THE effect on the public
mind of the revelations of sufferings entailed on the shareholders of
the City of Glasgow Bank, by the necessity of providing for the enormous
deficit discovered in the accounts of the bank, was very strong. There
was an almost wild desire to take the burden from their shoulders, or at
least to ease the strain to as great an extent as possible. It was in
this spirit that an association was formed with the object of promoting
a great lottery to raise money, which, after payment of prizes and
expenses, should be applied in meeting the bank's debts. The proposal
met with a good deal of public approval; and there can be little doubt
that, so far as the adhesion of supporters was concerned, it might have
been carried out with considerable success. Led away by the hope of
achieving a grand result in the mitigation of misery, many persons
forgot that even charity must be founded on high principle. Even the
Government authorities hesitated to suppress a movement which had so
much good for its object, although it could with difficulty be regarded
as legitimate. A little consideration, however, convinced people that to
cure the City Bank troubles by imitating the action which had caused
them, and to pay gambling debts by further gambling, even although the
sufferers were innocent parties, would be a violation of the national
honour, and an establishment of a precedent prejudicial to commercial
morality. The Crown authorities then intimated that the scheme seemed to
violate the law; and, after some reasonable negotiation, the proposal
was withdrawn (January 1879).
It then became evident
that the shareholders must face their difficulties unaided. They had a
duty to do, and it must be said that they did it nobly. They could not
escape their responsibilities, but the spirit in which they met them was
admirable. But, while the public saw that there could be no
interposition between the debtors and their creditors, they were not the
less resolved to stand close by and help those who fell. A relief fund
subscription was opened for the benefit of those who were deprived of
their means of support by the calamity. This at once met with great
success. People of all classes felt relief in the opportunity of
affording material assistance to, and substantially testifying their
sympathy with, the hundreds of innocent sufferers whose case had
engrossed their attention for months previously. The various committees
throughout the country obtained subscriptions for about £400,000 within
a few months. Of that very large sum only a small fraction was not
eventually paid up by the subscribers, and all but about £20,000 was
raised in Scotland. This result was one of which Scotland may well be
proud; the more so as it was accomplished at a time when, irrespective
of the direct consequences of the disaster which had occasioned it, the
nation was sadly straitened by dull trade, bad harvests, and lessened
incomes.
The great question which
was evolved, as the main economic principle, from the experience of the
crisis, was the advisableness of continuing the system of unlimited
liability of shareholders in banks. While other business establishments
had, as a rule, availed themselves of the provisions of the Companies
Acts permitting limitation of liability, the Scottish banks, like most
of the larger English banks, had not thought it expedient to do so.
Those which had not been specially incorporated were registered under
the Acts as unlimited companies. The fact of any of the banks being in
the enjoyment of a limitation of liability was questioned by many
writers; but, after a fierce discussion, this argument came to nothing.
It was evident to candid minds that the doctrine of limitation of
liability by virtue of incorporation under special Acts of Parliament or
Royal Charters was as old as the law of the land. In point of fact, the
raising of the question was the result of the conflict of interests
between the unlimited banks and the three old chartered banks, and not
the discovery of any legal principle which had been overlooked by
lawyers and statesmen for hundreds of years.
An exception should be
made, however, in the case of one writer among those who doubted the
sufficiency of the charters to cover liability of the stockholders of
the banks in question. Mr. William Mitchell, [Our Scotch:Banks,
Edinburgh, 1879, p. 84, et seq.] waiving the untenable position of those
who doubted that Acts of Parliament and Crown Charters conferred
limitation unless the contrary was stated, founded his argument on
special provisions in the constitutions of the banks themselves, whereby
powers were conferred on the banks to make calls on their proprietors to
a limited extent. It was shown, however, by the other side, that these
provisions were of a purely optional character, had been inserted for a
specific purpose, and afterwards dropped. But, even admitting that these
powers are still available, the fact of their insertion is an argument
in favour of the doctrine of limitation by incorporation. The
proportions callable are, moreover, distinctly specified, and small in
amount.
There was a general cry
for legislation, but great difference of opinion existed as to what form
it should take. Early in January 1879, Mr. John M`Laren, M.P. (now Lord
M'Laren), introduced a bill providing for the auditing of the books and
accounts of the banks in Scotland, but it was talked out. Later in the
session, the Government took up the question on a broader basis, and
introduced a bill, which, after great modifications, became the
"Companies Act, 1879." It was not a measure of which its framers had
much reason to be proud, but it had the effect of removing all legal
difficulties which seemed to stand in the way of the adoption by some of
the banks of the principle of limited liability. It also established a
new system of reserve liability. The leading London banks at once
adopted its provisions, and their example was largely followed by other
English banks.
The Scottish banks,
however, refrained from recognising it as suitable for their needs. The
three old banks held that it had no applicability to them, and the
unlimited banks were fearful of appending the depreciatory word
"limited" to their names. Again and again they were attacked in the
public press for their hesitation. In letters to newspapers the old
banks were abused for harbouring every species of evil spirit which
words could define or imagination depict, as applicable to business
establishments, and the other banks were taunted with weakness and
cowardice. The criticism of responsible editors was, of course, more
dignified, but generally not less adverse. But the banks would take no
hurried action.
At last, however, the
three old banks made a movement which was a surprise to every one. In
November 1880 they individually gave notice of application to Parliament
for power to increase their capitals, alter their existing capitals, and
provide a large margin of responsibility of stockholders as additional
security to creditors. This resolution met with little or no opposition
from the proprietors of the banks, and the directors' proposals were
formally confirmed by them in each case. In the public press, however,
the new movement was not so favourably received, and in several cases it
was denounced with more severity than accuracy of criticism ; indeed, a
large amount of ignorance was manifested regarding the matter. The bills
were duly introduced, but met with considerable opposition in
Parliament. The Government expressed objection to proceeding in such
matters by private legislation, but intimated their willingness to
introduce a public measure, giving the powers asked, provided the banks
would agree to certain conditions, including the adoption of the term
"limited" as part of their titles.
In a few very able
letters addressed to the Treasury, the banks showed the impossibility of
their agreeing to the views of the Government; and in April 18 81 they
finally closed the negotiations, and intimated that they would not
proceed with their bills. This conclusion to the movement was a very
happy one for the three old banks. The alterations proposed would have
spoilt their constitutions, and, as experience has since shown, were not
necessary for maintaining public confidence. The action of the banks,
however, had a good effect in showing that they were sincerely anxious
to study public sentiment in the matter of providing enlarged security
for their liabilities. There can be little doubt that, in their
correspondence with the Treasury, they greatly strengthened their
position in the public view, and swept away the ignorant criticism to
which they had been subjected in the public press.
Shortly after the
abandonment of the scheme of the old banks, the unlimited banks took
into favourable consideration the propriety of adopting the provisions
of the Act of 1879. The result was a mutual resolution to become
limited, on the basis of having subscribed capitals five times as large
as their existing paid-up capitals. In the case of the National Bank, no
alteration of capital was necessary, as it stood at the required
proportion; but each of the other banks had to enlarge its subscribed
capital. As there was no issue of new stock, as had generally been made
by the English banks adopting the Act, there was no opportunity of
immediate pecuniary benefit to the shareholders. But general
satisfaction was felt that limitation of liability had been
accomplished, and it does not appear that this action was followed by
any prejudicial effect to their business.
Another question evolved,
or rather brought prominently forward, by the disaster was the propriety
of the appointment of neutral auditors to report on the statements of
accounts issued by the banks. Hitherto most of the banks had considered
the practice as unsuited to the nature of banking business. Even when
vehemently (sometimes not over politely) urged to adopt the system,
there was a good deal of hesitation. But, as one after another gave in
to the public demand, within three years after the City Bank's failure,
all had permanently adopted the principle of appointing two independent
professional accountants to examine the accounts and cash balances, and
certify as to the accuracy of the published annual balance-sheets and
profit and loss statements. This result was certainly in the general
interest, even if the security thus attained was less absolute than the
confidence sometimes reposed in professional audits. |