to ascertain by the oaths of a majority of the directors of said bank, that its capital hath been paid in by the stockholders of said bank, toward payment for their respective shares, and not for any other purpose; and that it is intended to have it therein remain as part of said capital, and to return a certificate thereof to the governor, and no loan shall be made to any stockholder until the full amount of his shares shall have been paid into the bank; and it shall not be lawful for any bank to have owing to it, on loan, on a pledge of its own stock, a greater amount than fifty per centum of its capital stock actually paid in; and no part of the capital stock of any bank shall be sold or transferred until the whole amount thereof shall have been paid in.”

England

"The law does not impose any restrictions upon the amount of capital. This will be found to vary from £5,000,000 to £100,000; and in one instance an unlimited power is reserved of issuing shares to any extent.

"The law does not impose any obligation that the whole or any certain amount of shares shall be subscribed for before banking operations commence. In many instances banks have commenced their business before one half of the shares are subscribed for, and 10,000, 20,000, and 30,000 shares are reserved to be issued at the discretion of the directors.

"The law does not enforce any rule with respect to the nominal amount of shares. These will be found to vary from £1,000 to £5. The effects of this variation are strongly stated in the evidence.

This will be

"The law does not enforce any rule with respect to the amount of capital paid up before the commencement of business. found to vary from £100 to £5."

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 farther 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 to fall back upon without recurring to the shareholders.

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

F

also a very small business, it had much better cease as an independant 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 dividend, provided that dividend be paid out of the business profits of the company. When we hear of a bank paying from fifteen to twenty 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 four per cent., then the capital raised by notes or deposit, produce 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. I would 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 amonnt 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.

Presuming that banks are to commence with a moderate amount of capital, and to increase that amount as the business increases, the question is suggested, what is the best way of increasing the capital? The English banks have followed two ways of doing this; one, by a further issue of shares; and the other, by further calls upon the existing shareholders.

The

capital of all the joint stock banks in England is divided into certain portions, called shares; each proprietor holds a certain number of these shares, and pays a certain sum upon them. If he wishes to transfer a portion of his capital he cannot transfer a half share or a quarter share, but must transfer a whole share, or a certain number of shares. Thus, if the capital of a bank be £500,000, it may be divided into 5,000 shares of £100 each, or 50,000 shares of £10 each, and a certain proportion of the amount of

each share will be paid up; and this proportion is called the real or the paid-up capital. Thus, if onetenth of the above capital 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. 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.

Some persons have objected altogether to a nominal capital; but their objections have been dircted more to the misrepresentations that may attend it, than to the thing itself. They say, "a bank announces that it has a capital of £500,000, whereas few shares are issued, and but a small sum is paid on each share; hence people are misled, and the bank acquires a confidence which it does not deserve." The objection here is against representing the nominal capital to be paid-up capital; it does not bear upon the principle of a nominal capital. In fact, we are misled by words. What is called nominal capital is nothing more than a farther sum, which the directors have the power of calling up. If this sum had not been called capital, it would not be objected to, as it could lead to no misapprehension. But the inquiry simply is, ought the directors to have the power of calling upon the shareholders for a farther amount of capital beyond that already paid up? Were they not to have the power, the bank would at its commencement probably have too large a capital, and after its business had advanced, would have too small a capital. And if the bank by any unforeseen occurrence became involved, and should have occasion for further sums to extricate itself from its difficulties, it could not make any further call upon its shareholders, although a very small advance might prevent its utter ruin. In case of a very large capital,

such as two or three millions, a nominal capital may not be necessary, as so large a sum is likely to be in all cases amply sufficient. But in banks of a second class, it will always be best to give the directors the power of making further calls upon the shareholders. The second way of increasing the capital of a bank, is, by the issue of new shares. The whole amount of shares to be issued is fixed in the first instance, and the bank commences as soon as a certain proportion has been issued. If the bank was not allowed to commence business until the whole of the shares were taken, a small amount would be fixed upon, and the bank would be proportionably weaker. But by beginning with a small number of shares, you have capital enough for your business, and you acquire more as you proceed. Many persons will join a bank after it is established who would not take shares at the commencement. Some shares are therefore reserved for persons of this description; and as the shares are more valuable when the success of the undertaking is no longer doubtful, they are often given out at a premium, and always a greater degree of caution is exercised as to the persons to whom they are distributed.

Some members of the committee appear to have an objection to shares of a small amount; they apprehend that these shares are taken by an inferior class of persons; and hence the body of proprietors are less respectable. But it would appear from the returns, that the general effect of small shares is, that each shareholder takes a greater number. Thus in the banks of £100 shares each proprietor has taken upon an average twenty-eight shares, on which he has paid the sum of £444. In the banks of £20 shares, each proprietor has taken forty-three shares, and paid £359. In the banks of £10 shares, each proprietor has taken fiftytwo shares and paid £400. While in the only bank of £5 shares, each proprietor has taken 117 shares, and paid £585.* It appears to me that the chief objection

* See the last edition of my Practical Treatise on Banking.