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THE first three-quarters
of the year 1878 are noticeable for little except a continuance of
depression in the national industries and commerce. Heritable property,
which is always last in being affected by alterations of prosperity and
adversity, began to show symptoms of depreciation; but prices were
maintained to an extent which seemed to justify hopefulness of the
future, and proved that there was little pressure on holders. Indeed,
the nation did not show signs of impoverishment from the long-continued
experience of bad trade. The Scottish banks seemed to be in a
satisfactory state; if money was accumulating in their hands from the
want of proper channels for its profitable employment, they were at
least able to maintain their dividends at the former rates. There was
nothing in their reports to indicate the imminence of untoward events.
People were rather looking and longing for a return of prosperity, than
groaning under the experience of adversity.
In these circumstances,
rumours, which first received utterance in the Loudon correspondence
columns of the Glasgow Mews, towards the end of September, regarding
difficulties on the part of one of the banks in Scotland, were received
with incredulity. In banking circles only one opinion as to which bank
was referred to received any support. It was freely said that if any of
the Scottish banks was in a weak condition, it was the City of Glasgow
Bank. But there was no alarm, for it was confidently believed that the
report would prove to be a Stock Exchange canard. So little effect had
it, that the prices of Scottish bank stocks were not materially
affected; and in a very few days it almost ceased to be spoken of. There
was, however, a general pressure of sales of pledged railway and other
stocks, indicative of impending disturbance; but this circumstance did
not attract general notice. Notwithstanding this extraordinary public
confidence, negotiations were all the time being carried on by the City
of Glasgow Bank and the Edinburgh banks, through the Bank of Scotland,
with the object of obtaining assistance.
As far as its business in
Scotland was concerned, the City of Glasgow Bank was not in the
slightest degree inconvenienced. The depositors were sleeping as soundly
as if their money had been invested in Government securities, and
noteholders would not have accepted sovereigns in exchange. The London
money market, however, had begun to feel that it had absorbed a
sufficiency of City Bank paper. Unable longer to retire maturing bills
with new paper, the bank had the greatest difficulty in taking them up,
and saw that in a very short time its available resources would be
exhausted. In these circumstances it sought an advance from the other
banks, to enable it to tide over its difficulties. It would seem that,
in consequence of the prevalence of rumours about the position of the
bank, the Bank of Scotland had, on 11th September, urged the City Bank
to retire a large amount of their acceptances; whereupon the latter bank
asked if they might rely on assistance from the other banks to the
extent of £200,000 or £300,000—an estimate of requirements which they
subsequently extended to £500,000. Further negotiations having revealed
the fact that the bank was involved with a few firms to the extent of
some millions sterling, on the 28th September an examination of the
books by an Edinburgh accountant was decided upon. After receiving his
report, the banks declined to give any assistance; and, on the 1st
October, the doors of the City of Glasgow Bank were closed at the usual
hour, never more to be re-opened for business.
The announcement of the
suspension of the City of Glasgow Bank, which appeared in the newspapers
of the 2nd October, had a paralysing effect throughout the business
community, and feelings of alarm and distrust arose among the general
public. The City Bank, although never in the enjoyment of the thorough
confidence of the other banks, was known to have a large proprietary
whose liability was unlimited, and had therefore been always trusted as
much as any of the others. In the eyes of the general public it obtained
a full share of credit. Although the youngest of the existing Scottish
banks, it had, by a constant policy of branch extension, built up a
deposit business of over £8,000,000; and, as its reports were always
framed so as to show steady progress, it was in many quarters regarded
as the most active and prospectively prosperous bank in Scotland. Its
customers and shareholders would sometimes taunt the officials of the
older banks with being "old-wifish" and slow of movement. Its stock,
moreover, commanded a good price in the market. It afterwards appeared
that there was actually a considerable pressure of sellers, and that the
price was maintained only by continual purchases on account of the bank
itself; but these facts were unknown to the general public, who
naturally estimated the position of the bank to a great extent by the
Stock Exchange quotations. The revulsion of feeling from confidence to
distrust was naturally very strong. People had believed so thoroughly in
the banking system, that the failure of one member of the circle tempted
them to lose belief in all. But it must be said that the public acted
with wonderful prudence and self-control. The action of the other banks
greatly tended to this result; for they at once announced that, with a
view to lessen the inconvenience of the stoppage to the public, they
would receive, in the ordinary course of business, the notes of the City
Bank which were in circulation.
From the first no hopes
of resuscitation were held out by those conversant with the bank's
affairs; and, although for several days no details of the extent of the
disaster were forthcoming, fears of a very grave state of matters were
steadily increased. These were augmented by the failure of some London
and East Indian houses, and rumours of further suspensions. On the 5th
October, Dr. M'Grigor and Mr. Anderson, who had been asked to examine
into the state of the bank, reported that it would be advisable to wind
up the business; and a meeting of the proprietors was summoned for the
22nd of the same month. Meanwhile the banks were actively engaged in
making arrangements for accommodating City Bank depositors who might
require the use of their money, and for taking up branch offices of the
bank.
Until the 19th inst.
almost nothing transpired regarding the position of the bank; but
failures in various parts of the country were daily announced, some of
them being for heavy amounts. Nevertheless, a somewhat easier feeling
prevailed throughout the community. It was, therefore, with feelings of
surprise, indignation, and dismay that the public read the report of the
investigators, which was issued late on the evening of the 18th. The
Scotsman of 19th October records that " the report of Dr. M'Grigor and
Mr. Anderson brings out a state of matters which far exceeds the
anticipations of the most despondent shareholder. The actual loss
amounts to the almost fabulous sum of . £6,190,983 : 11 : 3, which,
deducting the capital of £1,000,000, leaves £5,190,983 : 11 :3 of a
deficiency to be made good by the shareholders. This estimate takes no
account of the reserve fund of £450,000. Amongst other startling
disclosures, the investigators say that the shareholders had been led to
believe the bank had lent upon credits less than was the fact by
£1,126,764; that the bank had good securities belonging to themselves
absolutely more than was the fact by £926,764; and that there was more
reserve gold in the bank than was really the case by £200,000. The total
amount represented by bad debts, estimated at £7,345,357: 15 : 6, the
bank had been in the habit of treating in the balance-sheet as an
available asset. Four debtors under this head owe the bank £5,792,394,
while the securities held show a deficit of £4,269,957. The
investigators add that `it is by no means improbable that our own
estimate is beyond the mark, as the bank's title to much of what we have
entered as good is of a very imperfect description.'"
Such, in abstract, was
the frightful statement presented to the shareholders and the public as
the first official account of the position of the bank's affairs. It is
no exaggeration to say that people were stupefied by the astounding
disclosure. No such failure had ever previously been known. As was
naturally to be expected, public and private comment was of the fiercest
description. Yet the attitude of the shareholders and of the public was
that of dignified self-restraint. Righteous indignation was hurled at
the offenders; but there was little tendency to confound the innocent
with the guilty. One or two of the banks suffered for a short time from
diminished confidence on the part of the public; but the satisfactory
manner in which they met their engagements speedily restored their
credit. Most of the banks were not exposed to any actual trial; and the
older banks reaped a rich harvest of business from the suspension.
Immediately after the
publication of the report of the investigators as to the affairs of the
City of Glasgow Bank, the directors, manager, and secretary of the bank
were arrested on a charge of fraud—the latter, however, being
subsequently accepted as a witness. This action of the authorities met
with the unanimous approval of the public. Indeed, considerable
excitement was created by an apparent probability that the state of the
law would necessitate the prisoners' liberation on bail for £300 being
tendered. But to the charge of fraud, that of theft was added, and only
one of their number was permitted to avail himself of the privilege. The
trial commenced before the High Court of Justiciary, at Edinburgh, on
20th January 1879, and lasted for eleven days. The jury found the
prisoners guilty of fraud, and next day, 1st February, the Court
sentenced two of them to eighteen and the others to eight months'
imprisonment.
The first meeting of the
shareholders, after the stoppage, took place in Glasgow, on 22nd October
1878. It passed off with remarkable quietness, due in great measure to
the absence of the imprisoned directors, but also, doubtless, to the
utter futility of remonstrance. It was resolved unanimously to liquidate
the affairs of the bank voluntarily. (Subsequently, 27th November, the
liquidation was put under the supervision of the Court of Session, the
First Division of which was for a long time entirely occupied therewith,
and with cases relative thereto). Four liquidators were appointed, and a
committee of shareholders was nominated to consult with them. A few days
afterwards a call of £500 per cent on the capital stock was announced,
payable in two instalments, on 22nd December and 24th February
following. This step naturally elicited much comment, some persons
expressing surprise at the largeness of the call, others considering
that it should have been much larger. For the most part, however, the
action of the Iiquidators was viewed as a prudent preliminary step; it
being thought that a smaller sum would have been quite inadequate, and
that one materially greater would have seemed harsh as a first measure.
A number of failures
followed immediately on the stoppage of the bank. Of these, several very
large ones were those of firms in direct connection with the bank, and
through whose operations the disaster had been chiefly produced. The
most important of these firms was James Morton & Co., whose liabilities
amounted to about £2,500,000. Others were Smith, Fleming & Co., with
£1,600,000; Matthew Buchanan & Co., £1,310,000; John Innes Wright & Co.,
£750,000; Glen, Walker & Co., £445,000; and Potter, Wilson & Co., whose
affairs, including the private estate of the senior partner, showed a
surplus of about £70,000. From day to day numerous other failures
occurred—notably that of Heugh, Balfour & Co., with liabilities to the
amount of £400,000, and trifling assets. Although technically a distinct
suspension, that of the Bank of Mona was practically part of the failure
of the City of Glasgow Bank, with which it was amalgamated, while
retaining its corporate identity. Another bank failure was that of J. &
J. Fenton & Sons, at Rochdale, who, while nominally private bankers,
were actually stockjobbers. Subsequently (9th December), a more
important English bank, the West of England and South Wales District
Bank, was forced into liquidation ; but it was afterwards resuscitated
as the Bristol and West of England Bank, Limited.
One of the most painful
consequences of the disaster—the more painful from having been perfectly
unnecessary—was the suspension of the Caledonian Banking Company. It
most unfortunately happened that that bank had taken over from a
customer £400 of City Bank stock, in security for an advance, and had
thus become liable as a shareholder. The excitement of the time
exaggerated the extent of probable liability of wealthy shareholders,
the opinion being expressed that even the total estates of all the
shareholders, including the Caledonian Bank, might be insufficient to
meet the requirements. This, of course, was an erroneous supposition;
but allowance must be made for the heated imagination of people who were
dealing with a crisis without precedent, and for the fact that the
question of the personal liability of trustees holding stock was in
suspense. In the event of trustees having been absolved from liability,
the pressure upon ordinary shareholders would have been greatly
increased. The shareholders of the Caledonian Bank were seized with
panic, and threw their shares into the market, glad to be rid of them on
any terms. Dreading the contingency of the shares of the bank getting
into the hands of men of straw, who would not be good for possible
calls, the liquidators of the City of Glasgow Bank demanded that the
register of proprietors should be closed. This, the directors intimated,
they had no power to do. The liquidators replied by threatening to apply
to the Court for the liquidation of the bank's affairs.
Meanwhile, or rather
previous to this point in the proceedings, negotiations were carried on
with the Bank of Scotland with a view to the business of the Caledonian
Bank being acquired by that establishment. The entanglements into which
the north country bank had got its affairs would seem, however, to have
been too ravelled to admit of this solution of the difficulty. They were
aggravated, moreover, by a pressure which set in on the part of
depositors, who were naturally unwilling complacently to rely on the
responsibility of a bank which was seemingly doubted by people who might
be supposed most capable of judging of its contingent liabilities. The
little bank fought nobly for existence; but, baffled in its attempts to
shake off liability, and refused credit for its ability to meet it, it
had to succumb. On 5th December it closed its doors, and an application
was made to the Court of Session for liquidation of its affairs.
Eventually it was discovered that the full liability in connection with
the failure of the City of Glasgow Bank would be met by a sum of
£11,000—an amount equal to one half-year's profits. A guarantee fund of
£150,000 was raised by the shareholders and their friends; the final
decision of the question of the liability of trustees, by fixing the
responsibility of the full list of contributories to the City Bank
liquidation, relieved the ordinary shareholders of a large share of
their problematical liability; and further occasion for proceedings
against the Caledonian Bank ceased. By arrangement, the liquidation
order was cancelled, and the bank resumed business in August 1879, after
about seven months' interval.
A large amount of
litigation followed the suspension of the City of Glasgow Bank. Indeed,
for a long time one of the divisions of the Court of Session devoted
itself entirely to City Bank cases. But, if the number of cases was
notable, the admirable manner in which the Court disposed of them was
equally so. Celerity and sound judgment went hand in hand, so that, in a
surprisingly short space of time, the causes were satisfactorily
disposed of. The great majority of the cases were for rectification of
the register of shareholders; and in several cases shareholders were
fortunate enough to get their names erased. But attention was centred on
the great question of the liability of trustees. Only the great
interests involved could have made this question worth raising. The
House of Lords had unmistakably given its decision at the time of the
Western Bank liquidation--a decision by which the law of Scotland was
practically assimilated to that of England. Very probably that
assimilation was not warranted; but it had all the force of a
legislative assimilation, as far as future cases were concerned. For
there was no reason to hope that the House would stultify itself, by
applying an English rule on one occasion and establishing an opposite
Scotch one on another. The test case was that of William Muir and Others
for Rectification of the List of Contributories of the City of Glasgow
Bank, in which four trustees sought to evade liability on the ground
that they had not agreed to become individually members of the bank. On
20th December 1878 the Court of Session refused the petition. The case
was carried to the House of Lords, but the judgment of the Court below
was affirmed.
This was the third of
three great banking disasters in Scotland, which it is interesting to
contrast. The Ayr Bank was a high-class concern, founded on the landed
interest. Although it was doubtless taken advantage of by
self-interested people, there was more of ignorance and folly than of
actual iniquity about it. The Western Bank, while not having
aristocratic connection, was of good commercial standing; and, although
its infatuation was culpable to a degree almost requiring the plea of
insanity to excuse it, yet it did not descend to criminality. The City
of Glasgow Bank was never highly esteemed outside the circle of its
dupes, and seems to have been a long-continued fraud. It traded on the
respectability of its neighbours and the unlimited liability of its
shareholders. Blessed would it have been if, when it temporarily ceased
the issue of notes in 1857, it had been held to have forfeited its right
to issue. This would have practically terminated its evil career at a
comparatively early stage. |
