THE COLONIST. NELSON, FRIDAY, OCTOBER 21, 1864. BANKING AND PAWNBROKING.

Colonist, Volume VII, Issue 729, 21 October 1864, Page 2

THE COLONIST. NELSON, FRIDAY, OCTOBER 21, 1864. BANKING AND PAWNBROKING.

"When the action claiming damages for libel afc the instance of the "New Zealand Banking Corporation (Limited)" against the Otago Daily Times was first announced, " damages £5000," we believe that a large majority of the general public, not resident in Otago, understood the plaintiffs to be the Bank of New Zealand; and we have heard people express surprise that such an institution should have deemed it necessary to go into court for a "certificate of character." But; it happens that the banking plaintiffs in this action have nothing whatever to do with the Bank of New Zealand. They form a company established in London, and their sole representative, agent, manager, director, and attorney is the special mover of this action, Mr. John Reid Mackenzie, who carries on the business of the bank in Dunedin. "We do not know whether there is another branch in New Zealand. The action originated in an article commenting on the terms of a mortgage of the entire property and plant of the Dunedin Gas Company to the plaintiff as manager of the Corporation, together with certain debentures of the Gas Company's, for an advance of £12,000. This money had originally been advanced by the Bank of New Zealand, which was then pressing for repayment, and Mr. Mackenzie on being applied to, undertook to relieve the Gas Directors by advancing the money. There was an arrangement subsequently arrived at by which the gas works were leased to their maruiger Mr. Hutchison, a course on which the defendants' journal somewhat strongly animadverted, as can be seen from the alleged libellous article which we reprint in another column. It appears from Mr. Mackenzie's own evidence in the case that his bank was not a bank of issue, that he issued the notes of another bank, under an arrangement, that he had not made all the quarterly returns required by law as showing the assets and liabilities of the bank, in a regular quarterly abstract, and that he only had done so on an application being made therefore on behalf of the Government. On the other hand, we cannot observe in the report of this gentleman's evidence that he points out a single instance wherein loss has accrued to his bank in consequence of the article complained against. Individually Mr. Mackenzie himself has no locus standi in such an action, i except as a member, or attorney, manager,] director, or what not, of this corporation. The action is one at the instance of a corporate body which has " neither a soul to be saved, nor a nose to be pulled." Personally, therefore, Mr. Mackenzie could not claim any damages as a solatium for wounded feelings, which is sometimes attempted on behalf of private complainants. A corporation, like a board, has no feelings to be salved. Its bowels lie in its strong box. Actual damage, really sustained, ought to bo shown by a corporation, which, as this New Zealand Banking Corporation has done, goes into court demanding reparation for injury. The injury we apprehend, must be real and proved. On this subject not a single word was said by Mr. Mackenzie, nor was a single question asked him by his counsel on the point. There was an error touching a matter of fact which was repeated with unnecessary frequency in the article. It is that the Corporation was unincorporated. Now under " The Companies' Act of 1862," (an act of the British Parliament entitled "An Act for the Incorporation Regulation, and Winding up of Trading Companies and other Associations,") the plaintiffs, by the fact of their Company being registered conformably to this Act, were thus incorporated, just in the same manner as a joint-stock company in New Zealand is incorporated by simple registration. But the curious circumstance in the action is that on the one hand, the defendants should think they made an imcompliineutary comparison by referring to the French Government pawnbrokiug establishment, the Monte de piete of Paris, seeking to show that the transaction of the plaintiffs with regard to the Gas Company was similar to those of the Parisian Lombard House; and on the other, that the plaintiffs should take the comparison as an insult to be wiped out by damages, and address the jury strongly thereon. Let us look at a few facts, and it will be found that the difference between the two kinds of establishments ismuch less than people are apt to suppose. There is one special distinction, which is that pawnbrokino' consists wholly of advances on moveable security, while discounting, lending money on mortgage or other security, forms only one of the three main branches into \Vhich the business of banking is divided, namely, —deposit, discount, and issue of notes. It will be allowed that Mr. J. R. M'Culloch, the author of that deservedly popular, and everywhere relied on Avork, the " Dictionary of Commerce and Commercial Navigation," is an authority on all questions relating to commercial dealings and commercial nomenclature. What does this acknowledged authority say of pawnbrokers ? Why tins . A pawnbroker is a species of hanker, who advances money at a certain rato of interest upon security of goods deposited in his bands, having power to sell the goods if the principal sum and the interest thereon be not paid within a certain specified time. "The Popular Encyclopedia or Conversations Lexicon," under the head Banking says: &> j Another branch of banking business is the discounting of promissory notes and bills of exchange, or the lending of money on mortgage, pawn, or other security. "Webster in his unabridged dictionary gives the following definition of pawn : Paion.— Something given or deposited as security for the payment of money borrowed. A pledge.— Pawn is applied only to goods, chattels, or money, and not to real estate. In a well written article on banks, in " Chambers's Cyclopedia" we find the following which shows that it is.perfectly common for banks to lend money otherwise than on bills, Government or railway stock, or on real security. There is no cause for astonishment at this practice, because it is now common for banks to obtain moveable pledges in security of their advances. We have au instance of a bank in this province obtaining an absolute title to a steamer to whose owners it had advanced money, Probably

this was as collateral security, and over and above the personal obligation of some of the owners. The writer in the Cyclopedia says:

"The owners of commodities lying in a public warehouse, may obtain a loan on depositing witb the bank the warratits or certificates of ownership. It is seldom in this country that banks lend on mortgages over land. Borrowers, in these cases, generally take loans to lie unpaid for a few years; but to have his money locked up in that way does not suit the trade of a banker. Where a banker finds the security which ho has received to be insufficient, and repayment of the loan is not forthcoming, he will, of course, like any other trader, to avoid making a bad debt, take any other security the debtor can give him— such as a manufactory or a mine. Banks have in this way frequently become involved in manufacturing transactions, in theiv attempts to make more money of the securities than they would have done by an immediate sale of them; they havo become manufacturers and miners, and suffered great losses in consequence. And it is not to be supposed that banks always abstain from making loans when the security is known to be doubtful; far from it: basks, like other commercial establishments, have besn, on many occasions, recklessly managed. In trying to push business, they have made loans on insufficient security, and banks are under strong temptation, to which they frequently yield, when a trader largely indebted to them is approaching bankruptcy, to sustain his credit by additional advances, in the hope that he may retrieve his affairs, and pay in full both the old and the new advances. The result is often the loss of both. Conduct of this kind has been the ruin of many banking establishments in England, of two or three in Ireland and Scotland, and elsewhere."

The practice here stated is not deemed sound banking management. Mr. Gilbart, the late General Manager of the London and "Westminster Bank, who died a few months ago, is the author of an elaborate " Practical Treatise on Banking," in two volumes. On the subject of " dead loans," that is, loans which are likely to continue unpaid for a long period, Mr. Gilbart says (Vol. 1., p.p. 43, 44, 46) :— J

The difference between short and dead loans may be illustrated by a reference to Liverpool and Manchester. The Liverpool bankers make large advances by way of loan, but usually on the security of cotton. The cotton is sold in a few months and the banker is paid. At Manchester the banker advances his loans on the security of mills and manufactories ; he cannot get repaid ; and after a while the customer fails, and the mill or manufactory when sold may not produce half the amount of the loan.

During the commercial crisis of 1857, numerous cases of this kind occurred in the Manchester and Glasgow cotton trade, and in the linen manufacturing district of Forfarshire in Scotland. "We quote further from Mr. Gilbart :—

" Dead loans are sometimes produced by lending money to rich men. A man of moderate means will be anxious not to borrow of his banker a loan which he will not be able punctually to repay, as the good opinion of his banker is necessary to his credit. But a man of property has no scruples of the kind; he has to build a house, to improve his estate, or to extend his manufactory,- and he is unreasonable enough to expect that his banker will supply him with tho necessary funds. He believes ifc will be only a temporary advance, as he will shortly be in possession of ample means. The banker lends the sum at first desired ; more money is wanted; the expected supplies do not arrive, and the advance becomes a dead iock-up of capital. The loan may be very safe, and yield a good rate of interest, but the banker would rather have the money under his own control. " Dead loans are sometimes produced by lending money to parties to buy shares in public companies. Tliere was too much business of this kind transacted by some bankers a few years ago. The party did not sit first, perchance, apply to his banker to enable him to purchase the shares ; but the calls were heavy, and his ready money was gone,- lie felt assured, however, that iv a short time he should be able to sell his shares at a high profit; he persuaded 1113 banker to pay the calls, taking the shares as security. Other calls were made, which the banker had to pay. The market fell; and the shares, if sold, would not pay the banker's advances. The sale, too, would have caused an enormous loss to the customer. The advances become a dead loan, aud the banker had to wait till a favorable opportunity occurred for realising his security.

"We have said that dead loans are usually advanced upon inconvertible security. Sometimes that security consists of a deposit of deeds relating to leasehold or freehold property. In London, however, this kind of security is not considered desirable, and tho following rules are usually observed:— "No advances are made upon tho security of deeds alone ; they are taken only as collateral security; and then only to cover business transactions, and incases where the parties are supposed to be safe independently of deeds.

"Tho value of the property should be much higher than the sum it is intended to guarantee. When this is the case, and the parties fail, their creditors may take the deeds, and pay the "'ebfc due to the bank. The main use of taking deeds is to have something to fall back upon in this "vay. A customer should never receive more accommodation from having deposited his deeds than that to which he is legitimntsly entitled. ]S To banker takes deeds, if there is the slightest probability of his being compelled to realize the property, as the legal difficulties are vert) great."

It becomes apparent from some of the foregoing extracts and examples that, there can, in reality, be no slur iv comparing a certain class of bank transactions with those of an ordinary pawnbroking establishment. In principle they are precisely similar, and differ only in value and in the* class of customers. The history of banking in England would show that both had a common orio-in. Not only is property pledged as security in both institutions, but in both moveable property is impignorated, aud the right to sell exists in both. At least such transactions frequently appear in the business of banks.

In this Dunedin case there was, as we learn by the evidence, a much more distinct method of pledging or, lodging in security, than in ordinary bank advances, where it is customary to render borrowers personally liable as well as to hold security over property collaterally.

The plaintiff in his evidence stated that if the debentures of the Gas Company handed over to the bank and sent to London for negotiation " are not sold before June, 1865, I can foreclose the mortgage and sell the works altogether. The works will be sold immediately on advice being received that the debentures are unsaleable." Here described by the plaintiff himself, is the power of sale, which in questions of advance attaches alike to a bank as to apawnbrokinnestablishment. The latter, too, advances money without taking the personal security of the owner of the article pledged in security of such advance. This is exactly what the "New Zealand Banking Corporation (Limited) " appears to have done in takinothe Dunedm Gas Works as security for the money advanced. The personal security of the Directors of the Gas Company, was not taken, so that the works and debentures were the sole' and not merely collateral, security. Here is the statement; Mr. Sewell is examining the plaintiff, Mr. Mackenzie :— °

" You said you knew the names of the shareholders They were all first-class men P—Yes, though I considered them first-class men, I did not consider I oould look to them for any deficiency. I looked to the property• t 7° U di d un? lo°k t0 having m? to them P —I know I had no recourse against them,

" You advanced the money on security of the debentures and property of the* Company ?—Certainly. " Mr. Barton objected to the questions. " Mr. Sewell: What I want to know is did the plaintiff take additional security of the shareholders ?

" Mr. Barton said the Gas Company was a limited liability company, and therefore he had no recourse.

" Mr. Sewell: It is this. Whether you looked to any other security than the mortgage of property of the company and debentures?

" The Judge : We know what the mortgage is, the question is had you any security besides the mortgage?

" Witness: None."

The authorities we have quoted prove, we think, the close analogy there is between banking operations of a certain kind and the transactions of a person who exhibits the sign of the Lombardy Arms ,• and this particular transaction touching the plant of the Dunedin gas works confirms— if confirmation were necessary —the accuracy of those authoritative descriptions. The verdict of the jury in the face of evidence so strong as this, seems to us somewhat incongruous ; but there were several points held in reserve for the decision of the Judge, which may alter their verdict. After evidence like what came from the principal plaintiff, the only one really acting in the matter, (because the London head could have known nothing of the matter when the action was raised,) and after aiull consideration of what constitutes banking and pawnbroking, if such consideration were given at all, we should have thought that a farthing damages would have been more than ample recompense for the actual damage inflicted.

Since the foregoing article was in type, the mail from the South arrived yesterday, bringing intelligence of the overturning of the decision of the jur3r, a nonsuit being granted, and a new trial ordered by a full bench of the Judges sitting in banco. In our notice of the trial in another column, the grounds on which a new trial was granted are narrated. The reports of the proceedings and council speeches in the papers occupy some eight or nine pages of close matter, which we have not had time as yet to examine ; but from a cursory glance we can see that an adverse decision may tend considerably to affect the right of the New Zealand press to comment freely and fairly on what are undoubtedly public questions, which for the benefit of the public, ought to be open to the fullest criticism. "We may return to the question at another time.