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THE action of our history
for the years 1769-72 centres and culminates in the rise and fall of the
banking-house of Douglas, Heron & Co., trading under the designation of
the Ayr Bank. With the exception of the Darien Scheme, the failure of
which is attributable in great measure to circumstances independent of
its constitution and management, there has never been in the history of
Scotland so signal an instance of financial mania. We do not mean that
the contract of co-partnery was framed on erroneous principles, or that
the operations of the bank were absolutely prejudicial to the country.
On the contrary, the constitution of the company was carefully drawn,
and provided the usual preventatives to mismanagement; while advances
made to customers had a very stimulating effect on the agricultural and
other industries of the nation. The madness consisted in the unwritten
principles on which the promoters started and carried on the concern.
The promoters were, seemingly, men who, like too many business men of
the present day, thought that the old banks selfishly studied their own
interests to an extent both unnecessary and injurious to the progress of
the industries of the country; and that, at the same time, they were
monopolising a lucrative trade, which could be profitably competed for
by men of larger views.
They, therefore (to quote
their own words), "considering that the business of banking, when
carried on on proper principles, is of great public utility,
particularly to the commerce, manufactures, and agriculture of a
country, at the same time that it may yield a reasonable profit to the
bankers concerned in it ; and likewise considering the necessity there
is in the present situation of the country, that a Banking Company
should be created on proper principles at this juncture . . . resolved
to establish a Banking Company upon a solid, creditable, and respectable
footing." The contract of copartnery is dated 24th August 1769, and
provided for a capital of £150,000. Among the original shareholders,
whose subscriptions amounted to £96,000, were the Duke of Queensberry
and Dover, Governor; the Duke of Buccleuch; the Earl of Dumfries,
Director; the Earl of March and Ruglen ; the Hon. Archibald Douglas of
that Ilk; Patrick Heron of that Ilk, and several other distinguished and
respected names. The list numbers 136 in all, and embraces men of "rank
and fortune," lawyers, merchants, shopkeepers, etc., but no bankers.
The advent of this great
company was the occasion of general congratulation, of which the
following may serve as a specimen: "The utility and advantage of a Bank
of this kind to the country is too obvious to require any commentary.
Its influence upon the commercial part of this nation, the evident
tendency it must have to forward the improvement of the country, and the
aid and support which it must naturally afford to its manufactures, were
the inducements of those concerned to establish it, and are the benefits
expected to be derived from it--events wished for by all who are lovers
of their country." This was a euphonious, perhaps inspired, declaration
of the origin of the bank, which is more plainly and authoritatively
described by Sir William Forbes. " Some of the houses which carried on
the banking business in Edinburgh, having embarked in extensive
speculations for the purchase and cultivation of lands in the newly
acquired West India Islands, required a larger capital than their own
resources could command. To this must be added, the rage which then
began to take place for building larger and more expensive houses than
had been customary in Edinburgh before the plan of the New Town was set
on foot ; and larger houses led to more extensive establishments, as to
furniture, servants, and equipages. At the same time those projectors
and improvers, flattering themselves with the prospect of the immense
advantage to be derived from their speculations, launched into a style
of living up to their expected profits, as if they had already realised
them. Such causes combined had induced those gentlemen to have recourse
to the ruinous mode of raising money by a chain of bills on London; and
when the established banks declined to continue a system of which they
began to be suspicious, the Ayr bank was erected."
On 6th November 1769, the
head office was opened at Ayr, and soon afterwards branches were opened
at Edinburgh (in Canongate, 31st January 1770) and Dumfries. Each of
these offices exercised independent powers in the conduct of business,
under separate boards. Agencies were established at Glasgow, Inverness,
Kelso, Montrose, Campbeltown, and elsewhere. Among the partners were
many members of trading firms, who immediately secured for the new bank
an extensive advance business. Indeed so large were their demands, and
so accommodating were the directors, especially at Ayr, that the coffers
of the company were speedily emptied. This circumstance, however,
occasioned no uneasiness. When the capital and deposit money were
exhausted, they had an inexhaustible treasury from which to feed the
insatiable demands of their customers. They had paper money "for the
makin'," and they proceeded to manufacture it right heartily. Before
long, however, their inexhaustible treasury began to manifest symptoms
on which they seem never to have calculated. The notes came back on them
for payment almost as quickly as they were issued. The directors had
little specie to pay them with, and the partners were paying up the
periodical instalments of their subscriptions in an unsatisfactory
manner. Difficulty, however, is the opportunity of genius. A banker of
merely average ability would, in such circumstances, restrict his
advances and endeavour to replenish his cash reserves. But the directors
of the Ayr Bank, like those of two long-to-be-remembered Glasgow banks,
breathed the upper strata of the economic atmosphere. Their mission,
like that of their predecessor, John Law, and the typical modern
American, was that of the "eye-opener"; and it must be admitted that if,
in a purely literal and technical sense, they failed, in another and
hardly less literal sense, they achieved their object a couple of years
later.
Instead of contracting
their business as they ran out of funds, they increased their
engagements. To provide themselves with funds, they arranged with
certain firms in London to accept bills on their account at a
commission; and with their notes they purchased bills of exchange on
London from the Edinburgh bankers to replenish their account with their
London correspondents. Thus assisted, and aided by a call of 20 per cent
on the shareholders, the affairs of the company proceeded pretty
smoothly for some time during the year 1770, though the London debt
stood at £85,000. Bills maturing were met by renewals, which were
readily granted, as the commission was tempting, and the liability of a
wealthy proprietary was unlimited; and further requirements were
similarly provided for. But early next year the London debt assumed a
threatening aspect. Dimsdale & Co., the London correspondents, refused
further assistance. A deputation to London, however, overcame obstacles
and arranged for further credits. Meantime the management went from bad
to worse. Irregular advances were made to privileged individuals; the
circulation of notes was forced by means of paid agents scouring the
country for specie and notes of other banks; the affairs of the company
were represented to the shareholders as in a flourishing condition; and
a dividend was declared in May 1771. The business of John Macadam & Co.,
bankers in Ayr (the Air Bank), was purchased on 1st January of that year
for £18,000; and, on the following 29th October, that of Alex. Johnston,
Hugh Lawson & Co., in Dumfries, was acquired for £7350. Neither of these
houses seems to have been in a satisfactory condition; and Johnston,
Lawson & Co. were virtually insolvent. Meanwhile the capital had been
increased beyond the originally designed £150,000, the old directors
were regularly re-elected, and affairs went on in the usual way.
In May 1772, the
directors began to realise the gravity of the situation, and resolved on
retrenchment. But the opportunity for such a course had passed, and
irretrievable ruin stared them in the face. Even if they had had the
moral courage (which they had not) to put their resolution into force,
their power of doing so was gone. They were so hopelessly involved in
the web they had themselves woven, that they could only passively submit
to the fate that awaited them in a few weeks. Their bills on London had
rapidly augmented until they amounted to about £400,000; they had more
than £200,000 of notes in the circle, and £300,000 of deposits, and but
small available funds. The Edinburgh banks had refused to hold their
paper, and even their hitherto fertile genius was at last unable to
devise an alleviation for their distress. They struggled on,
nevertheless, and, aided by the general ignorance of their position,
managed wonderfully to maintain their credit.
But in the afternoon of
Friday, the 12th of June, a horseman, in extreme haste, rode into
Edinburgh. He had travelled from London in the extraordinary space of
forty-three hours. The news he brought accounted for his speed. The
banking house of Neale, James, Fordyce & Downe had failed, and dragged
down other firms with it, from which a terrible panic had ensued. These
were dire tidings for the financial houses of the Scottish metropolis.
All, except the few who had preserved the even tenor of their way,
unallured by will-o'-the-wisp dreams of suddenly-got wealth, read their
doom in the message. To none must the news have had more purport than to
the Edinburgh Board of the Ayr Bank, who, although not at the chief seat
of management, were perhaps even more involved than the Ayr Board in
maturing and carrying out the credit and exchange transactions. They had
intimate relationships with most of the private banking houses in
Edinburgh, in order to assist the floating of their paper.
The first of these firms
to collapse was Fordyce, Malcolm & Co_, who stopped payment three days
after the arrival of the news from London. Next day, the 16th, Arbuthnot
& Guthrie followed suit. These failures, and fears of more to follow,
seem to have raised the first excitement to a considerable pitch. A
rumour got abroad that the bills of the Ayr Bank were refused for
discount in London. "Terrified with the apprehension that an immediate
stoppage would be the consequence, the common people ran in crowds to
draw specie for their notes; and on Tuesday evening the following
advertisement was handed about in Edinburgh: `BANK OFFICE, CANONGATE,
June 16, 1772. —Whereas the Branch of Douglas, Heron & Co., here, have
for these two days past had an immense demand for specie, from the lower
class of people, in exchange for notes, owing, as it is suspected, to
some ill-grounded reports raised by foolish or malicious persons
respecting said branch, a reward is therefore offered of one hundred
pounds sterling, to any one who will discover the person or persons who
have been concerned in raising such an infamous report; the reward to be
paid by Mr. Hogg, cashier, upon conviction of the offenders. For
Douglas, Heron & Co., Tho. Hogg, cashier.' This advertisement, joined
with the knowledge of the solid foundation of that company, in a good
measure quieted the minds of people, and the ferment had greatly
subsided. But new failures continuing to happen, the demands on them for
specie became greater than ever." On the 24th June, the important firm
of Wm. Alexander & Sons, with Gibson & Balfour, Andrew Sinclair & Co.,
Johnstone & Smith, and Garbet & Co.—all well-known houses—suspended
payment. [Sir William Forbes mentions (p. 42), in a list of firms which
failed in consequence of the Ayr Bank collapse, an Anthony Ferguson. All
the other names are those of bankers, and it may be that Ferguson was
also engaged, more or less, in banking business; but his name does not
appear in other lists of Edinburgh bankers. Sir William does not,
moreover, give his list explicitly as that of bankers.]
The demands on the Ayr
Bank had now become too great for their restricted treasury; and on the
morning of the 26th they issued the following circular:—"Air, June 25,
1772.—The company of Douglas, Heron & Co., Bankers in Air, taking into
their consideration the present state of the credit of this country, and
the uncommon demands that have been made upon them for specie, owing to
causes sufficiently well known, have come to a resolution to give over,
for some time, paying specie for their notes. But as the country, who
have received the most liberal aids from this company, cannot entertain
the smallest doubt of the solidity of its foundation, it is hoped that,
on occasion of a national emergency of this kind, the holders of their
notes will not be under any alarm." The circular, which was signed by
John Christian, cashier, proceeded to declare that interest at 5 per
cent per annum would be allowed on notes remaining in the circle, for
which a bond was duly executed on 4th July succeeding. The Ayr office
appears to have closed on 22nd June.
Thus passed away in a
thunderstorm, originated, or at least greatly aggravated (so far as
Scotland was concerned), by their own actions, a great house who had
promised much, and of whom much had been expected. Their hopes of
resuming business speedily vanished amid the engrossing difficulties of
providing for their outstanding liabilities. The Bank of England had
refused assistance,--they had probably enough on hand with their clients
in London, for the crisis there was of the gravest nature, and they had
already £150,000 of Ayr Bank paper on their books,—so the directors, who
had been sent to London to negotiate a loan, were at their wits' end how
to accomplish their mission, notwithstanding they had two noble dukes
and many other influential and interested friends to assist them.
Eventually they succeeded in raising £356,715 on most exorbitant terms,
viz, at the rates of an annuity of £100 a year for life on payment of
£700 or on two lives for £800, with the fortunate proviso of option of
redemption at the purchase price plus a half year's payment. The total
sum raised, as afterwards redeemed under authority of a special Act of
Parliament, was £457,570.
These events were
productive of much hardship to the public, for, although the
shareholders of the Ayr Bank were, for the most part, well able to meet
their losses, the failure of so many bankers produced a general
distrust, which for a time paralysed the note circulation of most if not
of all the banks. In this connection it is gratifying to note the
position of the three public banks and the leading private bankers in
Edinburgh. These, or at least the two old banks, had for some time
previous to the crisis been expecting and providing for it. They had
refused dealings with Douglas, Heron & Co., and had made ample provision
for the catastrophe which they anticipated as the consequence of that
company's proceedings. The result is recorded by Sir William Forbes.
"Besides the Bank of Scotland, Royal Bank, and British Linen Company,
which were established by public authority, the only private companies
that continued solvent were Mansfield, Hunter & Co., William Cuming &
Sons, and our own." From other records, it would appear that two or
three individual bankers also survived the crisis; but it is probable,
from the omission of reference to them by Sir William, that they
temporarily suspended payment, or that their banking business was of
small extent. "On Monday, [presumably the 29th June], a very smart
demand for money took place on us all, just as had happened the
preceding week in London [Black Monday, the 2 2nd]. This was a new and
unexpected circumstance; but as neither our house nor any of those
others had been engaged in the circulation carried on from Scotland, and
were sufficiently provided with funds to answer promptly all the demands
that were made on them, the panic abated after two o'clock on Monday,
and the public confidence in their solidity was restored."
Glasgow and the provinces
of Scotland suffered but little, in comparison with Edinburgh, in this
crisis; as, with the exception of Douglas, Heron & Co.'s connections in
Ayr and Dumfries, they were not involved in the fictitious exchange
business to any great extent. The Merchant Banking Company of Glasgow,
however, was forced to suspend payment on the 9th of July. They
announced on that day that they would resume on the 9th of October, and
they appear to have been able to do so sooner. As confidence was felt in
their solvency, their notes, together with those of the other local
banks, remained in free currency. Similar confidence was shown in other
banks throughout the provinces. William Alexander & Sons resumed
business in Edinburgh on the 13th of July; but whether they retained
their banking as well as their mercantile business does not appear.
It was a fortunate
circumstance in connection with this crisis that an Act of Parliament,
amending the bankruptcy laws of Scotland, had been passed just in time
(the Royal assent was given June 1772) to preserve the equality of
rights of creditors in the numerous bankruptcies that occurred.
Previously, creditors ranked by priority of arrestment, and thus debtors
could give and creditors secure undue preferences. The Act 12 Geo. III.
cap. 72, abolished this system, and made several salutary provisions for
securing the rights of creditors.
At the time of stoppage,
the Ayr Bank had a capital stock of £160,000, of which £130,000 was
called up; but, of course, the partners were unlimitedly liable for the
debts of the company. The number of shareholders, shortly before the
crisis, was 241. The total liabilities, including the capital, were not
less than £1,250,000. These are specified in round numbers as capital
stock, £130,000; private loans (deposits), £300,000; note circulation,
£220,000 and current bills on London correspondents, £600,000. The
assets consisted of (1) advances of various kinds at Ayr, Edinburgh, and
Dumfries, amounting to £694,175 : 19s.; (2) advances at agencies which
had been established at Glasgow, Inveraray, Inverness, Kelso, Montrose,
and Campbeltown, £133,788 : 0 : 11; (3) bills of exchange, principally
held at Edinburgh, £409,079: 7: 2; making a total of banking debts,
£1,237,043 : 7: 1; and (4) an unascertained amount of fixed capital,
such as buildings and furniture in use for the business. Of the debts
due to the bank, about £400,000 consisted of advances made to partners.
On 28th September
following, the bank offices were reopened, but notes were payable in
specie only at Ayr. At Edinburgh interest was paid on notes for the
period of suspension, in specie when less than 2 Os., and in notes when
amounting to that sum. For the convenience of holders of large notes,
small notes were given in exchange. The Edinburgh banks and private
bankers would not receive Ayr bank notes. The bank continued to struggle
on in this fashion for nearly a year after resuming, but at a general
meeting of the partners in August 1773, it was unanimously resolved to
give up business. The liquidation was conducted in Edinburgh. Although
the shareholders were well able to bear the strain of meeting the
liabilities of the partnership, the losses were felt very severely. No
less than £750,000 of landed property is stated to have been forced into
the market through the failure of the bank, and the ultimate loss to the
partners is estimated at £663,396 : 18 : 6. [Scotch Banks and System of
Issue, R. Somers, Edinburgh, 1873, p. 103.]
The shareholders were
very indignant at the outcome of the brilliant essay at banking into
which they had been drawn, and this feeling was much intensified when
revelations were made of gross irregularities and reckless
mismanagement. A committee was appointed to investigate the affairs of
the company; and their report, presented in August 1777, and
subsequently printed as a thick folio volume, gives details which fully
corroborate the accusations made, and forms a detailed history of the
bank. [The Precipitation and Fall of Messrs. Douglas, Heron & Company,
late Bankers in Air, Edinburgh, 1778.] The book, although now but little
read, is also valuable for the lessons it teaches. In almost all their
transactions, the directors appear to have acted in the wildest manner.
Advances for the development of agriculture were made profusely far
beyond the ability of the country at that time to sustain, and still
further beyond the resources of the bank; and worse still, the
requirements of speculative customers were freely met by the discount of
bills. As their resources failed, the directors pressed their notes into
circulation, in the false hope that they would remain in the hands of
the public. As they found that their notes came back upon them very
speedily, they resorted to raising an ever-increasing amount of money in
London by bills, until the amount of the London debt was so great that
their credit in that quarter gave way. But worse than recklessness was
proved against their. Privileged persons got advances either without
security, or on worthless cash-credit bonds and bills, to the extent of
£361,611 : 17 : 6. Even after the failure, mismanagement continued. The
raising of money on annuities, to which we have referred, was conducted
on ruinous terms, and it appears that some of the funds so obtained were
misapplied in several cases, and a sum of £6220 was not accounted for.
In reviewing this crisis,
it is evident that much of its intensity was due to the unadvisable
conjunction of mercantile with banking business, which had always been a
prominent feature of private banking. It may be thought that an
over-issue of notes was a leading feature in the failure of the bank.
But this was not so. A vigorous and sustained effort at over-issue was
made all along; but the effort failed by the physical impossibility of
making the public hold more notes than they required. The system of
exchanges, moreover, expedited the return of the notes for payment. All
the Edinburgh houses which fell, with the exception of the branch of the
Ayr Bank, were general traders and speculators, as well as bankers.
Although Douglas, Heron & Co. were not directly engaged in mercantile
pursuits, they were entirely under the influence of the mercantile
spirit. Their existence began, and their business was conducted, in
close alliance with merchant banking. The collapse of 1772 effected a
thorough revolution in this matter; and, although private banking again
assumed a very active existence, its subsequent career witnessed a
complete severance of the hitherto somewhat indistinctly defined
departments of banking and commerce.
The essential errors of
the Ayr Bank were—trading beyond their means; divided control by
permitting branches to act independently; forcing the circulation of
their notes; giving credit too easily; ignorance of the principles of
business; and carelessness or iniquity of officers. |
