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The banks of every state confine themselves to that state, and do not extend their branches into the neighbouring states. Analogous to this is the district system of banking adopted by the joint stock banks in England. Had the law of 1826 permitted joint stock banks to be established in London, we should probably by this time have had ten or a dozen banks having their head quarters in London, and extending their branches throughout the country. But as the law prohibited these banks being established within sixtyfive miles of London, it necessarily gave rise to banks occupying particular districts in the country. advantages which are alleged to belong to the district system are the following-that the bank will be better adapted to the wants and habits of the peoplethat a local feeling will be excited in its favour, hence the inhabitants of the district will take shares, and the occurrence of runs upon the bank will be less probable that a better system of management may be expected, as it can more easily be governed, and will be more under controul-that a panic in the district will not affect the other parts of the country, and hence supplies may be more easily obtained-that banks will be of a moderate size, and hence will be attended with the advantages arising from numerous banks acting as checks upon each other, instead of a few large banks who may combine for objects injurious to the nation; and that as each bank will have an agent in London, the bills they draw will thus have two parties as securities, and the public will have a pledge that there is no excessive issue in the form of kites or accommodation bills. On the other hand, it may be contended, that in Scotland the large metropolitan banks which have branches extended throughout the country, have generally been more successful than the provincial or district banksthat there is a greater security to the public for the notes or deposits-that advances are not so likely to be made to speculative parties merely on account of their local influence-that the capital raised in one part of
the country can be employed in another-that the transmission of money from one part of the country to another is more rapid and direct-that the establishment of the bank being on a larger scale, you have a superior class of directors, and can demand the services of higher talents in those who are employed as officers.
It does not appear that these two systems are necessarily at variance with each other. County or districts banks have no doubt many advantages, but they do not seem to supersede banks on a larger scale.
Both the district and the extended system of banking are attended with a system of branches. The Bank of the United States had a branch in every state, and several of the state banks have also branches. It will be seen at page 48 that the 558 banks have 146 branches.
When the law existed in England that no bank should have more than six partners, the branch system scarcely existed. In some cases, a bank had a branch or two a few miles distant, but no instance occurred of a bank extending itself throughout a county or a district. But with joint stock banking arose the branch system-the head office was placed in the county town, and branches were opened in the principal towns and villages around. The credit of the bank being firmly established, its notes circulated freely throughout the whole district. The chief advantages of this system are the following:
There is greater security to the public. The security of the whole bank is attached to the transactions of every branch; hence there is greater safety to the public than could be afforded by a number of separate private banks, or even so many independent joint stock banks. These banks could have but a small number of partners the paid-up capital and the private property of the partners must be comparatively small; hence the holder of a note issued by one of the independent joint stock banks could have a claim
only on that bank: but if that bank, instead of being independent, were a branch of a large establishment, the holder of a note would have the security of that large establishment; hence the branch system unites together a greater number of persons, and affords a more ample guarantee.
The branch system provides greater facilities for the transmission of money. The sending of money from one town to another is greatly facilitated, if a branch of the same bank be established in each of those towns, for all the branches grant letters of credit upon each other. Otherwise you have to ask the banker in the town from which the money is sent to give you a bill upon London, which is transmitted by post, or you request him to advise his London agent to pay the money to the London agent of the banker, who resides in the town to which the money is remitted. This takes up more time, and is attended with more expense. A facility of transmitting money between two places usually facilitates the trade between those places.
The branch system extends the benefits of banking to small places where independent banks could not be supported. An independent bank must have an independent board of directors who in most cases will be better paid-the manager must have a higher salary because he has a heavier responsibility, and a large amount of cash must be kept unemployed in the till, because there is no neighbouring resource in case of a run. There must be a paid-up capital, upon which good dividends are expected; a large proportion of the funds must be invested in exchequer bills, or other government securities, at a low interest, in order that the bank may be prepared to meet sudden calls; and the charge for agencies will also be more. On the other hand, a branch has seldom need of a board of directors, one or two being quite sufficient-the manager is not so well paid: there is no necessity for a large sum in the till, because in case of necessity the branch has recourse to the head office, or to the neighbouring
branches; nor is a large portion of its fund invested in government securities that yield but little interest, as the head office takes charge of this, and can manage it at a less proportional expense. Besides at some branches the manager attends only on market days, or once or twice a week. The business done on those days would not bear the expense of an independent establishment.
The branch system provides the means of a due distribution of capital. Some banks raise more capital than they can employ, that is, their notes and deposits amount to more than their loans and discounts. Others employ more capital than they raise, that is, their loans and discounts amount to more than their notes and deposits. Banks that have a surplus capital usually send it to London to be employed by the bill brokers. The banks that want capital must either restrict their business, or send their bills to London to be rediscounted. Now if two banks, one having too much, and the other too little capital, be situated in the same county, they will have no direct intercourse, and will consequently be of no assistance to each other: but if a district bank be established, and these two banks become branches, then the surplus capital of one branch will be sent to be employed at the other-thus the whole wealth of the district is employed within the district, and the practice of rediscounting bills in London will be proportionably diminished.
The branch system secures a better system of management. The only way to secure good management is to prevent the formation of small banks. When banks are large the directors are men more wealth and respectability-they can give large salaries to their officers, and hence can command first-rate talent there will be a more numerous proprietary; and in a large number there will be always some active spirits who will be watchful of the conduct of the directors and the manager; besides, in a numerous proprietary there is a greater
number of persons eligible to be directors, and consequently there is a wider choice. In populous cities such as London or Manchester, a large bank may be formed without branches-but in smaller places there is no way of forming a large bank but by giving it branches throughout the district. A branch bank in a small town will probably be better managed than an independent bank in the same place. The directors and manager of the branch will be appointed by the directors at the head office, assisted by the general manager, who are very competent to judge what qualifications are necessary for these offices, and who would not be biassed by local partialities. But the directors of the independent bank would most likely be self-appointed or chosen by the proprietors, because no others could be obtained, and these directors would appoint some friend of their own to be manager. The manager of the branch, besides the superintendence of the directors, which he has in common with the manager of the independent bank, will be subject to visits from the general manager or the inspector; and he must send weekly statements of his accounts to the head office. The consciousness of responsibility will thus secure a more anxious attention to his duties; and besides, he will probably be looking forward for promotion to a higher branch as a reward for his successful management. These circumstances seem to ensure a higher degree of good management to the branch.
At the same time it must be admitted that banks with numerous branches require a proportionate paidup capital, and that the capital be kept in a disposeable form; it also requires vigilant and constant inspection, and a rigid system of discipline.
A proportionate paid-up capital is necessary, because in case of a run there are a greater number of points of attack; hence the funds must be divided to meet all these possible attacks, for if one branch be overpowered, the whole bank is immediately exposed to suspicion.