THE chief points in which a joint-stock bank differs from a private bank are, - the number of its partners - the permanency of its capital - and the form of its government. A private bank formerly could not have more than six partners;1 a joint-stock bank may have any number of partners. If a partner in a private bank die, or become insolvent, his capital is withdrawn from the bank; in the case of a partner in a joint-stock bank, his shares are transferred, and the capital of the bank remains the same. In a private bank all the partners may attend to its administration: a joint-stock bank is governed by a board of directors. The topics, therefore, to which we shall in this section more particularly direct our attention will be those that have a special reference to the constitution of joint-stock banks. After the 6th of May, 1844, it was not lawful for any new company of more than six persons to carry on the trade or business of bankers in England, unless by virtue of letters patent to be granted by her Majesty according to the provisions of that Act.2

I. All joint-stock banks have a certain amount of paid-up capital.

The payment of a certain portion of the capital before the commencement of business, is a pledge that the project is not a mere bubble, and this is especially necessary when the proprietors have no further liability. But even with unlimited liability a certain amount appears to be necessary. The employment of capital judiciously is sometimes a means of acquiring business; and in case of loss there should always be a sufficient capital to fall back upon without recurring to the shareholders.

1 Banks having more than ten partners must now register under the Companies Acts.

2 The Joint-Stock Banks Act of 1844 was repealed by 25 and 26 Vict., c. 89, sec. 205.

There is an evil in a bank having too small a capital. In this case, the bank will be but a small bank; the number of proprietors will be few, and the number of persons eligible to be chosen directors will be few; hence there will not be the same guarantee for good management. If a bank with a small capital have also a very small business, it had much better cease as an independent establishment, and become the branch of a larger bank. If, on the other hand, it has a large business, with a large circulation, large deposits, and large loans or discounts, its losses will sometimes be large, and hence the whole capital may be swept away. It is true, that while it avoids losses the shareholders will receive large dividends; but these large profits had much better be left in the bank as an addition to its capital than shared among the proprietors in the form of dividends. There is danger too that the high premium on those shares may induce many shareholders to sell out and form other, and perhaps rival establishments.

On the other hand, there is an evil in a bank having too large a capital. In this case, as the capital cannot be employed in the business, the directors are under the temptation of investing it in dead or hazardous securities for the sake of obtaining a higher rate of interest; perhaps too they may speculate in the funds, and sustain loss. Hence it is much better that a bank should commence business with a small capital, and increase the amount as the business may require.

It is difficult to state in all cases what proportion a capital ought to bear to the liabilities of a bank. Perhaps the best criterion we can have is the rate of dividends, provided that dividend be paid out of the business profits of the company. When we hear of a bank paying from 15 to 20 per cent. dividend, we may be assured that the capital is too small for the business. The liabilities of the bank, either in notes or deposits, must far exceed the amount of its capital. As a general maxim, the greater the capital the less the dividend. Let the whole capital be employed at any given rate of interest, say 3 per cent., then the capital raised by notes or deposit, produces, after paying all expenses, a certain sum as profit. Now, it is evident that if this amount of profit be distributed over a large capital, it will yield a less rate per cent. than when distributed over a small capital. Sometimes, however, a large capital may have increased the rate of dividend, in consequence of having been the means of acquiring a large increase of business. It may have done this in consequence of inspiring the public with confidence in the bank, and thus inducing them to make lodgments or circulate its notes; or it may have enabled the bank to make large advances, and thus gained the support of wealthy and influential customers.

Although the proportion which the capital of a bank should bear to its liabilities may vary with different banks, perhaps we should not go far astray in saying it should never be less than one-third of its liabilities.1 I would is paid up, then £50,000 will be the real or paid-up capital, and £500,000 will be called the nominal capital. In the chartered banks, on the other hand, there is usually no nominal capital, and the real capital is not divided into shares or portions, but any fractional sum may be transferred.1 The capital is then called stock. When there is no nominal capital, nor any way of increasing the amount of the real capital, this is the best way. But, in the other case, it is more convenient to have the capital divided into shares.

1 This view was no doubt a very reasonable one at the time the text was written, when joint-stock banking in England was in its infancy; but, as experience has proved that public confidence has in no way been impaired by the very large increase of banking liabilities, without a exclude, however, from this comparison all liabilities except those arising from notes and deposits. If the notes and deposits together amount to more than three times the amount of the paid-up capital, the bank should call up more capital. It may be said, that the bank is liable also for its drafts upon its London agents, and for the payment of those bills which it has endorsed and re-issued: - admitted; but in both these cases, the public have other securities besides that of the bank.