CHAPTER XXVIII.

COMMERCE AND TRADE.

In the earlier part of Lord Palmerston's political career, England was spending her money with a lavish hand. By the time that peace was made, she was in a state of exhaustion. Protection was wanted by men of all classes; and the lesson they all learnt was, that they were the poorer for that protection. As soon as England was won over to free trade, wealth poured in upon the land. At the same time, also, came in abundant supplies of Australian gold; and never was commerce so extended, never was trade so prosperous, never did wealth so rapidly accumulate, as when Mr. Gladstone was Chancellor of the Exchequer, and when Lord Palmerston was Premier.

Next to free trade, the mainspring of this enterprise, of later years, has been mainly due to the limited liability system.

The first germ of it was introduced into English law in 1826, when an act was passed, empowering the crown to confer charters of incorporation on certain trading and other companies, declaring, in the charter, some limit to the liability of the shareholders. Till that time, every shareholder in a concern was liable to his last shilling; and the idea was, that the companies thus exempted were to be especially beneficial to the community. In 1834, an act was passed, enabling the crown to grant letters patent to certain companies; and, for this mode of proceeding, it was urged, "that divers companies associate themselves together for trading, charitable, literary, or other purposes, which it would be inexpedient to incorporate by royal charters, although it would be expedient to confer upon them some privileges incident to corporation." Shareholders' liability was to be limited, not in amount, but in time, and when they had ceased to be shareholders three years. In the same year, a particular statute placed upon an improved basis the conditions for investing small sums in friendly societies, and insuring honesty in their management. In 1836, an act was passed relative to benefit building societies. The shares were not to exceed £100 each; and the payments not to exceed £1 per month. The society was to buy or build houses, and to hold them as mortgages till all the investments were paid up. In 1837, there was a parliamentary inquiry into the question of the introduction of the system of limited liability in partnerships, and more extensively into commercial matters; and the same year an act was passed for enabling the crown to confer certain powers and immunities on trading and other companies, in the form of charters of limited liability. In 1844, a Joint-Stock Companies' Act was passed, to apply to all companies of more than twenty-five members, formed after that date, and not provided with royal charters, letters patent, or acts of incorporation. There was to be provisional registration of all matters relating to the objects and constitution of the society, before even shareholders could be invited to join; and complete registration before actually commencing business. Till then no shares were to be transferred. General meetings, audited accounts, and open proceedings were insisted on for the safety of the shareholders. In the same year, also, another parliamentary committee collected evidence on the limited liability principle; but did not attempt to recommend its adoption. Immediately after this began the railway mania, which impoverished so many of the large class unduly hastening to be rich. It was some time before society recovered from the shock.

We find, at length, the limited liability principle began to be received with a show of favour. In 1851, a committee of the House of Commons examined the subject, and recommended that any person might be empowered to lend money for not less than twelve months, with limited liability, the interest to depend on

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the profit of the concern for which the money was used. Nothing, however, was done in the matter till 1853 (excepting the passing of an act for encouraging industrial and provident institutions, with partial limitation of liability), when a commission was appointed to investigate the subject. The first thing the commission did was to inquire into the practical working of the limited liability principle in other countries. Seventy-five contradictory answers were received, and the commissioners were puzzled how to act; and divided, in the ratio of five to three, against limited liability. In their report they say-"We have not been able to discover any indication of the want of a sufficient capital for the requirements of trade. The annually increasing wealth of the country, and the difficulty of finding profitable investments for it, seem sufficient guarantees that any adequate amount will always be devoted to any mercantile enterprise that holds out any reasonable prospect of gain, without any forced action upon capital to determine it in that direction; while any such forced action would have a great tendency to induce men to embark in speculative adventures, to an extent that would be dangerous to the interests of the general commerce of the country. However, we find no reason to suppose that the reputation of British merchants, either at home or abroad, would be raised by the establishment of firms trading with limited liability-but the contrary. Many of the opinions in favour of such a system are coupled with a recommendation of more stringent regulations for the prevention of fraud."

The House of Commons appears to have been of a different opinion. In 1854, Mr. Collier brought forward a resolution-"That the law of partnership, which renders every person, who, though not an ostensible partner, shares the profits of a trading concern, liable for the whole of the debts, is unsatisfactory, and should be so far modified as to permit persons to contribute to the capital of uch concerns, on terms of sharing their profits without incurring liability beyond a limited amount; and such modification is especially necessary in Ireland, regard being had to the peculiar social and industrial position of that part of the kingdom." The resolution was carried; and, in 1855, was passed the Limited Liability Companies' Act, applicable to companies, and not to partnerships. By its provisions, any joint-stock company, except for banking and insurance, established or to be established under the act of 1854, might obtain a certificate of limited liability upon complying with certain conditions; and any joint-stock company formed on the basis of 1837, or under a private act, might obtain a like privilege in the same way. The word limited is to form the last word in the name of the company. The deed of settlement is to be executed by not less than twenty-five shareholders, holding among them three-fourths of the nominal capital, and having paid up 20 per cent. of the amount. When three-fourths of the capital is lost by unsuccessful trading, the company must wind up; facilities for which are afforded by another act. Down to this date (1855) there had been about 900 companies registered under the Joint-Stock Companies' Act of 1844; but now these, and an enormous number of new ones, availed themselves of the privileges

offered them.

In 1856, another act was passed, empowering any seven or more persons to form a joint-stock company, for other purposes than banking or assurance, with permission to decide whether they will be registered with limited or unlimited liability, on compliance with certain conditions; and, by another act afterwards passed, any existing company having unlimited liability may adopt the limited system, with the consent of three-fourths of the shareholders, duly registered, and publicly announced. In 1858, an act was passed declaring that joint-stock banking companies may have limited liability, but not for their issue notes.

By the 1st of December, 1861, 2,141 companies had been thus created. In 1863, 263 companies were formed, with an authorised capital of about one hundred millions sterling. All sorts of enterprises were included in the list-banking, discount, financial, trading, manufacturing, insurance, shipping, hotel, mining, gas,

-the

&c. In 1866, a fresh return was published. During the two years over which it extends, the total number of companies, including mining enterprises, which were brought out and floated, amounted, in England, to nearly 3,000; in Ireland, to eighty-six; in Scotland, to seventy-three. During the last seven months of 1864, the number was 460; in 1865, there were about 1,700; and in the first five months of 1866, about 750. Of unlimited companies there were only eleven. It is probable, therefore, that but for the crisis of May, 1866, which, like a biting north-easter, nipped in the bud so many promising schemes, that year would have witnessed a development of limited enterprise and unlimited folly which would have thrown every previous year into the shade. In the merry month of May, there were no fewer than eighty-two concerns launched; "but then there came a frost, a killing frost," and adventurous promoters were left to mourn over inconstant fortune, and to lament the growth of experience, and the rapid decrease of cash. The variety of schemes to which the public subscribed, or which solicited support, is wonderful. We have the leviathan concerns-t "Credit Foncier and Mobilier;" the "Overend, Gurney, and Co.;" the "Imperial Mercantile Credit;" and others. Then we descend the scale to a "Grand Pumproom Hotel Company," at Bath, with positively seven shares taken by a confiding public; a "Swiss Gardens Company," at Shoreham, also with seven shares subscribed for out of 5,000; a "Family and Servants' Newspaper Company;" a "Bakers' Record and General Advertiser Newspaper Company," whose objects are stated to be, "the publication of a newspaper devoted to the bakers' trade," and whose paid-up capital is given as £122 108.; a "Great Grimsby Ice Company," and an "Unpickable Lock Company." We have coal, iron, gas, petroleum, wood, cordage, fish, photographic, felt-hat, piano, baking, brewing, manure, tea-growing, and innumerable other concerns. Almost every branch of industry finds a representative. The hotel companies, of course, occupy an important place, and the towns or districts for which their operations are intended are of the most widely diverse characters. It seems to be considered not at all necessary that the demand for accommodation should be urgent and conspicuous. We have associations for removing furniture, for delivering parcels, for sawing wood, for working stone, for "making and selling photogen gas," for building and destroying, for planting and cutting down. There is a magnificent-looking scheme, called the "Omnium Investment Society," with a nominal capital of £2,000,000, for the comprehensive purpose of "discounting, and advancing money on security." The company modestly abstains from giving its address, though it may be presumed the seven persons who have taken 190 shares out of 40,000, know of its whereabouts. are some concerns, however, of an altogether different stamp. The firm of "John Crossley and Sons," carpet manufacturers, appears as an enterprise in 110,000 shares, of which 105,300 have been bona fide taken, and the call of £10 paid up on every share-a singular exception to most of the companies that figure in the list. As a rule, all that have a large number of shareholders are in full operation.

There

In a very few months after Lord Palmerston's death, the fears entertained in many quarters, of the dangers arising from the too rapid and reckless formation of limited liability companies, were realised, and we had a panic, which may serve as a warning, and which will be remembered for many years to come. The law, as it now stands, is responsible for this to a very great extent; and some alteration is imperatively required. The law of limited liability limits the liability of the shareholder to the subscribed amount of his share; the liability of the company to the subscribed amount of its capital. But no provision is made for the relations to exist between the subscribed and the paid proportions of such share capital. Hence the secret of the panic. The public has been alarmed, in many cases needlessly, at its past credulity. The shareholder is alarmed at a responsibility he never till now contemplated. The fears of the one have acted and reacted on those of the other. Speculator and investor, borrower and lender, are equally scared; and, unless the government step forward to the rescue, the soundest names will be

discredited, and the most justifiable businesses ruined, by a distrust which is in many cases chimerical.

The limitation of liability is a sound commercial principle, but limitation should itself be limited on the same basis. The law has omitted to enact such further limitation, and hence the panic.

The defect in the law has been this-viz., that companies have been allowed arbitrarily to fix the limits both of their capital and their credit. The public have accepted such limits implicitly; and the shareholder, so long as times were easy, sacked his exaggerated profits in easy security, and unmindful of the rainy day.

What has been the practice? A company is formed of, say, a million of capital, in 50,000 shares of £20. On each of these shares £4 has been paid, and the company is started on the scale of a capital of £1,000,000, with assets really only to the amount of £200,000; and, strange to say, the public has accepted these companies as good to an amount, if not of the full million, at all events to a proportion much larger than was warranted by the sum paid. The public, for a long time, seem to have gone on trusting companies without analysing the meaning of the word; to have believed small capitalists, when in combination, to be much more solvent than when taken one by one; and to have taken for granted that a man who can pay £4 is good for a further payment of £16. It has never tested the solvency of the shareholders, and has granted to companies a credit which the shareholders individually could never have commanded. "I have myself," says a correspondent of the Times, "for some time been alive to the fact, that there are few companies in which there is not a great proportion of shareholders unable to pay calls beyond the small amount usually collected at starting. The proof is this-that there are few companies the shares of which are not depreciated whenever a call is made or anticipated. If the principle of limited liability had been soundly carried out, such could not have been the case. Calls would have measured an increase of business. Shareholders, if solvent, would be glad to invest additional capital in a lucrative concern; and the forfeiture of shares for nonpayment of calls would be a really severe penalty.

"It will thus be seen that the panic has been created both by shareholders and the public, who have suddenly hit upon a flaw hitherto overlooked. The public have discovered that limited companies have arrogated a margin of credit to which they were not entitled. Shareholders have awoke to a sense of liability far greater than they at first contemplated as real. Depositors ask for their money, and rouse shareholders by the fear of a call. Shareholders sell their shares at a discount, and stimulate depositors to ask for their money. The question now remainsWhere is the remedy? It is impossible to test the solvency of every existing shareholder. It is equally impossible to prevent insolvents purchasing shares at the quotations of the day.

"The answer is this. Make your paid capital so high as to deter all purchasers except bona fide investors, and reduce the margin of unpaid capital to the limits of legitimate credit.

"I have been told by the manager of one of the soundest of recent companies, that the large margin of unpaid capital is not made use of by his directors beyond a certain limit; that they never intend to make use of it; that it is consequently superfluous, and only tends to frighten the shareholders by a responsibility which possibly may become real.

"His observations entirely bear out my own experience. I believe the exaggerated discrepancy between paid and unpaid capital, while it deludes the public and endangers the shareholder, is perfectly useless to a well-managed company. Honest directors will never accept a credit beyond what they think within their range; and such a credit would be comprised within a much narrower limit of unpaid subscription. In France and in Germany the proportion of paid capital is fixed by law. So should it be fixed in England; if not by law, at least by the good sense of the companies.

"I would, therefore, suggest to the directors of the principal finance companies still extant, that they should immediately reassure their shareholders by taking steps to limit the existing liability on the unpaid portion of the capital. This could be effected by resolutions passed at general meetings, to lower the nominal capital of each company to a sum nearer its actual assets in cash. The shareholders would thus be relieved of an unhealthy liability, and the self-assigned credit of the company would not, I believe, suffer by being straightforwardly reduced from its nominal to its natural dimensions."

We have already referred to some of the panics which have illustrated our commercial history-panics which seem the inseparable result of commercial confidence and commercial enterprise.

The first genuine panic worthy of notice took place in Lord Palmerston's youth. On the 19th of February, 1793, the Bank of England refused to discount the paper of Messrs. Lane, Son, and Fraser. Next morning they stopped payment for a million. A panic seized the whole community; and, before long, a hundred country banks failed. In 1797, there was another severe panic, political rather than commercial. Ireland was the scene of revolt; the Channel fleet in a state of mutiny; and our coasts were threatened with invasion. Then we pass on to the great crash of 1825, of which we have already spoken. The panic of 1830, commonly called Alderman Key's panic, was political, and very ephemeral. In 1837, there was another panic, caused by-first, the joint-stock bank mania in England; secondly, the open credit system in the American trade; and, thirdly, the banking system of the United States. The year 1847 brought with it another panic, occasioned by extravagant railway speculations, and failures in the corn trade. In ten years we had another-the memorable year 1857—when Mr. J. Dennistoun and Co., with numerous agencies in America and Australia, failed for £2,000,000; and when the bank rate of interest was 10 per cent. The total liabilities of British mercantile houses and banks which succumbed, were estimated at £50,000,000. Germany also suffered greatly in consequence of it. In America, the panic, which had preceded ours, may be described as tremendous. "Picture to yourself," writes the Times' correspondent from New York, October 14th, 1857, "that immense crowd which assembled to see the Duke of Wellington's funeral procession, all dressed in male attire, and all pressing into Lombard Street; imagine Lombard Street expanded to its length, and every third house a bank, with depositors or bill-holders bent on obtaining gold for their debts, and you will have a real idea of the convulsion of Wall Street yesterday. New York was in a state of convulsion. A financial earthquake was rocking its moneyed institutions to their centre. One fell after another-shock succeeded shock-and, in the panic, no one felt sure that at the day's close anything would be left to tell the tale of the wealth, the commercial credit, and the honour of the mercantile community." Eighteen banks, says Mr. Arthur Locker, fell in two hours. In the interior all business was stopped for a time, by the refusal to take notes, and the impossibility of getting specie. The Mississippi steamers ceased to run, for the crews could not get their wages paid; and, at the city of St. Louis, there lay a line of smokeless funnels, a mile long. The annual state show and cattle fair occurred in that city during the height of the panic; but buyers and sellers could scarce come together, for want of a circulating medium in which they had the slightest confidence.

Of the panic of 1866, it is not within our province to write. We must, however, refer briefly to it, as it was due to the financial companies, which had been floated in 1865, in the most reckless and unprecedented manner. In March, symptoms of coming disaster were apparent. On the Stock Exchange, shares were becoming utterly unsaleable. May opened gloomily, and the failure of the Financial Corporation was announced. It is worth while to pause here for a moment, to point out how unjustly the principle of limited liability has been accused of causing the convulsion of 1866. The firm just spoken of was nominally limited, but practically unlimited. Its nominal capital was £3,000,000.