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Mr. Goschen-continued.

would probably make a very great difference?I have taken the total declared profits of each bank, and this gives the result of the whole.

Mr. Orr Ewing.

855. You have taken the total profits and the total capital?—I have taken the total profits and the total capital belonging to each bank.

Mr. Campbell-Bannerman.

856. Do you apply that to the aggregate profit and the aggregate capital of the whole of the banks?-No, I take what each bank has paid first upon its paid-up capital; the business profit I mean, apart from the 4 per cent. upon the capital and reserve; also the per-centage of profit upon its cash deposits and liabilities to the public.

Mr. Goschen.

857. I think that you have answered my question, but in order that there may be no misunderstanding I should like to state it again if the Committee will allow me; the profit of one bank may be a very large amount, and the profit of another bank may be a very small amount; for instance, one bank may have made 11 per cent., and another bank may have made 13 per cent.; in such a case, would you, in making your calculations, take the average as 12 per cent., or would you say that as the profit of the one bank was so much larger than the profit of the other, or so much smaller, as the case might be, the profit would not be 12 per cent., but 11 per cent., or 12 per cent., or whatever might be the proportionate figure?—I take the actual figures of profit made by each bank.

Chairman.

858. Supposing that one bank has a capital of half a million, and that another bank has a capital of three-quarters of a million; you add those two together, and you say that they have made so much profit in the aggregate between them, and that is so much upon the total capital of the two banks?—I take the profits declared by each bank, and putting aside 4 per cent. on the capital and reserve, I find what each bank has earned in the shape of net business profit upon its capital; another calculation is made of profits on cash deposits, and a third upon the total liabilities to the public.

Mr. Backhouse.

859. Do you take earned profit or divided profit? I take declared profit, not divided profit.

Mr. Hussey Vivian.

860. Will you kindly give me the total paid-up capital?-9,697,000 7.

861. What is the total profit? That I have

Mr. Hussey Vivian-continued.

Mr. Davidson.

not got added up. I merely give you each bank, and take the result. I could ascertain the total 6 May 1875. declared profit by adding it up.

862. Then it manifestly has not been calculated as an interest account is calculated, by days ?No.

863. I merely used the words "interest account," because that is a common account which is well known to men of business, and I think that is the way in which the question was put ; you have averaged the per-centages, and not taken the gross amount of profits upon the paidup capital?-The statement is not made in that form, but it can easily be made in that form.

864. In which form is it made; is it made by averaging the per-centages, or is it made by taking the gross profit upon the gross paid-up capital? In neither way exactly. Take, for instance, as I said before, the Bank of Scotland; its declared profits were 175,000 for last year; 4 per cent. upon the capital and reserve amounted to 56,000 7.; then that deduction left 119,000 l., which, divided in the form I have mentioned, shows a net business profit first of all upon the paid-up capital of 11. 18s.

865. Now, will you take another instance of some other bank?-I will take the North of Scotland Bank, the declared profits of which were 45,000 l., and the amount of 4 per cent. upon the paid-up capital was 17,000 7., leaving 28,000 7. of profit apart from the 4 per cent. which is supposed to have arisen from the capital and reserve.

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Mr. CHARLES GAIRDNER, of Glasgow, called in; and Examined.

Chairman.

870. WILL you state what position you occupy? -I am Manager of the Union Bank of Scotland. 871. The Committee will be glad if you will explain to them the principle upon which the average of the net profits of the Scotch Banks is ascertained?—The principle is this: the total amount of the capital of the Scotch banks is found to be about 9,000,000 7. (I need not be

Chairman-continued.

particular about the figures). The total amount of the declared profits in the year under consideration here is found to be about 1,000,000 Z. Four per cent. upon the capital and reserve is in the first place deducted, and the balance, being the aggregate profits of the banks, less 4 per cent. upon their capital and reserves, is applied in the first place to the capitals of the

Mr. Gairdner.

Mr.

Gairdner.

6 May 1875.

Chairman-continued.

banks, and found to bring out 8 l. 19 s. 6 d. per cent. of net business profit.

872. Then the net profit is not ascertained by averaging the per-centage of each bank, but by calculating the net profit after deducting 4 per cent. upon the gross capital of the banks?Quite so; the capital and reserved profits. The figures are taken from the "Economist" newspaper; they are not made up just now for this Committee at all. The "Economist" newspaper has applied this principle for years to the London banks, and for the last two years to the Scotch banks, and their figures are the figures which are now being placed before you. They have not been prepared for this Committee, but they are taken from the "Economist" newspaper, published in February last. (Vide Appendix, No. 6).

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881. It is important to distinguish between the amount upon which you calculate the profit of 8 l. 19 s. 6 d. and the amount upon which the 4 per cent. is deducted, because you say that 4 per cent. is deducted, not only from the capital, but from the deposits or reserves?-The principle is this: that the banks' own funds consist of their capital and reserved profits; those are invested, and the dividend received upon them is assumed at 4 per cent., and is rightly and is rightly deducted from the gross profits in order to ascer

Mr. Torr-continued.

tain what are the pure profits of banking. That is the principle, and that principle worked out brings out 8 l. 19 s. 6 d. per cent. upon the capital of the banks as the pure business profit earned in Scotland last year.

Mr. Orr Ewing.

882. What is the amount of reserve of all the banks? The total amount of the reserved profits according to the balance sheets of 1874, was 4,016,000 l., and the capital was 9,697,000 7.

Mr. Goschen.

883. So that if you were to calculate the whole of calculating it upon the capital plus the reserve of the profit upon the capital of the bank instead profits, of course it would show a very much higher dividend, would it not?-We are not speaking of the dividends paid by the banks; that is a totally different matter.

884. But it would show a very much higher business profit, would it not?-No, the true business profit earned by the banks is 8 l. 19 s. 6d. per cent. upon the capital.

885. It would show a very much higher percentage then?-Yes, it would be a very much higher per-centage. In addition to the pure business profits, there is added then the interest upon the bank's own funds, and that makes up the dividend.

886. For instance, if I take the Bank of England, where the rest is 3,000,000 l., the dividend of the Bank of England would be pulled down if you said that they must make their dividend upon that 3,000,000 7. as well as upon the capital of the shareholders; but this statement of yours makes up the accounts in this way: that upon the accumulated profits which have not been paid away, that is to say, upon the reserve fund, you calculate a business profit as well as upon the capital paid by the shareholders?—No doubt.

887. Could you prepare a statement for us, showing how the per-centage of business profit would turn out if it were calculated upon the capital of the shareholders alone?-This 81. 19 s. 6 d. is upon the capital of the shareholders alone.

888. I mean the paid up capital of the banks, not including the reserve funds? This 8 l. 19 s. 6 d. is the pure profit applied to the capital, exclusive of the reserved profits. This principle of calculation is that which, I understand, is commonly used in all mercantile houses. You first take off the interest upon the capital of the firm before you arrive at the pure profits. The funds of the partners here consist partly of capital and partly of reserve profits. Upon that 4 per cent. is calculated and deducted, and the balance is held to be the pure profits of banking.

889. Are you aware that in the Bank of England they do not charge 4 per cent. upon the 3,000,000l. of reserve fund?-The Bank of England do not make up any statement like this at all and publish it; but the same system applied to the Bank of England would work in this way: The capital of the bank is 14,000,000 7.; the rest is 3,000,0007.; that is 17,000,000 7.; 4 per cent. upon that is 680,000 7., and that would be deducted from the profit declared by the bank, which, assuming the dividend to be 10 per cent., would be 1,400,000 7. From the 1,400,000 7. you take off 680,000 l., being the interest upon the bank's own funds, leaving 720,000l. to represent the pure profit earned by banking.

890. If

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898. If you capitalised the reserved profits, the dividends would amount, I think, to about 15 per cent. ?-Possibly so. In order to ascertain what were the pure profits of Scotch banking in 1873, applying the pure business profits to the cash deposits of the bank, we find that that brings out a per-centage of 17. 1 s. 11 d. as the margin of banking profit. If I may put it in this way, the bank is supposed to be an intermediate party between two sections of the public, one having money to lend, and the other having occasion to borrow, and the bank has its profit by giving a lower rate of interest than it gets. Out of that margin of profit, the bank in the first place pays its expenses, and the surplus is held to be the net business profits, after deducting therefrom 4 per cent. upon the capital and reserves. The amount so brought out is found when applied to the cash deposits of the bank, the funds held by the bank from the public, to amount to a per-centage of 17. 1 s. 11 d. as the net margin of business profits earned by the bank.

Mr. Backhouse.

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903. This would be a statement, I imagine, severing the deposits as a separate account in the banker's books from any other part of your profit on your capital; you are dealing with deposits only?-With deposits only. The net profits earned by the eleven banks in the year 1874, after paying expenses, was 1,411,000 7. That included the interest upon the capital and reserved profits, which, being taken at 4 per cent., amounted to 550,000l.; and that being deducted left what I call the net business profits from banking at 861,000l. Then one test (I do not put it as the only test), as to how far that is too large or too small a profit, is to apply that to the cash deposits held by the banks, and having so applied it, we find that it is equal to a profit of 17. 1 s. 11 d. per cent. per annum upon the aggregate cash deposits held by the bank.

Mr. Sampson Lloyd.

904. In the term "deposits," do you include all balances held on account of the public generally? Yes.

Mr. Hussey Vivian.

905. If you had let your money out at an interest of 11. 1s. 11 d. less, you would have made no profit at all?-Exactly so. Then to apply it to the total liabilities of the bank, including notes and acceptances, and everything in the shape of liability to the public, as distinguished from the proprietors, the net margin of business profit is equal to 18s. 11 d. per cent. per annum. consists in the first place of cash deposits, secondly notes, and thirdly acceptances.

Mr. Sampson Lloyd.

That

906. The total liabilities, in fact, are the deposits, plus the notes and acceptances?-Exactly so; the total liabilities to the public.

Mr. Torr.

907. Could you give the Committee the amount of notes and acceptances?-The notes were 7,000,0007., and the acceptances were 5,500,000 7. This mode of testing the per-centage of profits earned by the banks is, as I say, taken from the "Economist" newspaper, and has been adopted

899. Including acceptances?-No, I am speak- here for the purpose of bringing out the contrast ing now of cash deposits alone.

Mr. Hussey Vivian.

900. That is calculated on the deposits ?-Yes, that is calculated on the deposits; that is to say,

between the Scotch system and the English system in regard to the net business profits earned by the banks; and I start, therefore, with the assumption that I have explained that in Scotland in 1873 and in 1874 (it happens, curiously enough,

Mr. Gairdner.

Mr. Torr-continued.

to be precisely the same in both years) we had a margin of 11. 1 s. 11 d. per cent. upon our cash 6 May 1875. deposits. Again, taking the figures of the "Economist" newspaper, I find that the eleven London joint stock banks who have funds to a somewhat larger amount, the deposits being, I think, 96,000,000 l., had, in 1873, a margin of profit, calculated in the same way, of 1 l. 6 s. 3 d., and in 1874 a margin of 1 l. 1 s. 3 d.

Mr. Goschen.

908. In order to make the comparison complete, could you state what is the proportion of capital to deposit in the case of the Scotch banks, and in the case of the eleven London joint stock banks? -I have the per-centage of capital and reserve profits in each case thrown together. I have not got the capital separately, but I will give it to you as I have it. The per-centage of capital and reserve profits to cash deposits was, in the case of the eleven Scotch banks 17.8 per cent. In the case of the eleven London joint stock banks it was 12.8 per cent.

Sir John Lubbock.

909. Could you put in the expenses too?-In speaking of profits I have throughout spoken of net profits, that is to say, profits after paying ex

penses.

910. Could you put in the actual expenses ?The London banks give them, but the Scotch banks do not give them. That is a very important point, undoubtedly. I should think that the Scotch bank expenses may be taken as nearly as possible at 1 per cent. upon the amount of the cash deposits.

1

911. I dare say that you would be able to ascertain the expenses?-No, they are not published, so that I can only tell you from any banks which choose to inform me; but, judging from our own experience, and from what Mr. Davidson, and one or two of the officers of other banks have told me, I think that the total expenses of the Scotch banks come as nearly as possible to about per the amount of their cash deposits cent. upon held from the public. 912. I do not wish to ask you any question that I have no right to ask, but are you speaking for your own bank?—I am speaking for our own bank and for one or two others, who have told me how they stand in that matter. Perhaps 17. 1 s. per cent. would be nearer, but it is about 1 per cent., I think, upon the cash deposits. In regard to the question as to the per-centage of net business profit borne to the capital of the London banks, I find that it comes to 11 l. 1 s. 10 d.,

Sir John Lubbock-continued. and that it was earned from cash deposits amounting to 96,000,000 7. In the case of the Scotch banks the per-centage of business profit to the capital was 87. 19s. 6d. earned from cash deposits amounting to 77,000,000 l.; in both cases after deducting the 4 per cent. I am speaking of net business profit. The contrast ought, however, to be made rather between the Scotch system and the English provincial system than between the Scotch system and the London system. I find, by taking such balance sheets of the English provincial banks as I have been able to find (I have got the balance sheets of 10 provincial banks of issue and of 11 provincial banks without issue) that, applying the same mode of calculation to their profits, the 10 provincial banks of issue have earned upon their cash deposits a margin of 17. 19 s. 4 d. per cent., and that the 11 English provincial banks without issue have earned a margin of 11. 10s. 9 d. per cent., or, if I throw the 21 banks together, banks of issue and banks without issue, the average percentage comes out at 17. 13 s. 2 d. The result is that the 10 English provincial banks of issue show that they make a larger profit than the 11 Scotch banks of issue by 17 s. 5 d. per cent. per

annum.

Mr. Goschen.

913. Have you the proportions of the capital and deposits in those cases?-I have. The cash deposits of the 21 banks amount to 78,000,000 4, the capital amounts to 8,670,000 7., and the reserve amounts to 3,900,000 l. The per-centage of net business profits to capital comes out at 14 l. 19 s. 5 d. over the 21 banks, but the margin of net business profit in favour of the English provincial banks of issue, adopting those 10 banks as the test, is equal to 17 s. 5 d. per cent. per annum. That applied to our 77,000,000 l. of deposit would give if the banking system in Scotland were similar to what exists in England, a difference of about 670,000l. per annum.

Sir John Lubbock,

914. That is, of course, after allowing for bad debts?-That is taking the declared profits of the banks all round, after allowing for all bad debts, and after paying all expenses.

915. And therefore it might well be that the profit was not larger in the one case than in the other, but that the bad debts were smaller?That I cannot tell anything about.

916. But might not the difference of profit be to some extent accounted for by the difference in the amount of bad debts?—Yes.

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Mr. DAVID DAVIDSON and Mr. CHARLES GAIRDNER, called in; and further Examined.

Chairman.

917. (To Mr. Gairdner.) I THINK you wish to offer some further explanation in answer to the last question but one, put to you by the honourable Member for Maidstone (No. 915), when he said that it might well be that the profit was not larger in the one case than in the other, but that the bad debts were smaller?-Yes, I did not catch at the moment the precise import of the question, which seems to convey almost an inference that the Scotch banks lost more money by bad debts than the banks of England; I wish expressly to say that I do not believe that there is the slightest foundation for such a supposition as that; I believe that the banks have been very free from bad debts for a considerable number of years, speaking of them as a whole.

918. Do you desire to complete the statement which you commenced, showing the contrast in the results of banking in England and Scotland? -I should like to do so; I do not think I stated on Thursday the fact that in selecting the 21 English provincial banks from whose balance sheets the figures had been taken from which I spoke, I took the balance sheets of all the banks that I could find whose liabilities exceeded a million and a half; I have put in the following papers, and they were handed to the printer on Friday: First, an analysis of the published balance sheets of the 11 Scottish banks for 1874; Secondly, an analysis of the published balance sheets of the London Joint Stock Banks (those two having been made up from the figures of the "Economist" newspaper); newspaper); and thirdly, analysis of published balance sheets of the English Provincial Banks, whose liabilities amount to a million and a half in the case of each bank. The aggregate amount of the liabilities of these 21 English Provincial Banks is 78,000,000 l., and the comparison therefore, so far as the amounts are concerned, seems to be fair, seeing that the Scotch banks' liabilities come out at 77,000,000 ., and the London Banks' liabilities come out at 96,000,000 7.

an

919. Have you any further observations to make upon this point?-Yes; on Thursday I

Chairman-continued.

stated what might be held to be the estimate of loss that would accrue to the people of Scotland by the adoption of the English margin of banking profit. I now propose to state what the estimate of gain to the people of provincial England would be by the adoption of the Scottish margin of banking profit. In approaching that I find that I am without any accurate statement of the deposits in the provincial banks in England, but I have the assistance of Mr. Palgrave's very useful publication, in which he, after a very careful estimate, arrives at the conclusion that the amount is somewhere about 200,000,000 l., and I think that that must be held to be a very moderate estimate, seeing that it embraces a population which, I should think, is considerably in excess of 15,000,000, excluding London and its suburbs, as compared with 3,300,000 of population in Scotland, where the deposits come out close on 80,000,000 I think the amount must be very much under-estimated, but I take it as stated by Mr. Palgrave. That includes private banks and joint stock banks in provincial England. Upon the basis of that estimate of 200,000,000 l. I apply to it the margin of profit shown to be earned by the 21 English provincial banks of which 10 are banks of issue and 11 are banks without issue, and whose aggregate liabilities on deposits are 78,000,000 7. The margin of profit shown by their balance sheets after deducting expenses and bad debts and 4 per cent. upon the capital and reserve profits, is 17. 13s. 2 d. per cent. The margin of profit of the 11 Scotch banks as calculated in the same way is 1 7. 1 s. 11 d. per cent., and the difference is 11 s. 3 d. difference applied to the assumed amount of 200,000,000% of deposits would give a gain of 1,125,000. per annum. I have put in a statement, which is in the hands of the printer, showing that in detail, and I propose to put in this statement (the same was handed in, see Appendix). I do not know that I have anything else to add upon that branch of the subject.

This

920. Can you give us any illustration from the history of the Union Bank, of the manner in which the smaller banks have been absorbed ?—

Mr. Davidson,

and Mr.

Gairdner.

10 May

1875.

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