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History of Banking in Scotland
Chapter XX - First Break-Down of the Banking Settlement - Exchange Companies

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.

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