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History of Banking in Scotland
Chapter XVII - A Typical Period - Joint-Stock Mania and the Crisis of 1837

THE period which falls to be treated of in the present chapter extends from the crisis of 1825-6 to the death of King William IV. in 1837. It is a well-marked illustration of the theory of cycles in financial and commercial experience. From 1827 to 1832 there was commercial depression, consequent upon the sufferings and losses of the preceding crisis. With 1833 there came a change for the better—activity and enterprise were abundantly manifested, and prosperity shone on the land. Then followed renewed confidence, drifting into speculation, and culminating in the inevitable crisis. In its political aspects, the period is noticeable for the almost profound peace which Britain enjoyed, the only important exception being a short conflict with Turkey in 1827, when the battle of Navarino; fought by the allied squadrons of Britain, France, and Russia, gained the independence of Greece. In the earlier years of the period, much distress prevailed among the working classes, which broke out in riots, among which those at Bristol, in the autumn of 1831, acquired pre.-eminence. The Corn Laws were pressing heavily upon the people by maintaining the price of bread. The sliding scale of duties introduced in 1828 may have mitigated the sufferings; but the high price of corn was in itself a sufficient affliction. The cholera epidemic of 1831-2 found the country in an unfavourable condition for resisting such a scourge. Meanwhile, however, the spirit of mechanical enterprise, to which we have referred in previous chapters, continued to develop. Following on the establishment of oceanic steam communication, the foundation of the great system of railways was laid on 15th September 1830, by the opening for traffic of the Manchester and Liverpool Railway; and the application of steam power to various departments of industry was continually on the increase. The final abolition of Colonial slavery, the rapid increase of periodical literature, Parliamentary reform, the manifestation of the power of trade-unionism, and the adjustment of the Poor Laws, were other notable features of the period.

In the department of banking a rapid development took place. This is specially noticeable subsequently to 1833, when the Bank of England Charter Act was passed. By it the formation of joint-stock banks in London and the provinces was greatly facilitated. The Act of 1826, dealing with this matter, does not seem to have been explicit enough, or sufficiently wide in its provisions. Under the powers of the new Act, however, a mania for joint-stock banks sprang up, and this species of investment was greatly overdone. In 1835 and 1836 upwards of one hundred new banks were established in England and Wales alone, and thirteen in Ireland. In 1827 the directors of the Bank of England adopted an important resolution for the conduct of their business. This was, that in future the foreign exchanges, the variations in which had been systematically ignored since 1819, should be deemed a necessary factor in their calculations. Under a provision of the Act of 1833, moreover, they were required to publish a weekly statement of the position of the bank.

Turning to Scotland, which is the main subject of our record, there is much to chronicle. In 1826 there appear to have been about thirty-four individual banks, of which several had numerous branches, and most had some. The total number of offices is stated as 167, or 1 to every 13,000 inhabitants. An evidently very loose estimate of the deposits held by these establishments places the amount at from ten to twenty-five millions sterling; but two estimates which seem to have been thought competent give £20,000,000 and £24,000,000 as the amount. Such calculations are, of course, of little practical use ; but they show, at all events, the ideas of magnitude in banking business held at that time. The par of exchange on London was 20 days, to which it had been reduced from 40 or 50 days, by the action of Maberly & Co. Gold and silver were scarce; and it is probable that a permanent issue of 5s. notes would have been very serviceable; but the banks do not seem to have favoured denominations under £1, perhaps because the trouble and expense would have been more than the profit. Of these banks, several passed out of existence during the succeeding ten years. In 1829 the Montrose Bank, which had been established in 1814, was amalgamated with the Dundee Union Bank. The firm of James & Robert Watson failed in 1832. The house had been established in Glasgow in 1763 by David Watson, the later firm dating from 1793. At the time of their failure this firm were agents for a large number of banks; and it would seem that this department of banking constituted the main part of their business; but they are stated to have held the greatest amount of agency business of any bank in Glasgow.

In 1831 their office was robbed by London thieves. The robbery took place "on Sunday, 26th December 18 31. The thieves escaped with their booty, but one of them, William Heath, was afterwards captured, tried, and executed. While under sentence of death, this villain confessed that he had nearly committed murder. One Sunday before the robbery, he was in the bank trying the false keys, when one of the gentlemen of the bank came in. The robber had only time to glide behind a door. He saw the gentleman sit down, read a letter, and afterwards go out. The robber had a drawn dagger in his hand, and declared that if the gentleman had . discovered him, he would at once have stabbed him to the heart." [Banking in Glasgow, p. 42.] Whether owing to this disaster, or to unsoundness in their business arrangements, they stopped payment in June of the succeeding year. The two Edinburgh firms of Thomas Kinnear & Sons, and Donald Smith & Co., amalgamated their business in 1831 as Kinnears, Smith & Co. This arrangement ended, however, three years later by the failure of the new firm, with about £320,000 of liabilities—an event which caused a considerable run on one or two of the other private banks in Edinburgh. [Tait's Edinburgh Magazine, September 1834. This firm issued notes of the Bank of Scotland only.] In 1832 the exchange and deposit firm of J. Maberly & Co., who were also manufacturers in England, closed their doors after an existence of fourteen years. Their business was an important one on account of the number of offices at which it was conducted, and the active competition they carried on with the Scotch banks proper. The failure disclosed a large deficiency. The Commercial Banking Company of Aberdeen amalgamated with the National Bank of Scotland in 1833. The private firm of Robert Allan & Son, established at Edinburgh in 1776, stopped payment in 1834, with about £108,800 of liabilities. [They did not issue their own notes, but used those of the Royal Bank exclusively.] About the same time, the younger firm of James Inglis & Co. (formerly Inglis, Borthwick, Gilchrist & Co.) also failed, their liabilities being stated at £23,000. It is probable that these events were connected with the failure of Kinnears, Smith & Co. just alluded to.

The Thistle Bank Company, established at Glasgow in 1761, amalgamated in 1836 with the Glasgow Union Bank. Another event of that year was the absorption of the Perth Union Banking Company by the National Bank of Scotland. Next year Messrs. Ramsays, Bonars & Co., private bankers in Edinburgh, withdrew from business. It is understood that their business had not, latterly, been of a favourable character; but their retirement was quite voluntary, and the business was wound up by themselves. [Mr. Wenley gives the date as 1834; but the circular, stating that the "surviving partners, having determined to retire from business, hereby intimate that they will cease to receive any money on deposit, or to issue notes," is dated 6th February 1837. The business was continued for the convenience of customers, 3 per cent interest being allowed to depositors. Notes were to be retired on presentation either at their own office or at the Bank of Scotland.] In November of this same year, the Paisley Banking Company, on the expiry of their contract of copartnership, made over their business, which included branches at Glasgow, Irvine, and Stranraer, to the British Linen Company. An important amalgamation, which took place in the same year, was that of the old Ship Bank and the Glasgow Bank Company, under the designation of the Glasgow and Ship Bank.

It will thus be seen that the period with which we are at present dealing witnessed the extinction of an unusual number of banking companies. It would seem as if those companies who, either from the smallness of their business, or from old-fashioned habits of mind on the part of their managers, were unable to adapt themselves to the altered and continually expanding circumstances of the country, were destroyed or swallowed up by their larger or more vigorous rivals. The doctrine of the survival of the fittest came powerfully into play amid the rapid development of the national industries, fostered by the achievements of mechanical skill. But while old banks disappeared, new ones arose ; and the system of branches received a great impetus. The single office system appears to have been discarded almost entirely by the older establishments, and all the new banks seem to have considered branches as indispensable to their business. Private banking also was rapidly dying ; and, although a few firms survived this period, their real character was almost always veiled under a local designation. The old system of local, or, at best, district, banks, was rapidly giving way before the modern system of broad-based establishments, partaking to a greater or less extent of a national character. Greater safety and economy in management were thus secured; but the new system, in its now largely-developed form, while in the main more satisfactory than its predecessor, has not been without its disadvantages to the trading community.

In the earlier years of the period under review, the great depression existing in connection with trade and finance prevented the formation of any new establishments, and very few new branches were opened. In 1830, however, the Ayrshire Banking Company, with a head office at Ayr, and five branches in the county, was established. A still more important movement was the formation of the Glasgow Union Bank, with branches at Edinburgh, Greenock, and Bathgate. Its capital was £350,000, held by 488 partners. By the rapid absorption of a multiplicity of large and small banks throughout the country, this bank fairly justified its name, and fully earned the designation of the Union Bank of Scotland, assumed by it in 1843.

Another great bank was formed in Glasgow in 1832, whose growth was still more rapid than that of the Union, and whose career was destined to secure to it a more unenviable notoriety than any of its predecessors had procured. The Western Bank of Scotland commenced business on 2nd July 1832. At its annual balance on 29th May 1833, the capital is placed at £209,170, held by 430 partners. From the outset it was managed with great activity, and it soon distanced its contemporaries in the growth of its business. But it achieved this result by setting at defiance the soundest principles of good management, in the face of the often-repeated remonstrances of friends and rivals; until, twenty-five years after its establishment, it became a wreck, such as had never been seen previously in the financial history of Scotland. So innate do vicious principles of management appear to have been to it, that little more than two years after its formation we find that the London house of Jones, Lloyd & Co. declined to honour their drafts, and the Edinburgh banks refused to receive their notes, remonstrating with them in lengthened correspondence as to their action, and particularly as to their omission to maintain a sufficient cash and investment reserve. At length a reluctant consent appears to have been obtained from them. The manager was dismissed; and it may be presumed some show of amendment was made.

Two years later than the Western Bank, the Central Bank of Scotland, with a capital of about £80,000, was established, with its head office in Perth. The North of Scotland Banking Company was formed in Aberdeen in 1836. In the same year an attempt was made to establish another bank in Glasgow. This was the City Banking Company of Glasgow. The attempt, however, proved abortive, owing, in all probability, to the doubt and hesitation prevailing among business men, as events tended towards the crisis which burst upon the nation soon afterwards.

Among other events deserving record was the passing of the Act 9 Geo. IV., c. 65, in 1828, by which the circulation in England of Scotch or Irish small notes was prohibited. The restriction did not extend to notes of £5 and upward. The Royal Bank of Scotland obtained, at the close of 1829, a new warrant of charter, by which it was empowered to increase its capital to £2,000,000. This power was exercised early in 1831, by appropriating £100,000 of reserved profits, and making a call of £400,000 on the proprietors. [The immediate cause of this movement, which was hardly justified on principles of financial expediency, was (according to office tradition) an impression that the Government contemplated the abolition of the bank-note issues, and the substitution of a State issue, in which event a large capital might secure special privileges in the conduct of the new system.] In 1831 the Commercial Bank and the National Bank obtained charters of incorporation. This judicious step was sadly marred by the adoption of the new principle, which had recently been obtaining general acceptance, of attaching unlimited liability to the stock of Corporations. The amount of branch extension which occurred during the period with which we are at present dealing was extraordinary. Not only did all the new banks open branches, but the older banks, with the exception of the Royal Bank, which steadily refrained for long after this time from establishing a general branch system, spread their agencies over the land with great rapidity. About one hundred and ten new offices were opened, of which about 93 were branches of banks existing previously to 1827. But while the Scottish banks were more or less affected by the prevailing excitement, it may be doubted if the following newspaper paragraph of the time was founded on fact. It is, however, interesting as a contemporary record "Extract from a private letter from London.—'We have heard from good authority, that it is the intention of the Bank of Scotland, as well as the Royal Bank of Scotland, to follow the example of the Dundee Union Bank, and to immediately establish branch banks in London, for the purpose of circulating their notes."' [Courant, 10th July 1834.]

As we have already indicated, the turning point of the period was the year 1833. From that time an active spirit of speculation set in, the main subject of which was joint-stock enterprise. In this department railways began to attract the favourable attention of promoters and investors; but the railway mania proper belongs to a somewhat later date. Of the many forms which speculation assumed, the favourite was joint-stock banks. But numerous other species of companies were promoted. It has been estimated that, in the years 1834-5-6, the new companies projected involved nominal capitals to the extent of two hundred million pounds sterling. ["No fewer than 119 new companies have been started in London during the last year (1835). Of these, 41 are mining companies, 35 for the establishment of railways, and 43 miscellaneous. The nominal capital is—Mines,£2,994,000; railways, £34,040,000; miscellaneous, £19,811,000; total, 56,845,000."—Edinburgh Chronicle, 6th February 1836.]  But it was not thus alone that the speculative spirit found vent. Owing to the higher rates of interest offered in America, large quantities of United States securities were greedily absorbed in this country. This led to a continuous and heavy drain of gold from the Bank of England, which, despite the efforts of the bank to stem it, reduced the reserve to a low point.

The first actual disturbance began in Ireland in the autumn of 1836, by the suspension of the Agricultural Bank. It appears to have been a badly-managed concern. One or two of the few Irish private banking firms which had survived the crisis of 1820 also gave way. English bankers became alarmed, and their precautions led to a still further reduction of the stock of bullion in the bank of England. A lull, however, took place; but, in March of the succeeding year, the storm which had been brewing burst over England and Scotland. Many bankruptcies occurred; but the recorded number for 1837 is not so much above the general average as might have been supposed, from the active speculation which had been carried on. Of the failures in England, few appear to have been of bankers. The most notable bank failure was that of the Northern and Central Bank of England. It had only been in existence for about three years. Another case was that of the Norwich and Norfolk Joint-Stock Bank; but it was a comparatively small affair. In neither case do the creditors seem to have lost, and the shareholders did not suffer very severely. We have already detailed the banking events which occurred in Scotland at this time, from which it will be seen that the crisis fell lightly on Scottish banking.

Among minor incidents within this period mention may be made of the loss of a remittance by the Bank of Scotland. On 27th February 1826 the smack Delight, on her passage from London to Leith, struck a sunken wreck off the Norfolk coast, and foundered in fifty feet of water. The passengers and crew took to the boats, were picked up and taken into Yarmouth. But a valuable cargo, and specie amounting to £4500 in gold and £500 in silver, going to the Bank of Scotland, were lost. As the remittance seems to have been insured, it is probable that the bank was reimbursed. In this year an Act was passed which must have been of considerable service to the unincorporated banks. This was 7 Geo. IV. c. 67 (not c. 4 6, mentioned previously), to regulate the mode in which certain societies or co-partnerships for banking in Scotland may sue and be sued. It provided that all banks of issue, except the chartered banks, should enter on oath their names, and the name and abode of every partner and manager, in the books at the stamp office in Edinburgh, which were to be open for public inspection; and in the course of the year similar entries were to be made of any change of partners or officers. It also provided that such banks might sue and be sued under the names of their office-bearers. The introduction of the system of closing bank offices earlier on Saturdays, so as to allow the employees a weekly half-holiday, seems to have commenced about 1827. It may also be noticed that notes of the Scottish banks for £1 appear to have circulated freely 'in the north of England until 1828, when the Act 9 Geo. IV., c. 65, prohibiting them, was passed. The issue of them in England was already illegal, but not their circulation. The change was not accomplished without opposition, numerous petitions and other representations in favour of the practice being presented to Parliament. A modification of the usury laws was made by the Bank of England Charter Act of 1833, and was extended, and made permanent, by subsequent Acts in 1850 and 1856.

Allusion may here be conveniently made to the system of settling exchange balances. Until 1834 this was done by the debtor banks giving drafts on London at ten days' date for the amounts due by them. But in consequence of the stoppage of a private bank in Edinburgh (presumably Robert Allan & Son, to whom we have just referred), while many of the other banks held its drafts, Mr. Blair, treasurer of the Bank of Scotland, proposed that the balances should be settled by exchequer bills, similarly to the practice of the London Clearing House. The bills were for £1000 each, the fractional parts of the balances being paid in Bank of England notes and specie, and latterly in notes of the three old Scottish banks. Each bank was to hold an agreed-on quota of bills. This system was adopted, and continued in practice for many years. But it was an inconvenient arrangement, and eventually a return was made to the older plan, in a modified form. The system is still, or was until recently, in use in Dublin, among the banks of issue.

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