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IN last chapter an
account was given of the revolution in banking legislation effected by
the three Acts passed under the auspices of Sir Robert Peel, for the
three kingdoms respectively. To complete the survey of banking in
Scotland to the close of the year 1845, only a few further particulars
require to be specified. In 1844 the National Bank of Scotland increased
its paid-up capital from £500,000 to £1,000,000. The new shares were
allotted to the existing proprietors. As it does not appear that any
premium was required, and as the market price was about 50 per cent
premium, this would constitute a large bonus. The shares were at the
same time converted into stock. The Commercial Bank of Scotland
absorbed, in the middle of the same year, the Arbroath Banking Company,
a small joint-stock bank, which seems, like Dogberry, to have had
losses, of which, however, it was not so proud as to resist the
temptation of security under the agis of the brilliant metropolitan
establishment which had so rapidly and surely won success in the banking
field.
Early in 1845 there seems
to have been an attempt to form a new bank in Glasgow, which, however,
was unsuccessful. But that it assumed concrete form is indicated by a
remark in a contemporary stockbroker's circular—"Clydesdale is also
better, in consequence of an arrangement they have entered into with a
second establishment recently formed under the title of the `Glasgow'
Bank, which has not succeeded." [R. Allan, 31st January 1845. This was
the third company of that name.] The Western Bank increased their
capital at this time, by £300,000, making it £1,300,000, which enabled
them to add £120,000 to the reserve fund. They also bought the business
of the Ayrshire Banking Company, giving them a premium of £60,000. The
Ayrshire had existed for seventeen years, and had nine well-placed
branches. In this same year some excitement was occasioned by the
removal from office of Mr. John Thomson, cashier of the Royal Bank of
Scotland. This unusual incident was occasioned by Mr. Thomson's refusal
to retire gracefully by resignation, when the interests of the
establishment seemed to the directors to require a change of management.
Mr. Thomson angrily addressed the proprietors on the subject, but the
nature of his defence only served to justify the action of the board. He
subsequently became manager of the Edinburgh and Glasgow Bank, and in
that capacity he did not disprove the wisdom of the Royal Bank board in
relieving him of his duties.
During November 1845, a
sharp stock exchange panic occurred, as the result of long-continued and
excessive speculation in railway scrip. The effects were very acute
while it lasted, and heavy losses were sustained by private persons; but
the banks only benefited by an increased demand for advances and
improved interest rates. The market quotations of their stocks, however,
were materially lowered by forced sales on the part of embarrassed
holders.
It will be proper to
refer here to a species of company which, about this time, was the
subject of a speculative mania, and whose operations were to some extent
allied to banking. Indeed, some of these companies actually styled
themselves "banks," although most of them were content with the less
pretentious and more appropriately descriptive term of "exchange
companies." The occasion of the formation of these companies was the
great development of all classes of joint-stock associations, and more
particularly of railway companies, to which reference has already been
made. This extensive joint-stock enterprise was, to a large extent, mere
speculation, and applicants for shares had very often no intention of
retaining their allotments longer than was necessary to secure the
premium to which public credulity and the wiles of promoters usually
raised the shares soon after the floating of the company. In order to
carry on these transactions to the best advantage, speculators sought
for advances on the security of their stocks.
Banks looked on such
business as beyond the limits of their legitimate profit; but the demand
for accommodation produced the necessary means for supply. Exchange
companies sprang into existence, and achieved a rapid and brilliant
success, beyond the expectations of their projectors. It was in Glasgow
that this industry was originated, and where, also, it was most
extensively carried on. The first of these companies formed in Scotland
appears to have been the Glasgow Commercial Exchange Company, which
commenced business in May 1845. The capital was £1,000,000, of which
half was paid up. Before the close of that year four similar companies
were formed in Glasgow, and other two followed soon thereafter. In
Edinburgh only one exchange company seems to have been established,
although another was projected towards the close of 1846 ; but Aberdeen
and Dundee helped to swell the list. The Edinburgh establishment was
called the Exchange Bank of Scotland, [Paid-up capital £350,000,
dividend 6 per cent, share £100, £50 paid, price £38:15s.—R. Allan, 28th
April 1848. In the official stock list of 3rd August 1846, the shares
are stated as £10, £5 paid, price £5:10s.] and was under the management
of Mr. Duncan M'Laren, afterwards well and honourably known in
connection with the affairs of the city of Edinburgh. It obtained a
royal charter in December 1846.
The extent of the
operations of these companies may be estimated from the fact that they
usually had a full staff of officials, such as manager, secretary,
cashier, and accountant, with a staff of clerks to correspond. Indeed,
they aimed at appearing as thoroughly-equipped banking offices. As,
during the height of the speculative mania which followed the brilliant
harvests and general prosperity of the years 1842-45, speculators paid
from 5½ per cent to 8 per cent for advances, while deposit money could
be obtained with a margin of 2½ per cent profit, the operations of these
companies were attended with very great success. But, like Sancho
Panza's enjoyment of power and luxury, this bliss was of short duration.
The approach of the severe crisis of the autumn and winter of 1847-48
curtailed their business, and during the crisis they suffered heavy
losses—a contingency which they seem never to have contemplated. Public
confidence in them completely broke down, and in rapid succession they
collapsed. Three of them disappeared in 1848, after a brief career of
three years' duration. The Edinburgh company survived till 1852, one of
the Glasgow companies till 1853, and another maintained till recently a
sort of galvanic existence, and a place in the Banking Almanac, although
even its name is but little known. This is the North British Bank. It
was established at Glasgow in August 1845, and in 1872 its paid-up
capital was stated to be £120,000, held by 155 partners, on which it
paid a dividend of 1 per cent. [1848—Paid-up capital £250,000, no
dividend, share £50, £10 paid, price £1 : 17s. 3rd August 1846—price
£10.] In recent years, however, it seems to have refrained from paying
even that small dividend, and it has, at the same time, modestly
withheld particulars as to its financial position. Latterly it conducted
a bonded store business, but was wound up some years ago, the business
being taken over by the Warroch Street Stores, Ltd.
The theory on which these
companies were formed was by no means an unsound one. Had they been
managed with sufficient caution, and had time been given them to secure
consolidation, they might have weathered the storms which inevitably
disturb the financial world in well-marked cycles. But they were formed
at a time when the securities in which they dealt were at an inflated
price, and they acted as if the vast extension of financial activity
which brought them into being would prove perennial. They were guilty,
moreover, of grave errors in business management in regard to the
securities they accepted. They also indulged in reckless competition
with each other, and, strange to say, involved themselves in each
other's liabilities, by taking over exchange companies' shares as
security for advances. The soundness of the business, when properly
conducted, is best evidenced by the fact that, when exchange companies
had paid the forfeit for their bad management, banks adopted the
business of advancing on stocks as one of their regular departments, and
have since conducted it with much profit. In a pamphlet [Banks and
Exchange Companies. George Kinnear. Glasgow. 1847. The author was
manager of the Glasgow Commercial Exchange Company. He also issued A
History of the Rise of Exchange Companies in Scotland, and a Defence of
their Proper Business.] written in defence of the companies when they
were beginning to get into difficulties, a complaint was made that the
banks attempted to suppress the companies by the formation of an
association to deal with this business in their own interest, under the
designation of the British Trust Company.
The interval of about ten
years and seven months which elapsed from the crisis of 1837 to that
which we must now refer to, shows the usual rotation of experiences in
financial and commercial affairs. The years 1838-42 are marked in the
main by quiescence. In exception to this, however, it must be noted that
the last great burst of the bank-projecting mania in Scotland took place
in 1838. But this would seem to have been more the completion of
projects conceived previous to the crisis, and found to be feasible in
Scotland (where most of the crises from 1793 to 1857 fell with
extraordinarily small effect, so far as banking is concerned), than a
new outburst of speculation. The harvests of 1842-3-4 were exceptionally
good, and were accompanied with great general prosperity. With this the
speculative fever broke out with great intensity. The special form it
assumed was the formation of railway lines. No number of railway
projects seemed too many to the insatiable public. Every prospectus that
appeared was greedily seized on, and shares applied for and gambled with
both before and after allotment. Money was borrowed on shares obtained,
in order to apply for the next venture. The game reached its maximum in
1846, and by the fourth quarter of the next year it was all over.
In 1847 there was a
marked diminution in the railway mania, although the commitments were
still on a sufficiently large scale. Speculation was giving way in 1846.
This was the second year of the great Irish potato famine, and the
famine fever had commenced its ravages. Distress in England, too, was
manifest. Next year matters grew worse. Money was scarce and dear.
Bankruptcies were numerous. The Bank of England minimum discount rate
rose steadily front 3 per cent to 8 per cent during the months from
January to October. The change was so impressive that a writer in 1847
asserts, with pardonable exaggeration, that there was a sudden and
almost total cessation of commerce, and that mercantile cities appeared
as if men were liquidating debts, winding up concerns, and retiring.
[The Crisis and the Currency. John G. Kinnear. Edinburgh. 1847.] From
the 18th to the 25th of October a state of acute crisis existed. Several
joint-stock banks and a number of private banks failed in various parts
of England. Assistance could hardly be got by men possessed of the best
securities on any terms. On the 25th of October the crisis suddenly
ceased. Accommodation could be had with ease, and was comparatively
little asked for.
What was the cause of
this extraordinary change? How were men's minds suddenly placed at rest,
and their strained financial relationships instantaneously relaxed? The
patent perpetual self-acting and generally beneficent Bank Charter Act,
by which the powers of the Bank of England were restrained for the good
of the community, was suspended by an arbitrary and illegal act on the
part of the Government. As soon as it was known that the Bank of England
would be allowed to set aside the provisions of the Act of 1844, which
prohibited the issue of notes by the issue department beyond a fixed
amount against securities, plus the amount of bullion held by the
department, the alarm subsided. Holders of securities, who before were
panic-stricken to find that they were cut off from all assistance, were
now perfectly satisfied with the knowledge that, should they require
accommodation, they could easily get it, and in most cases did not even
seek it. Thus, three years after Sir Robert Peel had so elaborately
adjusted the basis of the financial system of the country, it came to a
dead-lock. The restriction imposed on the Bank of England acted like the
sudden jamming of an engine's works—intense friction and heat were
produced. When the restriction was removed, the engine worked to the
utmost satisfaction.
The effect of this crisis
on the banking business of Scotland was not specially noticeable; but
one point calls for attention. The Western Bank of Scotland, to whose
affairs we have already referred, again got into difficulties. It does
not appear, however, that the other Scottish banks were aware of this at
the time. Pursuing its habitual course, despite remonstrances on the
part of the other banks, and reluctantly-granted promises of amendment,
the Western Bank had been lending out all its funds, re-discounting its
bills, and neglecting to provide a reserve of convertible securities. In
order to meet its engagements in London, it applied to the Bank of
England, and got the loan of £300,000. This it repaid soon afterwards,
owing, doubtless, to its growing popularity in Scotland replenishing its
coffers. At the same time, the past-due bills account was running up to
an alarming extent. Nothing could avert the fate in store for this
establishment, its directors and manager being the complacent subjects
of an infatuation that is almost incredible. For it must be remembered
that, up to the time of which we speak, it would have been an easy
matter for the bank to reverse the policy which precept and experience
had both condemned, and at the same time to have permanently established
one of the best banking businesses in Scotland. The capital was nearly,
if not entirely, intact. The bank enjoyed the utmost credit with the
public, if not with the other banks. Losses might have been gradually
made up from the large profits earned, and before the next crisis came,
the bank might have been in a thoroughly strong and healthy state. But
all the experience of bankers in the past, all the reason and wisdom of
those of the present, were contemptuously thrown aside by men who were
mere tyros in the business. Carried away by the brilliance of the
success they had achieved by their active and daring policy, they did
not pause to secure the conquest they had made. When they had again to
encounter trial, they found it ruin. |
