10: The Private Banks
The author means, in this chapter, to be critical of private banking, but does not wish the reader to construe that he is categorically opposed to the notion. "I can imagine nothing better in theory or more successful in practice than private banks as they were in the beginning."
At its originals, private banking was practiced by men of known wealth, integrity, and ability who was entrusted with the money of his neighbors. It was a personal matter, as his neighbors put their faith in him because of their personal connection: they saw the daily manner of his life and the wisdom he exercised in the conduct of his affairs. Moreover, his neighbors would very soon witness if the was acting in a manner that caused them to question the confidence they placed in him. As such, the practice of private banking has been successfully carried out for generations. As such, the position of a private banker gained great esteem by virtue of the character of the men who were involved in that trade.
The moniker of "London Banker" had an especially charmed value: to bank in London was to take advantage of the greater opportunity for growth present in the trade capital. It was also believed, with good reason, that a banker in the city possessed a great deal of knowledge of opportunities and was familiar with the tradesmen, merchants, and manufacturers who congregated in the city. And having such familiarity, such a banker could identify good opportunities and extend credit to those who would make good and productive use of funds.
However, this esteem generated by the early bankers, by virtue of their being men of good character and great knowledge, was borrowed upon by others who entered the profession. They laid claim to the title of "banker" but were not of the same quality as the men whose efforts had imbued the profession with such esteem, and as such brought shame and disrepute upon a once-honorable profession.
This aside, the very circumstances that facilitated the establishment of private banks have also largely passed away. The volume of mercantile activity has vastly increased, and the number of individuals involved in it has exploded, to the point where it is difficult to know whom to trust. There are a few enormously wealthy men whose names are known throughout England, but they are likely to have amassed their fortunes from some occupation other than finance. And as such, the men who are adept in the financial services sector are not well known, except by their association: if a known man of wealth does his business with a given bank, then it is assumed the bank must be solid and reputable.
Also, private banking came into existence in a time when there was simply no other option for the person with modest wealth and no idea how to manage it. In the present day, there are a multitude of corporate and joint-stock banks available to the depositor to choose from - and they are functionally no different than any private bank. They are also considerably more aggressive in advertising their services, as a private banker was merely doing a favor for his neighbors, whereas a corporate bank seeks to generate a profit from managing the wealth of others.
And in a competitive environment, business tends to become aggregated: the larger banks tend to become larger, and the small ones tend to become smaller. It is true of any industry, but especially so in banking, as a larger amount of deposits gives the bank the ability to generate a larger profit, attracting more depositors - and working exactly in reverse for a bank with a smaller amount of capital to invest.
The amount of business done by private banks is "perfectly unknown." As they are privately-owned, they are private in their affairs: they are not required to report their operations to a board of shareholders, and as such "their balance sheets are effective secrets" that they see no reason to disclose, and are under no obligation to disclose to anyone.
However, it can be seen that the number of private banks is in decline - from nearly 40 at the turn of the century to about a dozen in the present day (the book being written in 1873), such that the author feels confident in forecasting that the entire industry will be divided among the joint-stock banks and a few large private banks that remain.
The persistence of private banking is further confounded by the very source of its value: the character and capability of a given individual. When the founder of a private bank passes away, there is uncertainty in the ability of his heir to do as well. This is often with good reason, as the child of an industrious and responsible man, having inherited rather than earned their wealth, has a character much different than that of his father. As such, each time a private bank loses its founder, it will lose depositors. A JSB, having no fountainhead, presents its depositors with no such opportunity to reconsider.
Granted, the same situation is witnessed as well in large and long-standing firms, in which the founders were men of great vision and ability who ran their business with exceeding competence, but who lef their firm in the hands of less capable men Such a firm, if it reaches a significant size, can perpetuate for quite some time in the hands of poor management, being able to hide their losses in the ledgers until such time as they suffer from some great catastrophe or the cumulative effect of years of gradual erosion. With this in mind, it may be just as well that a private bank does not persist for long in the absence of its founder.
The author therefore does not "expect with certainty" the continuance of private banking. The growth of commerce and wealth in general makes it difficult for a single individual to manage with competence the wealth of so many others, and the sheer volume of deposits and loans requires an institution of considerable size and requires the "machinery" of a large institution to manage.
As such, the business of banking has become consolidated in a smaller number of larger enterprises. A few private banks of significant size still exist, but the author foresees that they will in time have need to reply upon a board of directors and a body of employees, ceding to them over time a degree of control that changes the character to more resemble a joint-stock bank and, upon the retirement of the individual who founded the organization, to become joint-stock banks.