matters not that you enter into an histori- cal statement of how this confidence arose, spread, and became confirmed ; it is enough that it exists, and that it has been the cause of throwing into the hands of the Scottish banks the enormous aggregate of five-and-twenty mil- lions of deposits, of which twenty are permanent and exempt from fluctation as the principal sum of the national debt itself. As regards the small note issues, it is sufiicient here to state, that they form two-thirds in amount of the whole paper currency of Scotland. Now, to enable the English country banks to compete with their Scottish contemporaries in the scale of banking charges, you would have to place them on a similar footing in other re- spects. Their present limit of issues of ^8,000,- 000, for example, must be extended to £24,- 000,000, to admit of a proportionate issue of small notes, and their existing aggregate of de- posits, whatever they may be, should be raised to something like two hundred million of pounds sterling. Let it be further arranged that one hundred and sixty millions of these shall continue as permanent and free from fluctuation as the twenty millions of the Scottish deposits are — exempt the banks in England from the action f' 142 LETTER XVI. !! > or the fear of "runs" — and on these condi- tions you may safely pledge your honour as a gentleman, that the Country Bankers of Eng- land would abandon the charge for commission, and look to their deposits and circulation solely as sources of revenue and profit. But a change is coming over the Scottish system, as to the principle of charging commis- sion on current accounts. Already the prin- ciple has been introduced — very partially it is true — but it is the point of the wedge. The truth is, that Sir Kobert Peel's Scottish Bank Act of 1846 effected a fundamental change in the princi- ple of issuing notes in that country. Previous to that enactment the banks had been regarded as the most competent judges of the amount of notes it was prudent for them to issue, and also of the reserve in specie it was desirable to hold against them. But the act sets bounds — and very arbitrary bounds — to both. It declared that, up to a certain point, every bank should issue notes, with or without a reserve of specie, as it thought best ; but that every note issued beyond this point or limit must be represented by specie in the coffers of the issuer. Now, previous to this enactment, it was the interest of each bank to maintain the circulation of its own notes at the highest attainable point which the action of the local exchanges would permit. Of the total circulation required for the monetary wants of Scotland, and of which those exchanges were the ceaseless and unerring corrective, I say it was the policy of each bank to procure as large a share as it could. Its cus- tomers, therefore, were encouraged to pay in to REVENUE OP A BRANCH. 143 their credit the notes of other banks as they collected them, and to make their payments exclusively in the notes of the bank in which they dealt — a process for which a charge for commission would obviously have tended very materially to obstruct, and in a great measure to neutralise. The Act in question, however, has changed all this. A Scottish bank now has no induce- ment to enlarge its issues a single pound beyond its fixed limit, however much the cir- culation generally may fall short of the actual monetary requirements of the country, and hence, probably, the first step towards the English system of charge which I have noticed above. ^i' ''I : i' ; • Letter XVII. REVENUE OF A BRANCH— Continued THE TRANSACTIONS IN COUNTRY BANKING WHICH ARK CHARGED WITH COMMISSION — THE ADVANTAGES DERIVED BY THE CUSTOMERS OF THE BANKS AN EQUIVALENT. Before we can arrive at a correct decision as to the reasonableness, or otherwise of the particu- lar item of bank charge, which we had under discussion in last letter, it will be well to con- sider briefly upon what description of transac- tions and on what specific grounds the charge in question is levied. So far we have argued the point as if the charge for commission were peculiar to the English country banks ; but it will be found, on inquiry, that the charge is made to include a variety of transactions upon which all other banks impose a similar tax. When you intimate to a party seeking to do business with your branch that your terms will be a commission of 5s. per cent, upon the total " outdrawings" upon his account, it is under- stood between you that these outdrawings may consist or arise out of any or all of the transac- tions following. For the charge in question, you agree — 1. To grant him a draft or letter of credit on any town in the three kingdoms ; 2. To pay over to him any sum or sums of REVENUE OF A BRANCH. 145 ttioney lodged to his credit in London, or any- where else in England ; 3. To protect or retire his acceptances, whether domiciled in London or elsewhere ; 4. To open a credit in London, or with any of your branches or agents, for him, to be oper- ated upon at his pleasure ; 5. To collect his bills receivable, cheques on other banks, dividend warrants, &c., wherever payable, if not out of England ; and — 6. To supply him, on demand, with Bank of England notes, gold or silver, in exchange for any description of currency or bill which may have been paid to the credit of his account. These are the transactions which constitute the " outdrawings" upon a banking account, and on the total of which you charge 5s. per cent, at the end of the half year. And if the nature of the transactions on which the commission is charged be fairly considered, it will be obvious, I think, that no one could act as " his own banker" on equally favourable terms. 1. Let him, for example, resolve to be his own remitter of payments which he may have to make in any part of England ; and how far this is likely to be to his advantage in the long run we have already considered in discussing the matter of " Drafts on London." 2. Instead of receiving, through a country bank, moneys that may be lodged to his credit in London (in the shape of dividends on stock, &c.,) or ill other places, let him collect them in person, and place his travelling expenses in so doing against the commission which their collec- G I i U(i LETTER XVIi. tion by a banker would cost, and if the differ- ence is not heavily against him, all we can infer is, that he must be a person of very splendid income. 3. The same observation will apply with re- gard to the protection of his acceptances. If he must make a special trip to London or elsewhere to pay each of his acceptances as it falls due, the sooner he abandons putting his pen to paper, as the acceptor of a bill, the better for himself — and, possibly, for his creditors as well. 4. By opening a credit for him in London or elsewhere, you enable him to draw for that amount of money, and no more, which he finds he will require when he has completed his pur- chases. Without this facility, he would require to take with him a much larger sum than he would probably have occasion for ; and that sum also, he carries in his pocket at his own risk, and in a shape much more attractive to the light- fingered of the community than a dry untrans- ferable letter of credit. 5. Or let him essay the collection of his bills receivable, cheques on other banks, dividend warrants, &c., wheresoever payable, and if his transactions of this description are not exceed- ingly limited in number, he will be on the wing from one year's end to another. To collect a single railway dividend warrant for £10, upon which a banker's charge for collection would be threepence, it is no great stretch of fancy to sup- pose that he may have to travel some hundreds of miles. 6. But the grievance, you will be told, does not so much lie in charging commission upon REVENUE OF A BRANCH. 147 such transactions as these, but in making a party pay 5s. for withdrawing £100, which he may have placed in your hands only the day before. You might fairly urge in reply, that any one subjecting himself to this charge does so with his eyes open, and therefore cannot reasonably complain. If he placed it to his account in for- getfulness of an amount which he had to pay the d..y following, and which he had meant to pay without passing the transaction through the bank account at all, and so evading the commis- sion, I for one, must confess that I can have no sympathy for him ; on the contrary, I should con- sider him rightly served. It will be argued, however, that the lodgment and withdrawal of cash simply are not optional with the holder of the account ; that a party must make the operations upon the account reach a certain minimum per annum. This is perfectly true; but it appears to me, that in seeking to evade this, a party seeks to evade a deliberate bargain. If you have taken the ac- count upon certain conditions, I apprehend these conditions are not less binding upon your cus- tomer than upon yourself, and, therefore, that he has no right to complain if you hold him to the strict letter of the agreement, so long as you fulfil your part of its conditions. When the minimum in question is attained, it is purely optional with the operator on the account whether he pass 5s. or £5000 through it, over and above. There are many persons, however, who must be allowed to be tolerably shrewd men of business, and who systematically pass all their cash transactions through their 148 LETTER XVII. bankers with an indifference to the commission, which is quite unaccountable to those who are alive to the advantages of being their own bank- ers, and who, on principle, do not pass a shilling through thwir bank accounts which they can by possibility avoid. But what at first sight may seem indifference to the charge is, probably, the result of sound reasoning and shrewd calculation. For, in the first place, by passing all transactions through his bank account, the merchant secures a valua- ble check upon his own cash-book, the intromis- sions of his cleilcs, and his transactions with others. Many a grievous law-suit is avoided by those whose mode of business enables them to call their banker into court, as a disinterested witness to every payment made by them in the course of business. In the second place, by systematically seeking, day by day, the protec- tion of the banker's safe, in preference to his own, for the safe custody of his floating balance of cash, the man of business insures himself against two grave risks — fire and theft. Let the banker's safe be robbed, or its contents burned to tinder, and your remedy against him is just as good as if neither catastrophe had hap- pened ; but be robbed of your cash, or have it burnt whilst in your possession, and your reme- dies in either case are desperate in the extreme. And it will be admitted that it would be an easy matter to lose in this way, a sum that would cover the commissions upon your bank account during your lifetime. Lastly, even men of the most correct business habits do not invariably register the numbers, dates, and particulars of REVENUE OP A BRANCH. 149 every note they receive or pay away. It is thought quite sufficient in the matter of notes received to write the name of the party upon them from whom they were received, and on notes paid away either your initials or some mark by which you can identify them again ; and so far as enabling you to purge yourself from participation in forgeries or thefts, (the proceeds of which may have innocently passed through your hands,) these precautions are suffici- ent. But suppose you take or send £100 in notes to pay an account, and they are lost by the way, what avails your private mark upon them ? Doubtless, the mark would be of infinite service in identifying the notes when found, but how to find them is precisely the result which your private mark will not accomplish. Now, it instead of this you had paid the £100 by a cheque upon your bank account, you would have been just £99 15s. the richer. Nay, even if you had drawn money for the cheque, and taken the money with you to settle the account, and lost the money by the way, you had only to go back to your bankers to have payment of the notes stopped at the Bank of England, (within the next ten minutes, by means of the electric tele- graph,) and at all the banks in England, Scot- land, and Ireland, by the same day's post. By passing every transaction, without exception, therefore, through a bank account, the operator upon the account avoids a troublesome but necessary process — that of registering the par- ticulars of every note that passes through his hands — and a process done with much more system and accuracy by a banker than it can well be done by any one else. ^ III ' 1 ■ 150 LETTER XVII. But, after all, it is but a shabby objection, which we have thus been combating. We have been answering the question, why a sum paid in to account to-day is charged with commission, although withdrawn in cash to-morrow, and to all liberal minded people the answers given we hope and believe will be conclusive. Even if reasons which we have already stated were in- sufficient, we might fairly urge that the just and liberal way to view the commission charged upon an account is to take the account as a whole. If you select a particular transaction, and say upon this the charge falls too heavily, you are bound in fairness to point to others, and admit that the charge upon them falls too lightly. Place on one side, then, the commission upon all trans- actions which you might have evaded, if you had chosen, and place on the other the expense which the remaining transactions would have put you to, but for the intervention of your banker, and the probabilities, I take it, are that the balance would be seriously against you. To those, however, who may still be of a con- trary opinion, and who adhere to their resolution of banking on their own account, you and I, and all others, the country bankers of England, can say in conclusion, and with entire candour and sincerity, that we heartily wish them all the suc- cess which they are likely to reap in the long- run by so doing. Letter XVIII. EXPENDITURE OF A BRANCH. i ' INTEREST PAID — THE NATURE OP AN ACCOUNT DETER- MINES THK RATE OF INTEREST ALLOWED UPON IT — INTEREST ON DEPOSIT RECEIPTS. From the question of revenue let us now pass to that of expenditure, which it will be best to consider, perhaps, in detail, under the several h&ads into which you divide it, viz. : Interest Paid. ^ • Salaries. Rent, Taxes, Rates, and Interest. , Expenditure on Bank Premises. Incidents. Interest Paid. — You make a distinction under this head betwixt interest paid on mrrent accounts and on deposit receipts, and the distinc- tion is necessary not merely as one of classifica- tion but of rate also ; because the rates upon the one description of deposit do not always corres- pond with those upon the other. On Current Accounts. — In respect of balances or deposits on current account, you are instruct- ed, I presume, by your head-office as to the max- imum rates to be allowed previously to making up your accounts for the half year, and the dis- cretion given you of reducing the maximum in cases where a lower rate would be a fair allowance. The maximum iji question is always higher than \ : ill J52 LETTER XVIIl. the rate allowed on deposit receipts that may be withdrawn on demand ; because these receipts are not subject to commission on withdrawal. But it is clear that in allowing this higher rate it is on the supposition that the accounts, shall be operative, and that the higher rate will be compensate*! for by the commission upon the ©utdrawings. If it shall api)ear, therefore, that amongst your current accounts there are some which have not been current at all, but mere deposits, without an operation upon them for- the half year, then obviously upon such balances you cannot consistently allow the maximum rate, but merely your current rate, whatever that may- be, for deposit receipts repaj^able on demand. Other accounts you may find upon which there have been a few trifling op«^rations, but not of sufficient amount to place them in the highest rank in respect of interest, and on which, there- fore, you would properly allow an intermediate rate. Supposing, for example, your highest rate to be 3, then 2 per cent, would be a fair rate for dormant balances, and 2| for balances only slightly operative. But you wish to be informed, if it is not the fact, that certain country bankers, located in large towns, allow the same rate of interest which they charge upon current account balances 1 In a certain sense they do ; and their reasons for so doing are not difficult of explanation. In certain of our greater towns, where this princi- ple prevails, the custom is for a party to pay to his credit his receipts of cash, cheques, and bills, not in the order in which his requirements arise, but in the order in which the bills, ^c, come EXPENDITURE OF A BRANCH. 153 into his hands, and the bills so paid to his credit generally constitute by far the greater portion of the lodgments on the account. It, therefore, becomes of great consequence to a party, that by agreeing so to conduct his account, instead of merely providing for his requirements as they arise, he does not subject himself to unnecessary expense. To prevent this, the usual arrange- ment is, that all his bills are passed to hm credit without reduction, — that is to say, he is credited in account with the exact amount of the bills, the discount upon them being carried out into tho interest column, to be brought to his debit at the end of the half year : and upon the balance at his credit thus created, interest from day to day is carried out at the same rates, and brought to his credit at the end of the half year. The result is obviously thi^, that he is debited for discount according as the bills are drawn against only. An example, however, will render the matter clearer. Take the case, then, of a party paying a bill at three months for £1000 to his credit, and operating against it as follows : — Interest. Dr. Cr. April 30. By Bill due .30 June £1000 x 61 = 61000 30. To Cash 200 Cr. 800x32= 25600 June 1. To Cash 400 Cr. 400x29= 11600 30. To Cash 400 61000 37200 37200 Interest 23800=£3:5!3 ll ! ■ 154 LETTEtt XVII I. Now, if instead of having the bill passed to his credit, he had lodged it in your hands as colla- teral security for such sums as he might have oc- casion to draw against it, and had drawn as above, it is obvious that the result, as to interest, would have been precisely the same. The bill you would have passed to the credit of bills lodged for collection until due, and to the credit of the party when paid, and your account with him would have run thus : Interest. Dr. Cr. April30. To Cash £ 200x32= 6400 June 1. To Cash 400 Dr. 600x29=17400 30. To Cash 400 Dr. 1000 "ByBiUdue 1000 " Interest 23800=£3:5:3 By allowing, therefore, the same rate of in- terest on balances created by passing bills to credit before they are drawn against, as he charges upon the bills themselves, a banker vir- tually does neither more nor less than charge discount upon such bills from the dates he gives cash or value for them. If he declined to do this, the parties could insure to themselves nearly the same result by simply keeping the bills in their own hands until they required to discount them. It is true that, by allowing the same rate upon the balance of the account as is charged upon the bills passed to its credit, you also allow the rate upon that portion of the balance which may EXPENDITUHE OF A BRANCH. 155 have been created by the lodgment of cash sim- ply ; but, practically, it rarely happens that this amounts to anything. It is not unusual, in the case of accounts such as those now under review, to charge only the same rate on any overdraft that may arise upon them as is allowed upon balances at their credit; but this is only in cases where the overdrafts are purely temporary and accidental, and where the general character of the account is that of a creditor or deposit one. And, as I have already stated, it is not to the interest upon such accounts, debtor or creditor, that a bank looks for profit — but to the operations upon them, and the conse- quent commissions. But the custom of allowing the same rate of interest upon both sides of a running account is not confined to great towns and great banking accounts. Look nearer home, and you will find the custom in full operation — even at your own branch. Your principle with respect to overdrawn ac- counts is to charge interest on the balance. Now, if my account is overdrawn to-day JBIOOO, and I reduce it to £500, by a payment in cash, and you charge me 5 per cent, on the remaining bal- ance, it is clear that I am allowed 5 per cent, on the money which I paid in reduction. And so long as an account continues overdrawn, however little, and interest is calculated on the fluctuating balance, it follows that interest is allowed upon all sums paid to the credit of that account at the same rate as is charged upon sums withdrawn. That this is so will be obvious by a very .1 ' •■ i' 156 LETTER XVIII. short and simple example — first, of an account calculated according to your method : — Dr. Cr. Days. Int. Int. Jan. 1.— To Cash £500x10 = 5000 11.— By Cash 300 Dr. 200x29 = 6800 Feb. 9.- To Cash 300 Dr. 500x10 = 5000 19.— By Cash 500 15800 Let us now calculate the interest upon the same account, but upon the lodgments and pay- ments respectively, instead of upon the bal- ance : — Dr. Cr. Jan. 1. To Cash.. 500 Feb. 9. To Cash... 300 Int. 19500 8000 Jan. 11. By Cash.. 30t' Feb. 19. By Cash.. 500 800 Int. 11700 800 27500 11700 11700 To interest.... 15800 The result, as to interest, you will see is the same in both cases : and what is true in this respect of these few entries would be equally true of any number or variety of entries or ac- counts. On Deposit Receipts. — In England the deposits in banks consist chiefly of sums allowed to ac- cumulate to the credit of the parties to variable amounts, then to be withdrawn for investment in the funds, or in railway shares, or to be lent EXPENDITURE OF A BRANCH. 157 out on mortgage, or personal bonds, or some other description of real or personal security. In Scotland, on the other hand, the great bulk of deposits are permanent investments as such. The Scottish depositor prefers keeping his prin- cipal intact, and always at command, even if the interest is a little lower, rather than seek other forms of investment for his money. He prefers that his principal shall remain fixed and the in- terest upon it variable, rather than that the inte- rest should be fixed and the principal variable. Permanence, therefore, is the characteristic of deposits in Scotland — fluctuation in England : hence two points in which the banking system of either country differs. In Scotland the cus- tom of requiring notice of the repayment of de- posits is a rare exception —in England it is the rule. In Scotland, again, the rule is to allow an uniform rate on all deposits — in England the rule is that this rate shall vary according to cir* cumstances. You could not, for example, properly allow the same rate of interest on £1000, which you may have to repay at any moment, as upon a like sum which may not be withdrawn short of a month's notice. Deposits of the former des- cription you must necessaiily invest in securities of a first-rate character — at all times convertible into cash at will ; and upon such investments the interest that you will receive will be low in proportion. Deposits of the latter description (those subject to notice) you may safely invest in securities of longer date, less superior charac- ter, and bearing, consequently, a higher rate of interest. 158 LETTER XVIII. Upon deposits, again, lodged with you for fixed periods — six or twelve months — you can allow a still higher rate ; because, for these you may descend still lower in the scale of invest- ment, and the lower you descend, the higher, of course, will be the rate of interest borne by such investments. At present, for example, first- class bills of short dates, if purchased in London, would yield you an interest of from 2 to 3 per cent. ; fair commercial bills, not exceeding four months* date, you might discount to yield you 3J to 4^ per cent. ; and for advances on railway shares, with a good margin, for stated periods, you might obtain from 5 to 6 per cent. Letter XIX. EXPENDITURE OF A BRANCH— Continued. SALARIES— OBJECTIONS TO A FIXED SCALE OF SALARIES — SALARY BY SENIORITY PRINCIPLE — CONSIDERA- TIONS WHICH SHOULD GUIDE IN THE ADJUSTMi^NT OF SALARIES. Your plan for disposing finally of the salary question has at least the merit of brevity. " I would attach," you say, " a fixed salary to each branch proportioned to the profits ; and I would place the managers at the respective branches in the order of merit." Captivating as this pro- position may be at first sight, it nevertheless in- herits the usual defect of abstract propositions — that of being wholly impracticable. A fixed salary to each branch, on the prin- ciple proposed, would be a fixed injustice ; be- cause the profits of branches fluctuate from year to year, and, in the majority of cases, from causes over which the managers have no con- trol. Would you have the salaries to partake of these fluctuations 1 If you would, the fixity of your scale is gone ; if you would not, then its equity is destroyed. But there is another objection. You would have the most meritorious oflicer as the ma- nager of the best-paying branch ; the next in order of merit as manager of the second best, ^ii ICO LETTER XIX. I and so on, downwards. But it is the most weakly branches — the branches that have to struggle against competition, and make their way against ignorance, prejudice, and other hostile influences, that require the best oJSicers. To send your worst officer to your worst branch is simply to make an end of it. For the most des- perate case, your scheme would call in the most incompetent physician. Mark me, I do not lay it down as a principle that your most incompetent officers should have the charge of your best branches ; and, con- versely. What I contend for is, that the busi- ness of a branch often sinks into that inert con- dition that it imperatively requires the presence of an intelligent, vigorous, and active officer to revive it ; and that any scheme which would render this impracticable or unjust is unsound and pernicious. But follow your scheme out to its legitimate consequence ; and when manager A dies, or re- tires, then, as a matter of right, manager B takes his place, making room for 0, who is re- placed by D, and so downwards, until your en- tire managerial force is re-shuffled, and you start a new game, with fresh hands. You may by these means, now and then, by accident, play a safe card ; but you are far more likely, as a rule, to play the deuce, or something like it, for there are few things more damaging to the permanent interests of a branch than a frequent change of its manager. The trust and confidence which must necessarily be reposed in this officer by his customers are very great, and are not readily or cheerfully transferred to a stranger. A man is EXPENDITURE OF A BRANCH. 161 as averse to changing his banker as he is to changing his lawyer or his physician. It is no reply to this, to argue that the change in ques- tion is not actually a change of one's banker. Practically, it amounts to this ; for it is not to "the Directors and Company," but to the manager, personally, that the customer confides his finan- cial matters, just as he confides the little weak- nesses of his bowels or liver to his physician, and not to the whole College of Surgeons. And this is only one objection to the universal "flitting" which your scheme would, every now and then, occasion at your branches. It is in the last degree, impolitic to remove a manager from a district with which he is familiar, to one to which he is either comparatively or totally a stranger. A knowledge of the parties with whom he has to deal is essential to the proper efficiency of a mafiager. To allow A and B, therefore, who know their respective localities intimately, to exchange places, would be wan- tonly to throw away a safeguard against loss and imposition to an extent altogether incalculable.* * There is, however, another side to the argument. A change in the management is sometimes de- sirable in order that all the transactions of a branch may be brought under review in the simple light of banking principles. A manager, as time passes on, forms associations, connections, and friendships, (not to say antipathies) which to a certain extent, unconsciously influence his judgment. Those who have charge of the general working of a bank know how strongly these operate in certain cases, with some men, generally according to temperament, and what an advantage it has been to have ma- ^ 162 LETTER XIX. For these reasons, and for others which I will give you by and by, I am opposed to regulating the salaries of a bank according to any fixed and arbitrary scale whatever. The services ex- pected and required from the officers and clerks of a bank are not simply mechanical : they are not merely hewers of wood and drawers of water. Look at those great public establishments where the salary-by-seniority system prevails, and perhaps unavoidably prevails, — where youth ful genius is obliged to succumb to aged dulness, and the finest capacities, equally with the mean- est, have no more freedom for independent exer- cise or expansion than the works of their office clock, — and confess that the no-system under which you at present live is, after all, the better of the two ; for, few as its prizes are, it still has priies that may be battled for and won by in- tellect, and merit, and, therefore, constantly holds forth to p}}. the inducement to aspire. But the other system acknowledges but one standard of nagers change poBitions in order that the mists of preposaessiou or prejudice may be removed, and everything be judged on its merits. It has indeed been argued, and by some of the most suc- cessful bankers, that a manager does not require to know the peculiar character and temper of the cus- tomers of a branch at all. If he knows banking, they say, he knows enough ; let him apply banking principles to every transaction, no matter who the parties are to it, and he must do 'veil. There is something to be said for this view, though it is rather an extreme ground in the contrary direction to our author, EXPENDITURE OF A BRANCH. 163 intellectual value — the weight of years. Weighed in such a balance, seniority preponderates as a law; and judgment, thought, and aptitude, if linked with youth, inevitably kick the beam. Promotion thus reduced to a question, not of merit, but of time — a dreary waiting for of mortality amongst " the seniors " — what other results could be reasonably looked for, than the frigid apathy, the cold selfishness, the " insolence of office," that are the notorious characteristics of the system 1 " But why, in the name of justice and common sense," you break out again, " am T, who have the same duties to perform, and the same res- ponsibilities to bear, to receive less salary, by some fifty per cent., than my predecessor in office t If I was fit to succeed him in ofiice, surely I was equally fit to succeed him in salary ) If I was fit — " and so forth. In the letter in which you announced to me your promotion, you stated, with something of a boast, that you were to succeed one of the oldest officers of the bank, yourself being one of the youngest ; and thus, unconsciously perhaps, furnished me with a conclusive rebutter to the plea you now urge ; for length of service is, un- questionably, one of those considerations that ought to weigh with a board of directors in the adjustment of salaries. In all probability, your predecessor commenced his management at a rate of remuneration as low as you enter upon yours. His steady merit has, doubtless, year by year, secured some acknowledgment of his services, in the shape of increased salary ; and if you will follow in his footsteps, I do not ill! 164 LETTER XIX. doubt but that, in due time, your reward will be equivalent to his. Although the salary question cannot, with any regard to fairness, sound policy, or common sense, be reduced to a scale, however finely graduated, and for the simple reason that the in- tellectual faculties are not admeasurable by the ordinary standards of length, weight, area, or capacity, — certain principles are, undoubtedly, to be admitted in the equitable adjustment of salaries. I would have it a recognised principle, for example, that, other things being equal, the officer of ten years' standing has a larger claim on the generosity of the board than the officer of yesterday ; and, again, other things being equal, that the officer of unquestionable merit — the worker — the sound head and willing hand, has a claim upon the Direct ars, which thick- headed, shirk-work, blundering dulness has not. And, finally, I would have it a fixed and un- alterable LAW, that the lowest salary in any es- tablishment should be such as would enable its recipient to mail? tain that footing in society to which his office may entitle him. I hold that, as a matter of mere policy, no bank should have a shabby-genteel Manager in the whole range of its employment, foi the poverty of the repre- sentative is reflected back upon the represented with usury.* Note by the Author: * " Keep down the salaries of your officers." " A more mischievous recommendation," says Mr. Gil- bart, '* can hardly be conceived. Next to having a dishonest Manager, the greatest evil is to have one that is badly paid. If he is known to be poor, his EXPENDITURE OF A BRANCH. 165 Boards of Directors all ! — cease to estimate the value of an officer by what he will fetch in the clerk-market. The value of a good and faithful servant is not appreciable in exact figures. Sterling honesty, sound ability, willing aptitude, and tried fidelity, are not convertible into any known species of currency. You can- not " price " them as you would a bale of cotton or a piece of calico. Rather give an officer whom you have known and trusted for years, a trifle more to stay, than a stranger a trifle less to come. Rely upon it, that by so doing you con- sult your own interests, for more work will be done, (I speak as a practical man,) and better done, in a given time, by three willing hands advice will have less weight in the board-room ; the Directors individually will treat him with less res- pect ; his wealthy ciistoiners will not disclose to him their private affairs ; the needy class, when re- fused discount, will insult him by threatening to complain to the Directors ; and his inferior officers will be less prompt in their obedience. But worse than all this, will be the efiect produced upon his own mind. He will not be, and he cannot be, so efficient a Manager when badly paid as he would be if he received a liberal remuneration. It is the be- setting sin of men of business that they never pay attention to mind, though among no class are men- tal phenomena more strikingly exhibited. The amount of his salary is the only tangible means by which a Manager can judge how far his services and his character are appreciated. It is not the money alone, but the feelings, of which the money is an indication, that produces an effect upon the mind." — Fnictical Treatise on Banking , 5th edition, vol. I., p. 228. i\ ■1 IM 166 LETTER XIX. than by four unwilling ones ; whilst the same sum that would pay the four badly would hand- somely remunerate the three. To give to all in your employment high sala- ries is not to be expected ; but to give to every officer in your service, directly or indirectly, the promise or the hope of increase, according to his deserving, is merely to adopt a wise and liberal policy that brings its own reward. A few well-timed gifts, by way of increase, to the more meritorious of your officers and clerks, distributed with a just discrimination, and in a kindly spirit, will never jeopardize your rate of dividend. In their renewed exertions, quickened by invigorated hopes and hearty gratitude, these rewards will bring you cent, per cent, in mere vulgar profits. Combine such timely acknow- ledgments of merit with incidental promotions from the ranks to offices of trust and profit, and so keep open the door of advancement to the lowest clerk in y^ur establishment, and you at once raise honest merit to a premium, and sink indolence, apathy, and incapacity, to a hopeless discount. i Letter XX. EXPENDITURE OF A BRANCH- ^ Concluded. BANK PREMISES, EENT, &0. — TENDENCY TO EXTRAVA- GANCE, IN THE INCIDENTAL EXPE^8ES OF A BANK, (fuel and light, stationery, TRAVELLING EX- PENSES, ETC.) — SUBSCRIPTIONS AND CHARITIES. I NOW revert to a letter which I received from you some months since, but which I deferred answering at the time, because it had no refer- ence to the subject then in hand. We have now, however, arrived at that stage at which the matter may properly have place. The subject broached by you is that of BANK premises, in conjunction with which we may as well consider the kindred head of expenditure, viz., RENT, RATES, and TAXES. Your present office, it would appear, is old, gloomy, inconvenient, plain, and cheap ; the office of your competitors in business is new, airy, roomy, grand, and, I presume, dear, although you do not say so. The inevitable conclusion you arrive at is, that your present office ought instantly to be exchanged for a bet- ter. But you shall speak for yourself: — " Now this is not merely my individual opin ion. There is not a shareholder in this district, nor a customer either, who does not admit, when I ijut it to him, that our present pu;uii;sb«i 111 lit 168 LETTER XX. are a disgrace to the establishment. Well, the other week, a splendid old house, in the best part of the town, was in the market for sale. The accommodation I forget, but it was im- mense. There was, for one thing, an acre of garden ground attached, with coach-house and stables — in short, the place was fit for a lord. The price was — what do you think ? Why, only £1300 ! It would have been a dead bar- gain at £2000. And what answer would you imagine our Directors gave to my urgent en- treaty that they would not lose a post in closing for the property 1 You shall have it verbatim : ' Dear Sir, I am instructed by the Directors to acquaint you, that there, being still thirteen years unexpired of the lease of their present premises at Huggleton, they have no immediate intention of changing them for others.' As if we could not have let the old shop for the unexpired term of the lease, or as if it was of any great consequence whether we did or not ! However, I wash my hands of the business. If the Directors won't keep their connexion here together, I cannot help it. If they are resolved to play into the hands of our rivals, of course they may — it is their prerogative ; and when half of their customers here have gone over to the other bank, perhaps they will begin to open their eyes to the irreparable mistake they have committed." I think your Directors took a wise and proper view of the matter, rightly judging that the pre- mises of your argument were even more unsound than the premises of which you complain. And, in taking this view, they did you a personal ser- EXPENDITURE OF A BRANCH. 169 vice ; for, if they had taken this very splendid house, you would either have furnished it entire, or left half the rooms empty ; in the one case, you would have involved yourself in a ruinous outlay ; in the other, one half the house would have been a continual mockery of your poverty. Thus much as immediately concerns yourself As concerns the expenses of your branch, you would have been saddled with a double rent, and double rates and taxes, for a series of years — for you do not appear sanguine as to letting the " old shop." Instead of having one old house to keep in repair, you would have had two — and one of them, I suspect, a rather seri- ous affair, if I am to abide by the idea which you have given me of its magnitude. Then there would have been the converting the din- ing-room into an office, and another room into something else. Partition walls would have been knocked down, windows built up, and new doors opened out. Accompanying all this, there would have been a general bolting and barring — a dense and steady play of saws and hammers for weeks together, and dust without end. And you cannot kick up a dust of this nature without coming down with dust of a very different de- scription, and that handsomely, as a reference to your " Bank Premises Account " will testify. How far all these permanent additions to the usual expenditure of your branch would have disposed your Directors to reconsider their " in- iquitous " decision as to your salary — unless with a view to its reduction — I leave you to de- termine at your leisure. Nor do I participate in your fears that the il 170 LETTER XX. non-acceptance of the offer of house. dead-bargain as it may have been, will have the effect of breaking up your connexion at Huggle- ton. It is not by doing business in splendid suites of offices that great banking fortunes have been realized. The constitution of a bank, its agencies, its charges of business, the liberality, or otherwise, of the, terms on which it takes accountSj the amount and position of its capital and resources, and, perhaps, above all, the affability, or the con- trary, of its local managers — these are the con- siderations which attract or repel the customers of a bank. Let these be attractive, and take my word for it, your customers will care little whether they approach your counter through a plain street door, or from beneath a Grecian por- tico. A certain air of sobriety is what should pervade a banking establishment throughout its staff, machinery, and movements. Flash, and glitter, and ostentation, are the natural proper- ties of your Colonial Emporiums, Cigar Divans, and Tailoring Marts. There now remain for remark only those items of expenditure which are usually classed under the general heading of Incidents, con- sisting of Fuel, Light, Stationery, Postages, Tra- velling Expenses, Charities, &c. Now, whether it is that by constant dealing with large sums, that bankers' clerks acquire a contempt for small ones, it is certain that their notions of expenditure on account of the bank are not generally governed by principles of ex- treme economy. They have undeniably a tend- ency to supply the branch with the best of EXPENDITrjRE OP A BRANCH. 171 everything, and in great abundance. In winter time, in respect of coals, there is extreme diflfi- culty in setting prudent bounds to their con- sumption. I marvel sometimes why there are not as many branches burnt down in England as there used to be huts in China, when the burn- ing of a hut was the received method of roasting pig in that country. And our banking youth are whimsical, too. The fashion in respect of steel pens, for example, is of a highly fluctuating character, and steadily changes with each fresh issue from the manufactories. I have in my mind's eye a young man in a certain banking establishment, Dennis , whose well-known mania forpenshas acquired for him, amongst his fellow-officers, various soubri- quets — the last of which came out with the an- nouncement of Mr. Thackeray's admirable work, and he is now only known as Pen Dennis. It is estimated that Dennis uses, in fair work, two steel pens per diem ; but that, in finding two to suit him, he throws away daily at least other two. This is an annual consumption of some- thing like 1,200 steel pens for one young gentle- man. But Dennis has a sub-consumption of quill? also. The quill pen he uses for red-ink pur- poses ; and 1 am informed that the consumption bears a most extraordinary disproportion to the amount of work done, in consequence chiefly of Dennis being curious in penknives. In justice, however, to this young gentleman, it has to be stated that, in addition to his bank duties, and concurrently with them, he carries on, surreptitiously, a very extensive correspond- r)l L II 172 LETTER XX. ence with liis relatives and friends, which will, in some measure, explain his more than ordinary consumption of pens. True, the paper used for this purpose, and the sealing-wax, and, in some instances, it is to be apprehended, even the post- age stamps, are the property of the bank ; but then, as Dennis observes, what Board of Direc- tors, calling themselves gentlemen, would be so shabby as condescend to notice such trifles, or chronicle such very small beer 1 Dennis has what is commonly called a " neat turn." His tendency to blotches is at least not greater than his aversion to them ; but the num- ber of forms destroyed by him before he com- pletes one entirely to his liking, is serious. True, they are not quite thrown away ; the spoiled forms are used in ''trying" his pens, and before they are quite cast aside, contain as many of his autographs (of which he is rather vain) as would serve to accredit his signature to all the branches and agencies of the establish- ment — than which, by the way, Dennis has no higher ambition. It seldom occurs that Dennis travels in the service of the bank, but when this happens, he does so "like a gentleman," — to use his own expression. His salary being only a little short of £100 a year, he travels first-class by railway, or inside by coach ; pays the coachman munifi- cently ; takes up his quarters in the leading hotel during his sojourn at a branch ; has wine with dinner every day ; and remunerates the servants on a scale of liberality which only a gentleman of his means could afford. 1 send you this portrait, not so much on ac- EXPENDITURE OF A BRANCH. 173 count of its being a tolerable likeness of the in- dividual, but because Dennis is the type of a pretty numerous class. And if either of your as- sistants at Huggleton find the cap fit him, I trust he will have the candour to confess it, and mend. It is my firm conviction, however, that the waste of which I complain arises almost entirely from mere thoughtlessness, and not from laxity of principle. The value of the thing wasted is of itself, and at the moment, so minute as scarcely to excite a thought. " A bit of lead pencil, half a sheet of paper, the stump of a quill — why, what are they, after all, that this Mr. Bullion should make such a noise about them 1 Very likely he was just as bad himself when he was a clerk." It is highly probable, indeed, young gentleman, that he was — but not greatly to the purpose ; moreover, he sees his error, which he fears you do not. Therefore, let us reason together. On the supposition, then, that your unneces- saiy consumption of fuel and light, and station- ery, and unnecessary outlay of all other kinds, did not exceed the fifteenth part of a farthing a minute, or one penny an hour — and I should be sorry to supply Mr. Dennis with ways and means for double the money — still, you must re- collect there are eight working hours a day, and there are 300 good-working days in the year, and there are sixty of you in all : and the result, you will find, is just £600 a year. Possibly the matter never occurred to you in this light before ? Well, then, what is the practical result, as far 'i IMAGE EVALUATION TEST TARGET (MT-3) Zi ^ A £•.<- I % 1.0 HKfll 2.5 I.I 11.25 XL. mm H: 1^ 12.0 |g2 1.4 11.6 Ta '^^ ■v /A Photographic Sdaices (Corporation 33 WIST MAIN STRUT WUSTH,N.Y. 14510 (716) •72-4303 V. o^ 174 LETTER XX. as the officers are concerned 1 Just that amount withdrawn from the fund which might otherwise be applicable to raising their salaries. So that, substantially, the clerk who indulges in needless waste, indulges it at his own ultimate expense, or that of his fellow clerks. Let me not be misunderstood. You will tell me, perhaps, that I am becoming pen-urious; but what I complain of is foolish and extravagant waste — not necessary consumption. If I would not have the office ink thrown down the kennel, nor used as a dye for e^fe office-coats, neither would I measure it out by the gill. I would not stint the office to a fixed supply of sealing-wax ; but at the same time, I would interdict the youth who seals the letters from indulging in his propensity to take impressions of the bank seal in discs of wax suf ficient to take off the Great Seal itself I pro- test against a sheet of paper being used where the twentieth part of it would suffice ; but, at the same time, I would neither reduce the clerks to the use of yellow soap, in prcicrence to Wind- sor, nor compel them to contribute pro rata to the washing of the office towel. I believe there is a mean easily to be found betwixt mere parsi- mony on the one hand, which defeats itself, and thoughtless waste on the other. I also believe that it requires no Herculean effort of the will on the part of any rightly-disposed person, to deal with the property of others as fairly and economically as if it were his own. A word or two, in conclusion, as regards " Subscriptions and Charities." To the best of my recollection, you were very indignant, some EXPENDITURE OP A BRANCH. 17^ twelve tiionths ago, at a refusal on the part of your Directors to give a subscription to Huggle- ton races ; and took that occasion to " let fly " at them for their stinginess in the matter of charities generally. "Whatever other senti- ments may be found there," was your conclusion, ^' it is clear that the charities have no seat at our board." Now, touching your races, I am not aware whether the Huggleton St. Leger holds equal Tank in sporting circles with the Doncaster «vent of that name ; but even if it did, it would not be a matter to which the bank^ in its corpo- rate capacity, could with propriety subscribe ; because there is no doubt that amongst so mixed and numerous a proprietary as that of a joint-stock bank, many will be found who enter- tain conscientious and deeply-rooted objections to horse-racing altogether. It matters not whe- ther horse-racing is morally good, bad, or in- different : it is enough that objections against it exist among your shareholders, to render im- proper any application of the funds of the bank to its support. The same, or a similar objection, stands in the way of the directors contributing, on behalf of the bank, to any charity or other object respecting the utility of which your proprietors may be divided in opinion, on either religious or political grounds. In directing their course, they are bound to pay respect equally to the preju- dices of Churchman and Dissenter, Tory and Radical, Whig and Chartist. But as regards dispensaries, hospitals, asylums, and all other benevolent institutions, to which 176 LETTER XX. all may contribute on the broad basis of com- mon charity, I would have your directors as liberal as may be consistent with the compara- tive means of the establishment. *' It galls me to the quick," you write, " to see our rivals figuring annually as subscribers of £5 to our dispensary, whilst we contribute a shabby three guineas/ Do our lords and masters imagine that the £1 17s. is a clear gain to the establish- ment 1 If they do, I'll tell them what they gain besides, and that is an incalculable sum of ill- will and obloquy — ay, even among our own connexions." But the obloquy and ill-will are misplaced ; and your connexions, including yourself, must be an unreasonable set of persons to entertain any such feelings on the subject. Your rivals, recollect, have no h'anches ; their sole and head office is at Huggleton. True, you have often assured me that they do little or no business, and marvel how they pay their expenses ; but this is a point upon which I have observed that Branch Managers are uniformly subject to the strangest hallucinations. You must excuse me, therefore, if I attach no weight to it. Now, on the other hand, there are twenty branches attached to your head office. If each contributes to its locai dispensary in the same ratio as Huggleton, the total contribution by the bank would, of course, be £60 a-year ; and this^ properly, is the sum which you ought to set against the contribution by your rivals, if you would draw a just inference as to the compara- tive liberality of the two establishments. e Is ir ay Letter XXI. ROUTINE DUTIES. ATTENDANCE DUKINO BUSINESS HOURS INDISPENS- ABLE - THE PRIVATE CONDUCT OF A MANAGER IN CERTAIN RESPECTS OPEN TO THE SURVEILLANCE OF UIS DIRECTORS— INTERCOURSE WITH OTHER BANKS. In one of your letters you complain of what you conceive to be the unnecessary stringency of your regulations on the score of attendance — the eflFect of which, you add, is to tie you to your counter from day to day, without respite, from one year's end to another, except when formal leave of absence is obtained. "Surely," you observe, "an hour's absence in the middle of the day, now and then, (particu- larly when my accountant knows as much of the business as I do myself,) or even a day or a couple of days' absence might be permitted without detriment to the business, ar d without the formal sanction of the board ) It is not often that we have notice that we r ay require such short " outs," and it is downright slavery (in my opinion) to be tied by the leg as we are in this respect." The regulation of which you complain is a penalty — if penalty it may be called — which you pay to your profession, and is by no means pecu- liar to the regulations of your establishment. To be absent from duty is relatively as grave an H* 178 LETTER XXI. offence in the articles of banking as in the articles of war; and not without substantial reasons. In banking more than, perhaps, in any other trade the customer prefers in all cases to deal with the principal. However well qualified your juniors may be for their respective duties, they are still juniors, and will not be accepted as substitutes for the Manager. If the first neces- sity of banking is that your office door be open during the usual hours of business, the second is that you should be inside of it. If your clients find that there is an uncertainty in this respect, and that transactions of vital moment to their credit might, in consequence, have to be delayed a post, they will be apt to speculate upon the propriety of transferring their accounts elsewhere. A medical man who would leave his patients every now and then to the care of his surgery assistant would soon experience a sensible falling off in the demands upon his skill. You will remind me that you do not wish to be habitually, or even frequently, absent — only ** now and then." But unless you had the gift of second sight, how are you to time even an occa- sional absence so that it shall not be a cause of inconvenience 1 You cannot point to five con- secutive minutes in the twelve months and say with certainty that during these your presence may not be required on urgent business. Moreover in leaving your counter during the hours of business, you necessarily leave the cash in the charge of your accountant, and that with- out first balancing to see that so far it is correct. If, then, on balancing at the close of the day's I ROUTINE DUTIES. 179 trnnsactions you find an error in the cash, on whom is the blame to rest 1 You will not be over-apt to lay it upon yourself, and yet the pre- sumption is as strong that the error la^ with you as with him. And you will never make good a defi- ciency arising under these circumstances without a lurking suspicion that you have your accountant to blame for it — a suspicion that cannot be very pleasing to yourself, and must be very painful to him. Is the pleasure of an " out " equal to the pain that may thus be unjustly inflicted upon another 1 Is it just or reasonable to place your accountant in such a position, unless under a real and unforeseen emergency 1 You should bear in mind, also, that the Directors look to you as being, by virtue of your office, an infallible evidence of any transaction occurring at your branch that may at any future time involve a question of law. If the evidence required be of a general kind, which it frequently is, what weight will attach to it if your leading admission is that your attendance to your duties has been intermittent ? Such an admission would be damaging to your testimony, even on direct and specific points. For the reasons which I have stated, were there no others, a close attendance to your duties during the hours of business every day, becomes, as far as I can see, an unavoidable necessity ; but that it amounts to the hardship which you describe is not so evident. " There is not," you assure me, " a tradesman or artizan in all Hug- gleton, however mean his condition — not a jour- neyman shoemaker nor a draper's apprentice — who has not more liberty in this respect than we 180 LETTER XXI. have." Now, if I remember rightly, there is an inscription either in your office window or over your office door, to this eflFect: " Open from 10 till 3," the interpretation of which is, that your daily labour occupies five hours out of every four- and-twenty — but say six. Now, what would ex- press the periods of labour respectively assigned to those whose happy lots you sigh for 1 In no case less than twelve hours a day. They work six months, therefore, out of the twelve — you only three. Rightly considered, your life, as compared with theirs, is a perpetual half holiday ; and because you cannot now and then put two of these together, to make a whole one, you rail at your destiny, somewhat as a child might blubber for the moon. If your labour is con- tinuous in one respect, beyond that of most other callings, so also is it shorter in its dura- tion ; and the one fairly counterbalances the other.* Another grievance of which you complain with bitterness is, the espionage which your Directors maintain, by one meauB or another, over your private conduct and movements. * Mr. Bullion here is pressing an argument rather too close. A gentleman who knows so much as he, knows that banking hours altogether are much longer than those during which the public are ad- mitted. From nine or half-past to five, is a fair average for the work of clerks, and these hours have to be supplemented by late working during the periodical monthly, or half-yearly balancings. Bank work too, as a rule, is probably much more steady and persistent during the hours it occupies, than that with which it is here contrasted. ROUTINE DUTIES. 181 You denounce this as the most odious feature in the administration of the establishment — not that you fear the closest watching, you observe, but that it is gall and wormwood to be sus- pected. Not necessarily suspected, however. When, for example, a stranger to you, however respect- able in exterior, presents for payment a letter of credit in his favour, and you require from him a reference as to his identity, you do not neces- sarily suspect him to be a swindler ; you make the requisition simply as a matter of business. Oi', when the inspector of the bank comes round and counts your cash, he does not neces- sarily suspect that he will find in it an apalling deficiency ; he goes over and checks it purely as a matter of routine. Once again, when a customer lays down a sum of money on your counter, and tells you it amounts to so much, do you give him the right to suspect that you doubt his integrity, by count- ing it over before you pass the money to his credit ? To be watched, then, is not necessarily to be suspected ; and to watch is no more, I appre- hend, than to keep one's eyes and ears open. Would you have your Directors shut both, or your inspector make his rounds blindfolded ? There are limits sufficiently defined, within which, it is well understood, even the watchful eye of your inspector is not to penetrate ; but beyond these, your conduct is fairly open to criticism, and, if need be, to rebuke and punish- ment. With your private convictions in religious or 182 LETTER XXI. political matters, you will have no interference, provided you keep them to yourself ; but it is one thing to entertain an opinion, and another to seek its propagation ; and when a Bank Manager becomes either a political demagogue, or a ranting zealot, it is reasonable that his Di- rectors should tell him that these vocations and his own are incompatible with each other. Bank- ing, in the abstract, has no connexion with reli- gion or politics ; and, by consequence, your cus- tomers are made up of all manner of beliefs, sects, and parties. But take a side with any section, be it great or small — identify yourself prominently with its views and movements, and set all Huggleton by the ears — and defections from the ranks of your customers will assuredly follow in a greater or less degree, according to circumstances. With a Manager's tastes, habits, and pursuits, so long as they do not interfere with the effici- ent discharge of his duties, his Directors have no concern, and take none ; but when he over- steps the limits of prudence or propriety, they are bound to interfere. If his style of living, for example, becomes notoriously extravagant, and too great for his means, the Directors are bound, for their own protection and that of his sureties, to call him to account. He cannot live in excess of his income without one of two re- sults happening, sooner or later ; either he will meet the growing deficit in his finances by false entries in the books, or fraudulent dealings with the cash, and thus prejudice his sureties ; or, abusing his position as Manager of the branch, he will run into debt with his customers, and. ROUTINE DUTIES. 183 when the reckoning comes, bring gratuitous odium upon the establishment If, again, a Manager shall so far forget his position and himself as to yield to the vice of intoxication, even occasionally — to habitual gambling — to open profaneness — or to other vices which shall be nameless, — if he even make friends or intimates of those who have given themselves over to such habits — his Directors have a right, and it is their duty, to insist upon amendment, or to displace him. Tainted with such habits, a Manager will never secure that confidence, nor inspire that respect which is es- sential to the right fulfilment of his duties. And there are faults of temper and of manner which come fairly within the scope of remark and reproof. A proneness to incivility, arro- gance, or braggadocio, for example, if you have it, you will do well to curb, and altogether eradi- cate from your disposition. And whilst you thus study to avoid ruffling the tempers of others, guard well your own ; for in the course of your experience you will have to bear and forbear largely. When you are charged to your teeth by the respectable Mrs. Jones, for example, with having basely mulcted her of fourpence on " as good a sovereign as ever a one in your shabby bank ;" or when you are menaced by a commer- cial "gentleman" with the disruption of your entire establishment because you won't draw on London for him on his own terms, it is not in- cumbent upon you to quarrel outright with Mrs. Jones, nor in a violent heat to show your male assailant the door. In the very whirlwind of your passion you must " beget a calmness ;" and 184 LETTER XXI. if, when sorely pressed, the thought should cross your mind of braining some one with the 100- sovereign weight, banish it as by no means a sovereign remedy for insolence and mendacity. As regards your intercourse with rival estab- lishments, I should have considered it superflu- ous to suggest that it be marked by a liberal courtesy, but for a certain letter in the Huggle- ton Express^ bearing your initials, and headed, " Joint Stock v. Private Banking." Now, I do not call in question any of the facts which you allege in favour of one system and against the other, although it strikes me that your selection is rather one- sided ; but the spirit that runs through the article, of self-laudation on the one hand, and unneighbourly detraction on the other, is creditable neither to your good sense nor your good nature. Granted that the system of Joint-Stock Bank- ing is all that you pronounce it to be — never- theless, I had rather that the encomium were passed by an indifferent and disinterested party ; and I think the public generally will be of my opinion. Fine words butter no parsnips ; con- sequently, your sounding periods do not, to my mind, redeem your article from the reproach of the puff direct. Deliver it over to a bill-sticker, to be done into the style and language peculiar to posters, and he would throw it off in some such form as this : — ** Immense attraction to Depositors ! Unlimited responsibility of Proprietors ! ! Paid-up capital — a quarter of a million sterling ! ! ! BOUTINE DUTIES. 185 " The branch in Huggleton of the Bank (Charles Coigne, Manager,) continues to receive de- posits, discount bills, and grant letters of credit on terms extremely favourable to the customer. *' An early inspection of its scale of charges, and of the list of its immense and respectable proprie- tary, is invited. " N.B. No connexion with the concern opposite — the private bank of Hoaht <& Co." I do not doubt that you wrote with the very best intentions, and that you will consider my treatment of your maiden essay as brutal and gratuitous in the extreme ; but such things do positive harm, and ought to be put down. Do you take quack medicine because the label assures you solemnly that it will instantaneously heal the most incurable diseases — all other cures being counterfeits and delusions 1 When a man begins to brag of his means and resources, do you not begin to suspect that both are limited in the extreme — probably desperate 1 Do you not instinctively avoid a shop, the proprietor of which indicates in capitals and prodigious marks of admiration, that his arrangements enable him to sell everything off at 30 per cent, below any other house in the trade ? On the same principle, is there not a chance that the public may suspect that there is some- thing rotton in a system that is so vehemently extolled by its own members ? I have a strong conviction that if the system is sound, it will prevail ; but that its prevalence will not be has- tened, but may be indefinitely retarded, by in- judicious praise. I had far rather have seen you extending the 186 LETTER XXI. olive branch of friendship and brotherhood to your competitors. The world is wide enough for us all — our largest interests we hold in com- mon. Why should we not fraternise, and strive together for the common weal 1 There are pre- judices to overcome, schemes to baflSe, fallacies to refute, enactments to overthrow, that require the combined strength of the banking interests to accomplish. Disunion has been our bane from the beginning, and threatens to be our curse to the end. Our weakness has been the enemy's strength. Within the compass of five-and-twenty years, more legislative folly has been perpetrated in respect of currency and banking than upon any other subject whatsoever. What mattered it, that from this point or that came the protests of practical men, filled with astonishment and apprehension at that master- piece of legislative mischief — the Act of 1844? As an interest we remained inert and impas- sive, divided and powerless, and triumphant majorities trampled our protests under foot. And so it will be again, until the great banking inte 'ests, setting aside rivalry and division, at least for the nonce, shall combine for a common purpose. Divided— there are none so poor as to do us reverence ; united — we are a match for the strongest ministry that ever held sway in England. It would be an easy matter to extend this section of the subject, but it is enough, perhaps, to have shown generally that there are points in the private conduct of their officers which are fairly open to the surveillance and animadver- sion of the Directors of a bank, and, therefore, r w^niiTTriiatigtaMfia tnjntj ROUTINE DUTIES. 187 that the " gall and wormwood" under which you were suffering a few pages back are entirely gratuitous. If I might be permitted to borrow a phrase from another service, I would observe in conclusion, that what your Directors require at your hands, and are fairly entitled to demand, is simply this — thiit at all times, in all places, and under all circumstances, you demean your- self as becomes " an officer and a gentleman." Letter XXII. ROUTINE DVTIES^Concluded. COBRESV : NDENCE WITH THE HEAD OFPTOE, AS RE- SPECTS STYLE, ETC. — OF INSTRUCTIONS AND ORDERS ' BY CIRCULAR. A Branch Manager will strive to maintain a good understanding with his Directors and Chief Manager, if he has any regard for his own com- fort, or has an eye to advancement. No body of Directors will pointedly study the comfort or advancement of one who has wilfully incurred their displeasure or courted their dislike, what- ever abilities he may possess. By your letters, mainly, will this sort of un- derstanding, or the contrary, be established, and your character and abilities judged, be- cause your letters are nearly the only medium which brings you into direct communication with the board. You will do well, therefore, at all times to weigh both the manner and the matter of them, particularly of those which are meant for the eyes of the Directors. As regards the manner, a respectful firmness will better command attention than either a cringing humility or a saucy arrogance of tone ; and, indeed, the less of tone there is of any kind in business matters the better. State your opin- ions freely, but be careful to exclude all argu- ment from your letters; for, rely upon it, ROUTINE DUTIES. 189 your Directors will have an idea that they can arrive at a correct conclusion upon any given data without your showing them the way to it. Eschew the lighter graces of composition. Meta- phor, simile, or antithesis are well enough in their proper places ; but when found in a busi- ness letter, ludicrously adorning a plain state- ment of facts, are simply ridiculous. The young and ardent, it is true, think diiferently ; but in seeking by grandeur of style to write themselves up men, they uniformly commit the mistake of Dogberry, and write themselves down — some- thing else. I throw out these hints for your consideration chiefly in consequence of a certain letter of yours, in which there occur the following passages : — " I protest, Sir, I have no patience with these men," — meaning your Directors. *' There is great poverty in this place at present. I wrote up to head-quarters, using all the eloquence I was master of, to induce the board to come down with a handsome subscription to the fund, add- ing, as I thought, and still think, with perfect propriety. Bis dat, qui cito dat. I had occasion in the same letter to recommend that a fellow, Brown by name, who had figured in our dis- honoured bill list for a couple of months, and who had treated the half dozen letters I. had sent him with silent and uniform contempt, should be at once handed over to the tender mercies of our solicitors, harmlessly expressing a hope that they would do him Brown/ Well, Sir, the subscription was given (more than 1 petitioned for) and Mr. Brown was dealt with, precisely as I had suggested ; but how do you 190 LETTER XXn. think / fared ? You won't believe me, perhaps, but it is the fact, notwithstanding, that, instead of being commended for a seasonable display of good feeling and proper vigilance, I was insult- ingly told, in reply, to confine myself to the English language in future in my correspondence with the head office ; and, at the same time, that it was not usual to introduce jests in matters of business ! " You were snubbed for your Latinity, not, I apprehend, for the rather uncharitable reason you more than suggest, and which I will not quote, but because in pure matters of business such quotations are out of place. There is no visible relation betwixt currency and the classics — betwixt journal entries and hexameters. A Greek quantity is not naturally suggestive of a sum total. In matters so peculiarly British as pounds, shillings and pence, the British lan- guage is indubitably the best medium >f com- munication. As respects your "joke," it was, in the first place, execrable in itself, and, therefore, merited castigation. In the second place, the use of it smacked of a degree of familiarity and license which could hardly be supposed to exist between the board and so young an officer as yourself. And lastly, a Board of Directors is naturally a grave and deliberative body. It is not addicted to facetice. It is neither witty in itself nor (wittingly) the cause that wit is in other men. Its business is with realities — many of them stern enough — none of them so trivial as to be dismissed with a jest. To fancy the bank par- lour " in a roar " requires a painful eflfort of the imagination. ROUTINE DUTIES. 191 On the strength of a reputation for wit, what mortal man ever got a bill discounted, obtained an unlimited advance, a seat at the board, or the management of a bank 1 What witticism ever in this world sent corn up or cotton down, enhanced the price of Consols or lowered the rates of dis- count ? The wickedest pun would fail to relax the countenance of our Venerable Lady of Thread- needle Street ; and you will confess that it must be a tremendous joke, indeed, that would turn the exchanges. From the reply to the particular letter in question, your indignation boils over upon the subject of correspondence generally. It would jippear that, no matter at what length you may address head-quarters, you rarely receive in re- ply above a few stiflF lines. But if these are sufficient for your guidance, what need for more ? Why write a dozen lines where one will suffice ? When you complain of the *' eyes right" style of your secretary, you should make some allowance for the work he has to do. If yours were the only letter he had to answer by the same post, he might have time to indulge in the circumlocu- tion which you appear to expect at his hands ; but even if he had the time, it is not desirable that he should have the inclination. "Forv/ard a list of per return," is a sen- tence of great and imperative brevity, I admit : but would it please you better were it prefaced by some such exordium as this : "If you can make it perfectly consistent with your conveni- ence, and that of your accountant, Mr. , (to whom be pleased to communicate our wishes,) I 192 LETTER XXII. shall feel greatly obliged, and it will convenience us very much, if you will forward a list, &c." The brevity observed by all parent establish- ments in their correspondence with their branches, indeed, instead of being a cause of offence, should rather be an v>bject of emulation. Rely upon it your behests are more likely to command a hearing amongst a crowd of others, if expressed in a brief and business-like manner, than if clothed in the most copious rhetoric. The Directors have too many actual figures to deal with greatly to respect or cherish mere figures of speech. I put it to your own sense of the probabilities of things, what chance a letter, filling, we shall say, three closely-written pages of bank post^ has of being read even, when you consider the limited time that Boards of Direc- tors generally sit, and the mass of business they must transact at each sitting 1 And what is the consequence? Simply that such a letter must be abstracted. The ofiicer whose function it is to operate upon the verbosity of Managers, men- tally applies the knife, and cuts three fluent pages down to as many curt lines. He is compelled to do that, in fact, which the writer ought to have done, and would, no doubt, have better done himself. On tho other hand, however, there may be an excess of brevity. In aiming at extreme con- densation, which some do, there is a risk that facts of material consequence to the matter in hand may be put aside altogether ; and it is not to the credit of a Manager, in any case, to have a matter referred back to him " for further par- ticulars." It is like being condemned to write ROUTINE DUTIES. 193 rite a bad copy over again. The rule is, to convey the greatest possible amount of meaning and in- formation in the fevtrest possible words. Your next attack is upon those orders of the Board which are usually transmitted to the branches in the form of CIRCULARS from the head office, and by which you complain that, in- dividually, you feel yourself continually aggriev- ed and insulted. It does, at first sight, appear hard that you should receive a circular, because the neglect or blundering of some fellow Mana- ger has rendered the circular necessary. But, on the same principle, you might quarrel with our legislators for enacting against rioting and sedition. A circular, cautioning you against the breach of some regulation or another, need no more be a personal affront to you than an act for the relief of insolvent debtors. But you must beware, at the same time, of treating every circular sent you as a matter for the special edification of somebody else ; nor, because you don't clearly see the drift of it, must you conclude that therefore it may be set aside and neglected. You may safely lay it down as an axiom, that the parent establishment will not issue a single order that is superfluous. There is no man or Manager living, it appears to me, who, in a sound state of mind, would order even the shortest circular to be written twenty times over purely for his diversion. Bearing this in mind, believe me, you will best study your own interest and comfort by a prompt and cheerful compliance with the occasional orders sent you from head-quarters. Compliance relieves you at I 194 LETTER XXII. once from all blame or risk ; disobedience exposes you to both. A bank, as you well know, is a mere machine in its general movement ; hence the absolute necessity for uniformity of routine throughout the establishment, and of circulars now and then to enforce it. You can fancy the inextricable complication of threads that would follow were any individual bobbin in a spinning machine to take to spinning on its own account and after its own fashion ! Pardon the compa- rison; but apply it, and even circulars — the cause of your particular aversion — will rank as little worse than sundry other necessary evils. Letter XXITI. RESPONSIBILITIES OF MANAGERS. INSTANCES IK WHICH A MAKAOEB IB RESPONSIBLE IK CASE OF LOSS — FREEDOM OF ACTION NOT NECES- SARILY FETTERED BY SUCH RESPONSIBILITY — CONCLUSION. Of all sore subjects, the sorest to a Branch Manager is that of personal responsibility : it is the bug-bear of his official life. In all banks he is held personally liable for losses in certain cases, and bound to make them good. There is this, however, to be said at starting : that no Manager can subject himself to loss otherwise than by a direct breach of his instruc- tions, which clearly define those transactions which he is to gaurd against, at his peril. With most people, this simiJle fact will always be con- clusive of the whole matter. If a Manager, they will argue, is cognizant before hand of any risk which he chooses to incur, and he does incur it, and a los'S is the consequence, there would not appear to be any better reason for exempting him from this loss than for exempting a breaker of the law from the penalty attached to his offence. But you take exception to the cases in which a Manager is usually held responsible. " If we let a customer overdraw his account without authority," you write, " we are responsible. If 196 LETTER XXIII. we discount a bill beyond a certain amount with- out authority, we are responsible. If we cause an over-issue of the notes of the bank beyond the Parliamentary limit, we pay rhe penalty. If we cash a cheque upon another bank or branch, and it is dishonoured and becomes a loss, the loss is ours. If we discount a forged bill, or cash a forged cheque, or any other banking document, we make good the loss. And, to complete and round the sum of responsibility, it is expressly declared in the preamble to our instructions, (which number nearly 200 clauses in all,) that any loss which may arise by reason of their neglect or infringement, shall be sustained and made good by the officer or officers through whose neglect or wilful disobedience such loss arises." You are of opinion that " ' the force of folly could no further go,' than thus to tie a Manager head to heel with the cords of responsibility," and contend that he should be allowed a discre- tionary power. But to give a Manager the discretion to follow certain rules or to set them aside, would virtu- ally be to annul the rules themselves. A dis- cretion to thieves, burglars, and fire-raisers, (I mean nothing personal by the comparison,) would be fatal, I apprehend, to the operation of the laws against theft, burglary, and arson. Either the rules are bad or they are good. If bad, let them be amended; but if sound, let them be strictly observed. There is only one other course — the abolition of all rule, and " everybouy for himself." You will tell me that you do not seek for an absolute discretion, and RESPONSIBILITIES OF MANAGERS. 197 would be well content with a limited one only. You would have the discretion given you of making an advance on open account in any case to the amount of at least £100, without consult- ing the Board. There might not be any very great harm in this, perhaps, under favourable circumstances, and in good hands. The discretion would en- able you to make yourself a very great man in- deed amongst the small fry of your customers — a very Triton amongst the minnows — ^but this is an ambition which no doubt you will indignantly disclaim. But if your motive be, as no doubt it is, to improve the connexions, the profits, and the popularity of your branch, without reference to your personal importance, the discretion you sigh for must not be limited to £100 ; because many of your customers are just as good for £10,000 as others are for £10. Such a limit, therefore, whilst it would enable you to give in- stant accommodation to the inferior order of your connexions, would leave you powerless to meet the larger requirements of the wealthy and influential amongst them. To render a latitude or discretion to make advances equitable in its operation, you must adapt the figure to the customer, and not the customer to the figure. You cannot reduce your customers to one standard measure of advance any more than you can reduce their perl^ons to an uniform standard of height and rotundity. But such a discretion as this — a dis- cretion to make advances proportioned to the means and deserving of your customers would 198 LETTER XXIII. be unlimited ; and for any body of Directors to delegate such a power would virtually be to ab- dicate their highest function — the financial government of the bank. In a single month, it is not too much to say, that the effects of such an arrangement, operating at twenty different points at once, and at each with indefinite powers of expansion, might be to bring even a powerful bank into difficulties. That you should be held responsible if you cause an over-issue of the notes of the bank, is just as reasonable as that you should be held re- sponsible were you to set fire to the bank pre- mises with malice aforethought ; because it is hardly possible that you can cause an over-issue by inadvertence. When you give value for a cheque drawn upon another bank or branch, you do so in total ignorance of the state of the account drawn upon. The risk, therefore, in this case is self- taken, and the loss, if any, ought to be self- borne ; because, if you chose, you may take such cheques for collection only, where the shadow of a doubt exists as to the responsibity of the holder of the cheque. That any loss consequent upon your paying forged cheques or bills should be yours is only in accordance with the universal usage, not only of banking establishments but of all others. If there is one function more than another which is peculiarly that of a branch manager — at least where he acts as teller, which he generally does — it must be to see that every cheque or docu- ment, for which he parts with the bank's funds, bears the genuine signature of the party entitled RESPONSIBILITIES OF MANAGERS. 199 to the money, or that of his legally accredited agent. In the ordinary affairs of life, he who pays money to the wrong person inevitably bears the loss, on the same principle that he suf- fers pain if he burns his fingers ; and it does not appear upon what ground a branch manager should be exempted from the operation of a law to which all are alike subject. You hold it to be a hard case, notwithstand- ing, that a manager should be made to sustain a loss in any case arising out of transactions which yield him no advantage individually, but were adopted by him solely to promote the interests of the bank. But it cannot be to the interest of a bank to run risks altogether disproportioned to the pro- fits derivable from them ; and of this description are the transactions now in question ; and it is for this reason that such transactions are ex- pressly interdicted, unless you choose to adopt them on your own responsibility. If you dis- like the alternative, your course is to avoid the transactions, for which your instructions are not only sufficient warrant, but amount to a command. I am prepared to hear you tell me that the principles I advocate would reduce a manager to a mere automaton. I am very far, how- ever, from seeking to establish any such doc- trine. Although I contend that the discretionary power which you seek for in your capacity of branch manager cannot consistently with the safe working of a bank be gmUf I by no means 200 LETTER XXIII. I wish to assert that such discretion may not, un- der certain circumstances, be taken. The instruc- tions given by a bank to its officers are to be in- terpreted after the spirit as much as after the letter; and a departure from the strict letter may, nevertheless, be in strict accordance with the spirit of your instructions. Strictly taken, for example, the 4th article of your code is, that any overdraft or excess of overdraft made without the sanction of the di- rectors will be at the risk of the manager making it ; but mark what follows — " until specially and directly sanctioned by the directors." Now, ac- cording to my understanding of this, it gives you almost an unlimited discretion, if you choose to exercise it. You may make advances, and these advances will continue at your risk, but only until such time as they receive the sanction of the board ; and if you properly understand your business, and have continually in view the nature of your existing general instructions, you will rarely make an advance which your direc- tors will nd sanction. You will remind me, perhaps, of the rejection by your Directors of various accounts which you have recommended to them from time to time ; and also of sundry suggestions on general subjects, which have received the same " ignomi- nious treatment." {1 think this was your expres- sion.) As regards the rejected accounts, I think it highly probable that they did not conform in all respects to your special or general instructions. With respect to your " suggestions " — instead of leaping to the conclusion, that because they are not adopted, the Directors have withdrawn «»• RESPONSIBILITIES OF MANAGERS. 201 all confidence in your judgment, you should recollect that, from their position, they com- mand a range of view that embraces the whole establishment, from its nearest to its most re- mote extremities ; and that what might be en- tirely in accordance with your views of things, and the particular interests of your branch, might not be entirely conducive to the interests of the bank at large. Then why not say so ? you ask. If a sugges- tion is rejected, we are surely entitled to know why ? Not necessarily. The Directors find their time suflSciently occupied in giving instruc- tions what shall be done, without stepping out of their way to reason their officers out of crotchets that may be impolitic or impracticable. You will do well, then, to lay aside that questioning petulancy of tone that too easily besets young Managers ; for in proportion as it elevates you in your own esteem, it lowers you in that of others. It is not becoming in one, still on the sunny side of thirty to sneer at the judgment of those who are greatly his seniors in age and experience, and who, by possibility at least, may be his superiors likewise in knowledge and understanding. Even were this prevalent contempt for your official betters well founded, there is a certain forcible but vulgar adage you will recollect, touching the impolicy of crying stinking fish. You will find it a more becoming and a wiser course to '' think others see as well as you," and to believe that your superiors in office are actuated by the same spirit which ani- mates yourself — a steadfast endeavour and desire X* ■Hh ■ 202 LETTER XXIII. to forward to the utmost of your several abilities the best interests of the bank. The task which I imposed upon myself and you when I commenced this correspondence, is now finished — at least for the present. I do not know whether I have imparted to you anything absolutely new, or that was not tolerably well known before ; but when I became a BranchManar ger myself, I became aware, or at all events the fancy struck me, that, as in English law, there was in English banking, a certain section of the code unwritten and traditional only. Very able works existed, I knew, for I had read many such on the general subject — on banking viewed from without, so to speak : I imagined, there- fore, that a view of the subject from within — from behind the scenes — from the board-room itself — would not be altogether devoid of novelty or interest. This may have been a mere hallu- cination on my part, or it may have been the result of ignorance ; but if so, I shall at least have the satisfaction of reflecting that in any- thing that I have written, I have not consciously pilfered from other writers. Some of my elder and graver brethren, I apprehend — if any such rank amongst my readers — will be slow to excuse the flippancy with which I have treated the subject, but as I did not aspire to address, far less to teach them, but to impart to my juniors the substance of my own experience, such as it has been, I sought to in- vest the subject with such familiar and cheerful RESPONSIBILITIES OF MANAGERS. 203 allusions as I could bring to bear upon it, byway of set-off to its naturally dry and unattractive character. And now, farewell. You asked my advice as an " old hand," and T have given it, frankly and bluntly, as the manner of an Old Hand should be. You may question its eoundnesa but you win not doubt its sincerity. -«««6r