The Joint Stock Banks of this country are a most remarkable success.  Generally speaking the career of Joint Stock Companies in this country has been chequered.  Adam Smith, many years since, threw out many pregnant hints on the difficulty of such undertakings—­hints which even after so many years will well repay perusal.  But joint stock banking has been an exception to this rule.  Four years ago I threw together the facts on the subject and the reasons for them; and I venture to quote the article, because subsequent experience suggests, I think, little to be added to it.

’The main classes of joint stock companies which have answered are three:—­1st.  Those in which the capital is used not to work the business but to guarantee the business.  Thus a banker’s business—­his proper business—­does not begin while he is using his own money:  it commences when he begins to use the capital of others.  An insurance office in the long run needs no capital; the premiums which are received ought to exceed the claims which accrue.  In both cases, the capital is wanted to assure the public and to induce it to trust the concern. 2ndly.  Those companies have answered which have an exclusive privilege which they have used with judgment, or which possibly was so very profitable as to enable them to thrive with little judgment. 3rdly.  Those which have undertaken a business both large and simple—­employing more money than most individuals or private firms have at command, and yet such that, in Adam Smith’s words, ’the operations are capable of being reduced to a routine or such an uniformity of method as admits of no variation.”

’As a rule, the most profitable of these companies are banks.  Indeed, all the favouring conditions just mentioned concur in many banks.  An old-established bank has a “prestige,” which amounts to a “privileged opportunity”; though no exclusive right is given to it by law, a peculiar power is given to it by opinion.  The business of banking ought to be simple; if it is hard it is wrong.  The only securities which a banker, using money that he may be asked at short notice to repay, ought to touch, are those which are easily saleable and easily intelligible.  If there is a difficulty or a doubt, the security should be declined.  No business can of course be quite reduced to fixed rules.  There must be occasional cases which no pre-conceived theory can define.  But banking comes as near to fixed rules certainly as any existing business, perhaps as any possible business.  The business of an old-established bank has the full advantage of being a simple business, and in part the advantage of being a monopoly business.  Competition with it is only open in the sense in which competition with “the London Tavern” is open; anyone that has to do with either will pay dear for it.

’But the main source of the profitableness of established banking is the smallness of the requisite capital.  Being only wanted as a “moral influence,” it need not be more than is necessary to secure that influence.  Although, therefore, a banker deals only with the most sure securities, and with those which yield the least interest, he can nevertheless gain and divide a very large profit upon his own capital, because the money in his hands is so much larger than that capital.