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History of Banking in Scotland
Chapter XXI - The Crisis in 1857 - The Western Bank of Scotland

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.

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