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History of Banking in Scotland
Chapter XXV - The City of Glasgow Bank

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.

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