|
IN its political aspects
the period from 1847 to 1857 —of which we must now treat—was marked by
stirring events. During the first six years Britain was at peace with
all the world; but the state of the nation at home was, for part of that
time, very unfavourable. The country was suffering from the effects of
the great crisis of 1847-48; cholera was manifesting itself again; the
French Revolution of 1848 disturbed men's minds; conflicts between
labour and capital were very bitter; and agitation for parliamentary and
financial reform added to the disturbed state of the public mind. The
late Dr. Norman Macleod described the year 1848 as a time of "famine,
pestilence, riots, and rebellion." By 1850 matters appear to have
improved, for the people seem to have been so far freed from material
cares as to be able to join heartily in national excitement over the
aggression of the Church of Rome in re-establishing the Papal hierarchy
in England.
The circumstances of the
nation continued to improve. Unpopular taxes were successfully contended
against; international communication was improved by the laying of ocean
telegraph cables; and although in 1853 there were strikes and riots in
connection with a general agitation for an advance of wages, these seem
to have been the outcome of the increased volume and profitableness of
trade. In 1854 the usury laws were abrogated. In the same year the peace
which had hitherto blessed the nation was broken by the declaration
(March 28) of war with Russia. The Crimean war, undertaken by Britain
and France on behalf of Turkey, lasted more than a year, and is
estimated to have cost this country between £80,000,000 and £90,000,000,
and an immense number of lives. Hardly had it been successfully
concluded when hostilities with China broke out in 1856. Next year, the
last of the period under review, was burdened with the horrible Indian
Mutiny (May to December). The close of the same year witnessed a great
commercial and financial convulsion.
In the preceding period
the ruling feature of financial affairs was railway enterprise. The
period from 1847 to 1857 was, on the other hand, marked specially by
general commercial activity, which seemed to pervade all nations.
Railway commitments, although steadily engaged in, were not on anything
approaching their former scale; and the formation of joint-stock
companies seems rather to have followed in the wake of advancing
commercial prosperity than to have been the special subject of
speculative attention, as was the case from 1825 to 1836.
As regards banking in
Scotland, the period up to the crisis with which it closed is almost
destitute of important features, other than those evidencing a quiet but
rapid development of the banking system within the limits laid down by
the Legislature. In 1849 the British Linen Company obtained a new
charter from the Crown, authorising them to increase their capital,
which stood at £500,000, by £1,000,000. Next year this power was availed
of to the extent of £500,000, making their total capital £1,000,000. In
July 1849 the old-established Banking Company in Aberdeen was merged in
the Union Bank of Scotland; but it continued to retain its local
designation for four or five years. The terms of purchase were that one
Union £100 share with £50 paid, valued at £81: 15s., was given for 36 3
of the Aberdeen shares with £5 paid up, or a discount of 55 per cent.
During the earlier years of its existence this bank experienced quite
extraordinary success; but, seemingly its star had set. The last
surviving private banking firm in Edinburgh, Messrs. Alex. Allan & Co.,
disappeared about this time. They had, it may be presumed, long ceased
to do any active business as bankers, but the designation was kept up to
the last. Their business as insurance agents and stockbrokers continued
under another firm. A more important concern, the Perth Banking Company,
was, on 1st August 1857, amalgamated with the Union Bank of Scotland.
Although the roll of bankers was practically closed by the Act of 1844,
the banking system continued to develop. During the first half of the
period the increase in bank offices was under 30; but in the second half
no fewer than 240 new branches were opened. The Royal Bank commenced in
1855 an active extension of their branch system; but the banks which
figured most prominently in this respect were the Western Bank and the
City of Glasgow Bank.
The whole course of the
year 1857 was one of tension in commercial and financial circles. It
began with the Bank of England minimum discount rate at 6 per cent,
which rose in April to 6½ per cent. The rate subsequently dropped to 5½
per cent in July; but the average rate for the first half of the year
was nearly 6¼ per cent, the average for the whole year being £6 : 13 :
3. The foreign trade of the country had been extended during the
immediately preceding years in a formerly-unknown ratio. The enormous
dimensions which it had reached by 1857 were quite beyond the legitimate
bounds of the world's requirements. Thus naturally arose a reaction
which produced the crisis of the autumn of this year. Other causes, such
as the great development of banking facilities, and some loose methods
on the part of merchants giving credit to foreign correspondents, have
also been ascribed as contributing causes. But these can only be
considered as subsidiary, for they were merely the natural accompaniment
of the inflated sanguineness with which traders were imbued. The banks,
as a whole, cannot be burdened with much blame for the troubles which
arose; for it is evident from the final outcome that the great bulk of
their advances had been well secured. Some of them, doubtless, did err
to a culpable extent, and paid the forfeit with their existence; but for
the others, it was not to be expected that they should refrain from
transacting sound business, as judged from their own standpoint, merely
because they thought that trade was being overdone. That was the
merchants' business. It is thus evident that the real cause of the
crisis of 1857 was over-trading by the merchants of the world. It might,
perhaps, be still further limited by specifying the merchants of Britain
and the United States.
The first serious trouble
came from the latter quarter. Bankruptcies in America became numerous
early in the year, and increased as it progressed. The banks there
became embarrassed, and in September adopted a general suspension of
specie payments. This course seems to have worked satisfactorily,
without putting a stop to business. But, although the Americans could
get on pretty well in that way, the consequences on this side of the
Atlantic were very different. Failure of remittances from the United
States forced British mercantile houses to stop payment. Undoubtedly
solvent firms were obliged, for the time being, to succumb; and, of
course, their weaker brethren were at once crushed hopelessly. The Bank
of England discount rate, which had fallen to 5½ per cent on 16th July,
rose on 8th October to 6 per cent. Four days later it was advanced to 7
per cent, and next week to 8 per cent. The banking reserve had been
steadily and largely falling, and on 24th October reached the low point
of £8,485,840. On 27th October the Borough Bank of Liverpool failed,
after a hopeless appeal to the Bank of England for assistance. The
Northumberland and Durham District Bank also applied for assistance;
but, after examination, aid was refused, and it had to succumb. Two
large bill-broking houses in London, and a long list of minor houses,
also failed. On 5th November the bank rate was raised to 9 per cent, and
excitement reached a high pitch. The banking reserve had fallen to
£2,155,315.
It was seen that the
bank's ability to render assistance was, under the fetters of the Act of
1844, rapidly falling to zero. The directors made every effort in their
power, by the forced sale of consols, to replenish their reserve; but
the drain was beyond their power to supply. On the 9th November the
Western Bank of Scotland suspended payment, and the panic became
excessive. On the 11th the banking reserve was only £1,462,000. Day
after day the bank was forcing consols on the market to replenish the
reserve. The applications for assistance were far beyond its power to
meet. On the 12th affairs looked hopelessly dark. Suddenly there was a
ray of light. It was whispered that the Government were about to
sanction the breaking of the law. On the 13th the panic vanished, as by
the virtue of a magic wand. The Lords of the Treasury wrote to the
directors of the bank, authorising them to disregard the enactment of
Parliament restricting their power to issue notes. As in 1847, so now;
when people knew that there was no limit to the note-issue of the Bank
of England, and that therefore they could get assistance when they
required, they no longer sought it.
It is probable that this
crisis would have been comparatively slight in Scotland, had it not been
for the rottenness of the Western Bank of Scotland. As it was, the
crisis was intense in Glasgow and Edinburgh, and disastrously affected
the whole country. What gave peculiar sharpness to the panic was the
unexpectedness of its immediate cause. The Scottish public have always
displayed an amount of confidence in the banking institutions of their
country, which at first sight seems somewhat out of keeping with their
hereditary canniness. In point of fact, however, their reliance on the
soundness of the banks was by no means unnaturaL Experience had shown
that the public loss through bank failures in Scotland was quite
exceptional, and never serious. The total loss sustained up to the
present time is quite insignificant. Thus a habit of unsuspicious
confidence had grown up which could not easily be disturbed. Had it not
been for this, the Western Bank would not have enjoyed the great
popularity which distinguished it from all its rivals. It was supposed
to embody the solidity of the old banks with the broad-mindedness of
modern principles. It is not to be wondered at, that the sudden shock of
its failure should have, for the moment, driven the public to an
opposite extreme of distrust. The distrust, however, was of very short
duration; for it soon became evident that, whoever might suffer, the
creditors would not. It was noticeable, also notwithstanding the great
stress laid by statesmen and economists on the dangers of private
note-issues, that the note-issues of the Scotch banks did not contribute
in the slightest degree to the causes of the crisis, and were not
particularly the subjects of the panic which ensued.
The Western Bank of
Scotland had a fully paid-up capital of £1,500,000, which was one half
larger than the capital of any other bank in Scotland, except the Royal
Bank. The shares were of £50 each, and sold in 1841 at £71, while
shortly before the stoppage they stood at £84 : 5s. The bank had 101
branches, which was more than any of the other banks had established.
Its note circulation, although declining, was among the highest, and
testifies to the great extent of its business. Its deposits, although
reduced by rising distrust in Glasgow, amounted at the time of failure
to £5,306,569 (a very large sum for those days), of which £4,402,973 was
held by the branches. It would seem that of the total deposits less than
one-tenth consisted of sums under £50.
As we have seen from time
to time, the system of management of the Western Bank was not only
directly opposed, in some essential points, to the principles adopted by
the other banks, but had actually led it into grave embarrassment on
more than one occasion. Assistance had been given to it on promises of
amendment, but no sooner was the immediate danger past than the old
system was resumed. The great point which not only the Edinburgh banks,
but also the Western Bank's correspondents in London, had urged on the
bank's attention, was the danger of dispensing with a large reserve of
high-class convertible securities. To a certain extent the advice,
backed as it was by intimation that continued disregard of it would lead
to exclusion from the banking concert, was acted on. But it is evident
that the adoption of the principle was little more than nominal. A still
more serious evil was meanwhile undermining the foundations of the bank.
Neglect to provide proper reserves endangered the bank as a going
concern; but the reckless manner in which the directors were lending
their money on a few large risks was courting ruin. One of their wildest
schemes was establishing a discount agency in New York, which eventually
occasioned a loss of £185,250.
Owing to their close
connection with New York business, the troubles in America, which
reached a height in September, occasioned great embarrassment to the
Western Bank. On the 15th October, Mr. John Taylor, the manager,
resigned office, and was succeeded by Mr. J. S. Fleming, who was then
law secretary of the bank, and in 1871 became cashier and general
manager of the Royal Bank of Scotland. For a week negotiations were
conducted with the Edinburgh banks, with the object of obtaining
assistance; but this was refused, pending the result of application to
the Bank of England. That being unsuccessful, the Edinburgh banks at
length advanced £510,000 in consols. This was on 29th October. The
crisis in London increased, and the want of confidence in the Western
Bank became serious. Further aid was asked from the Edinburgh banks, but
was refused. The failure of Dennistoun & Co., of London and Glasgow,
with liabilities of over £2,000,000, on 7th November, brought the crisis
in Scotland to a focus. (The firm were only temporarily embarrassed by
want of remittances from America.) The note exchanges continuing to run
heavily against the Western Bank, the directors intimated to the Bank of
Scotland their probable inability to meet the settlement of 9th inst. At
two o'clock on that day the doors of the bank were shut, and the
branches were directed not to re-open next morning. The total
liabilities of the bank at the stoppage were £8,911,932, exclusive of
capital and rest, amounting together to £1,726,777.
After some attempts at
reconstruction, the bank went into voluntary liquidation. Two calls,
amounting together to £125 per share, or 250 per cent. on the capital,
were made on the contributories. These produced a total sum of over
£2,000,000, of which, however, more than £800,000 was subsequently
returned. The net loss to shareholders, including capital at par and
reserve fund, was £2,816,354.
On the failure of the
Western Bank, the other banks hesitated to accept their notes. This
increased the public panic, and a run on the banks took place. On the
11th, however, the banks resolved to take Western notes in course of
business, and influential statements of confidence in the ability of the
Western Bank to meet all its engagements having been made, the
excitement rapidly subsided. On the 10th November, the City of Glasgow
Bank suspended payment, with liabilities to the extent of £5,107,142. It
re-opened on the 14th December.
The only minor point
claiming notice here is a provision of the Stamp Act of 1853 (Clause 7)
by which the Treasury were authorised to compound with all the Scottish
banks, both for the stamp duties on their notes, and for those on their
bills, under such security and forms as the Treasury might require. This
arrangement was carried out on the 4th November, the rate being fixed at
8s. 4d. per cent. A calculation made by the Dundee Bank showed that,
during twenty-four years, they had actually paid an average of about 6s.
8d. per cent per annum on their note circulation. |
