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History of Banking in Scotland
Chapter IX - Douglas, Heron & Co., and the Crisis of 1772

THE action of our history for the years 1769-72 centres and culminates in the rise and fall of the banking-house of Douglas, Heron & Co., trading under the designation of the Ayr Bank. With the exception of the Darien Scheme, the failure of which is attributable in great measure to circumstances independent of its constitution and management, there has never been in the history of Scotland so signal an instance of financial mania. We do not mean that the contract of co-partnery was framed on erroneous principles, or that the operations of the bank were absolutely prejudicial to the country. On the contrary, the constitution of the company was carefully drawn, and provided the usual preventatives to mismanagement; while advances made to customers had a very stimulating effect on the agricultural and other industries of the nation. The madness consisted in the unwritten principles on which the promoters started and carried on the concern. The promoters were, seemingly, men who, like too many business men of the present day, thought that the old banks selfishly studied their own interests to an extent both unnecessary and injurious to the progress of the industries of the country; and that, at the same time, they were monopolising a lucrative trade, which could be profitably competed for by men of larger views.

They, therefore (to quote their own words), "considering that the business of banking, when carried on on proper principles, is of great public utility, particularly to the commerce, manufactures, and agriculture of a country, at the same time that it may yield a reasonable profit to the bankers concerned in it ; and likewise considering the necessity there is in the present situation of the country, that a Banking Company should be created on proper principles at this juncture . . . resolved to establish a Banking Company upon a solid, creditable, and respectable footing." The contract of copartnery is dated 24th August 1769, and provided for a capital of £150,000. Among the original shareholders, whose subscriptions amounted to £96,000, were the Duke of Queensberry and Dover, Governor; the Duke of Buccleuch; the Earl of Dumfries, Director; the Earl of March and Ruglen ; the Hon. Archibald Douglas of that Ilk; Patrick Heron of that Ilk, and several other distinguished and respected names. The list numbers 136 in all, and embraces men of "rank and fortune," lawyers, merchants, shopkeepers, etc., but no bankers.

The advent of this great company was the occasion of general congratulation, of which the following may serve as a specimen: "The utility and advantage of a Bank of this kind to the country is too obvious to require any commentary. Its influence upon the commercial part of this nation, the evident tendency it must have to forward the improvement of the country, and the aid and support which it must naturally afford to its manufactures, were the inducements of those concerned to establish it, and are the benefits expected to be derived from it--events wished for by all who are lovers of their country." This was a euphonious, perhaps inspired, declaration of the origin of the bank, which is more plainly and authoritatively described by Sir William Forbes. " Some of the houses which carried on the banking business in Edinburgh, having embarked in extensive speculations for the purchase and cultivation of lands in the newly acquired West India Islands, required a larger capital than their own resources could command. To this must be added, the rage which then began to take place for building larger and more expensive houses than had been customary in Edinburgh before the plan of the New Town was set on foot ; and larger houses led to more extensive establishments, as to furniture, servants, and equipages. At the same time those projectors and improvers, flattering themselves with the prospect of the immense advantage to be derived from their speculations, launched into a style of living up to their expected profits, as if they had already realised them. Such causes combined had induced those gentlemen to have recourse to the ruinous mode of raising money by a chain of bills on London; and when the established banks declined to continue a system of which they began to be suspicious, the Ayr bank was erected."

On 6th November 1769, the head office was opened at Ayr, and soon afterwards branches were opened at Edinburgh (in Canongate, 31st January 1770) and Dumfries. Each of these offices exercised independent powers in the conduct of business, under separate boards. Agencies were established at Glasgow, Inverness, Kelso, Montrose, Campbeltown, and elsewhere. Among the partners were many members of trading firms, who immediately secured for the new bank an extensive advance business. Indeed so large were their demands, and so accommodating were the directors, especially at Ayr, that the coffers of the company were speedily emptied. This circumstance, however, occasioned no uneasiness. When the capital and deposit money were exhausted, they had an inexhaustible treasury from which to feed the insatiable demands of their customers. They had paper money "for the makin'," and they proceeded to manufacture it right heartily. Before long, however, their inexhaustible treasury began to manifest symptoms on which they seem never to have calculated. The notes came back on them for payment almost as quickly as they were issued. The directors had little specie to pay them with, and the partners were paying up the periodical instalments of their subscriptions in an unsatisfactory manner. Difficulty, however, is the opportunity of genius. A banker of merely average ability would, in such circumstances, restrict his advances and endeavour to replenish his cash reserves. But the directors of the Ayr Bank, like those of two long-to-be-remembered Glasgow banks, breathed the upper strata of the economic atmosphere. Their mission, like that of their predecessor, John Law, and the typical modern American, was that of the "eye-opener"; and it must be admitted that if, in a purely literal and technical sense, they failed, in another and hardly less literal sense, they achieved their object a couple of years later.

Instead of contracting their business as they ran out of funds, they increased their engagements. To provide themselves with funds, they arranged with certain firms in London to accept bills on their account at a commission; and with their notes they purchased bills of exchange on London from the Edinburgh bankers to replenish their account with their London correspondents. Thus assisted, and aided by a call of 20 per cent on the shareholders, the affairs of the company proceeded pretty smoothly for some time during the year 1770, though the London debt stood at £85,000. Bills maturing were met by renewals, which were readily granted, as the commission was tempting, and the liability of a wealthy proprietary was unlimited; and further requirements were similarly provided for. But early next year the London debt assumed a threatening aspect. Dimsdale & Co., the London correspondents, refused further assistance. A deputation to London, however, overcame obstacles and arranged for further credits. Meantime the management went from bad to worse. Irregular advances were made to privileged individuals; the circulation of notes was forced by means of paid agents scouring the country for specie and notes of other banks; the affairs of the company were represented to the shareholders as in a flourishing condition; and a dividend was declared in May 1771. The business of John Macadam & Co., bankers in Ayr (the Air Bank), was purchased on 1st January of that year for £18,000; and, on the following 29th October, that of Alex. Johnston, Hugh Lawson & Co., in Dumfries, was acquired for £7350. Neither of these houses seems to have been in a satisfactory condition; and Johnston, Lawson & Co. were virtually insolvent. Meanwhile the capital had been increased beyond the originally designed £150,000, the old directors were regularly re-elected, and affairs went on in the usual way.

In May 1772, the directors began to realise the gravity of the situation, and resolved on retrenchment. But the opportunity for such a course had passed, and irretrievable ruin stared them in the face. Even if they had had the moral courage (which they had not) to put their resolution into force, their power of doing so was gone. They were so hopelessly involved in the web they had themselves woven, that they could only passively submit to the fate that awaited them in a few weeks. Their bills on London had rapidly augmented until they amounted to about £400,000; they had more than £200,000 of notes in the circle, and £300,000 of deposits, and but small available funds. The Edinburgh banks had refused to hold their paper, and even their hitherto fertile genius was at last unable to devise an alleviation for their distress. They struggled on, nevertheless, and, aided by the general ignorance of their position, managed wonderfully to maintain their credit.

But in the afternoon of Friday, the 12th of June, a horseman, in extreme haste, rode into Edinburgh. He had travelled from London in the extraordinary space of forty-three hours. The news he brought accounted for his speed. The banking house of Neale, James, Fordyce & Downe had failed, and dragged down other firms with it, from which a terrible panic had ensued. These were dire tidings for the financial houses of the Scottish metropolis. All, except the few who had preserved the even tenor of their way, unallured by will-o'-the-wisp dreams of suddenly-got wealth, read their doom in the message. To none must the news have had more purport than to the Edinburgh Board of the Ayr Bank, who, although not at the chief seat of management, were perhaps even more involved than the Ayr Board in maturing and carrying out the credit and exchange transactions. They had intimate relationships with most of the private banking houses in Edinburgh, in order to assist the floating of their paper.

The first of these firms to collapse was Fordyce, Malcolm & Co_, who stopped payment three days after the arrival of the news from London. Next day, the 16th, Arbuthnot & Guthrie followed suit. These failures, and fears of more to follow, seem to have raised the first excitement to a considerable pitch. A rumour got abroad that the bills of the Ayr Bank were refused for discount in London. "Terrified with the apprehension that an immediate stoppage would be the consequence, the common people ran in crowds to draw specie for their notes; and on Tuesday evening the following advertisement was handed about in Edinburgh: `BANK OFFICE, CANONGATE, June 16, 1772. —Whereas the Branch of Douglas, Heron & Co., here, have for these two days past had an immense demand for specie, from the lower class of people, in exchange for notes, owing, as it is suspected, to some ill-grounded reports raised by foolish or malicious persons respecting said branch, a reward is therefore offered of one hundred pounds sterling, to any one who will discover the person or persons who have been concerned in raising such an infamous report; the reward to be paid by Mr. Hogg, cashier, upon conviction of the offenders. For Douglas, Heron & Co., Tho. Hogg, cashier.' This advertisement, joined with the knowledge of the solid foundation of that company, in a good measure quieted the minds of people, and the ferment had greatly subsided. But new failures continuing to happen, the demands on them for specie became greater than ever." On the 24th June, the important firm of Wm. Alexander & Sons, with Gibson & Balfour, Andrew Sinclair & Co., Johnstone & Smith, and Garbet & Co.—all well-known houses—suspended payment. [Sir William Forbes mentions (p. 42), in a list of firms which failed in consequence of the Ayr Bank collapse, an Anthony Ferguson. All the other names are those of bankers, and it may be that Ferguson was also engaged, more or less, in banking business; but his name does not appear in other lists of Edinburgh bankers. Sir William does not, moreover, give his list explicitly as that of bankers.]

The demands on the Ayr Bank had now become too great for their restricted treasury; and on the morning of the 26th they issued the following circular:—"Air, June 25, 1772.—The company of Douglas, Heron & Co., Bankers in Air, taking into their consideration the present state of the credit of this country, and the uncommon demands that have been made upon them for specie, owing to causes sufficiently well known, have come to a resolution to give over, for some time, paying specie for their notes. But as the country, who have received the most liberal aids from this company, cannot entertain the smallest doubt of the solidity of its foundation, it is hoped that, on occasion of a national emergency of this kind, the holders of their notes will not be under any alarm." The circular, which was signed by John Christian, cashier, proceeded to declare that interest at 5 per cent per annum would be allowed on notes remaining in the circle, for which a bond was duly executed on 4th July succeeding. The Ayr office appears to have closed on 22nd June.

Thus passed away in a thunderstorm, originated, or at least greatly aggravated (so far as Scotland was concerned), by their own actions, a great house who had promised much, and of whom much had been expected. Their hopes of resuming business speedily vanished amid the engrossing difficulties of providing for their outstanding liabilities. The Bank of England had refused assistance,--they had probably enough on hand with their clients in London, for the crisis there was of the gravest nature, and they had already £150,000 of Ayr Bank paper on their books,—so the directors, who had been sent to London to negotiate a loan, were at their wits' end how to accomplish their mission, notwithstanding they had two noble dukes and many other influential and interested friends to assist them. Eventually they succeeded in raising £356,715 on most exorbitant terms, viz, at the rates of an annuity of £100 a year for life on payment of £700 or on two lives for £800, with the fortunate proviso of option of redemption at the purchase price plus a half year's payment. The total sum raised, as afterwards redeemed under authority of a special Act of Parliament, was £457,570.

These events were productive of much hardship to the public, for, although the shareholders of the Ayr Bank were, for the most part, well able to meet their losses, the failure of so many bankers produced a general distrust, which for a time paralysed the note circulation of most if not of all the banks. In this connection it is gratifying to note the position of the three public banks and the leading private bankers in Edinburgh. These, or at least the two old banks, had for some time previous to the crisis been expecting and providing for it. They had refused dealings with Douglas, Heron & Co., and had made ample provision for the catastrophe which they anticipated as the consequence of that company's proceedings. The result is recorded by Sir William Forbes. "Besides the Bank of Scotland, Royal Bank, and British Linen Company, which were established by public authority, the only private companies that continued solvent were Mansfield, Hunter & Co., William Cuming & Sons, and our own." From other records, it would appear that two or three individual bankers also survived the crisis; but it is probable, from the omission of reference to them by Sir William, that they temporarily suspended payment, or that their banking business was of small extent. "On Monday, [presumably the 29th June], a very smart demand for money took place on us all, just as had happened the preceding week in London [Black Monday, the 2 2nd]. This was a new and unexpected circumstance; but as neither our house nor any of those others had been engaged in the circulation carried on from Scotland, and were sufficiently provided with funds to answer promptly all the demands that were made on them, the panic abated after two o'clock on Monday, and the public confidence in their solidity was restored."

Glasgow and the provinces of Scotland suffered but little, in comparison with Edinburgh, in this crisis; as, with the exception of Douglas, Heron & Co.'s connections in Ayr and Dumfries, they were not involved in the fictitious exchange business to any great extent. The Merchant Banking Company of Glasgow, however, was forced to suspend payment on the 9th of July. They announced on that day that they would resume on the 9th of October, and they appear to have been able to do so sooner. As confidence was felt in their solvency, their notes, together with those of the other local banks, remained in free currency. Similar confidence was shown in other banks throughout the provinces. William Alexander & Sons resumed business in Edinburgh on the 13th of July; but whether they retained their banking as well as their mercantile business does not appear.

It was a fortunate circumstance in connection with this crisis that an Act of Parliament, amending the bankruptcy laws of Scotland, had been passed just in time (the Royal assent was given June 1772) to preserve the equality of rights of creditors in the numerous bankruptcies that occurred. Previously, creditors ranked by priority of arrestment, and thus debtors could give and creditors secure undue preferences. The Act 12 Geo. III. cap. 72, abolished this system, and made several salutary provisions for securing the rights of creditors.

At the time of stoppage, the Ayr Bank had a capital stock of £160,000, of which £130,000 was called up; but, of course, the partners were unlimitedly liable for the debts of the company. The number of shareholders, shortly before the crisis, was 241. The total liabilities, including the capital, were not less than £1,250,000. These are specified in round numbers as capital stock, £130,000; private loans (deposits), £300,000; note circulation, £220,000 and current bills on London correspondents, £600,000. The assets consisted of (1) advances of various kinds at Ayr, Edinburgh, and Dumfries, amounting to £694,175 : 19s.; (2) advances at agencies which had been established at Glasgow, Inveraray, Inverness, Kelso, Montrose, and Campbeltown, £133,788 : 0 : 11; (3) bills of exchange, principally held at Edinburgh, £409,079: 7: 2; making a total of banking debts, £1,237,043 : 7: 1; and (4) an unascertained amount of fixed capital, such as buildings and furniture in use for the business. Of the debts due to the bank, about £400,000 consisted of advances made to partners.

On 28th September following, the bank offices were reopened, but notes were payable in specie only at Ayr. At Edinburgh interest was paid on notes for the period of suspension, in specie when less than 2 Os., and in notes when amounting to that sum. For the convenience of holders of large notes, small notes were given in exchange. The Edinburgh banks and private bankers would not receive Ayr bank notes. The bank continued to struggle on in this fashion for nearly a year after resuming, but at a general meeting of the partners in August 1773, it was unanimously resolved to give up business. The liquidation was conducted in Edinburgh. Although the shareholders were well able to bear the strain of meeting the liabilities of the partnership, the losses were felt very severely. No less than £750,000 of landed property is stated to have been forced into the market through the failure of the bank, and the ultimate loss to the partners is estimated at £663,396 : 18 : 6. [Scotch Banks and System of Issue, R. Somers, Edinburgh, 1873, p. 103.]

The shareholders were very indignant at the outcome of the brilliant essay at banking into which they had been drawn, and this feeling was much intensified when revelations were made of gross irregularities and reckless mismanagement. A committee was appointed to investigate the affairs of the company; and their report, presented in August 1777, and subsequently printed as a thick folio volume, gives details which fully corroborate the accusations made, and forms a detailed history of the bank. [The Precipitation and Fall of Messrs. Douglas, Heron & Company, late Bankers in Air, Edinburgh, 1778.] The book, although now but little read, is also valuable for the lessons it teaches. In almost all their transactions, the directors appear to have acted in the wildest manner. Advances for the development of agriculture were made profusely far beyond the ability of the country at that time to sustain, and still further beyond the resources of the bank; and worse still, the requirements of speculative customers were freely met by the discount of bills. As their resources failed, the directors pressed their notes into circulation, in the false hope that they would remain in the hands of the public. As they found that their notes came back upon them very speedily, they resorted to raising an ever-increasing amount of money in London by bills, until the amount of the London debt was so great that their credit in that quarter gave way. But worse than recklessness was proved against their. Privileged persons got advances either without security, or on worthless cash-credit bonds and bills, to the extent of £361,611 : 17 : 6. Even after the failure, mismanagement continued. The raising of money on annuities, to which we have referred, was conducted on ruinous terms, and it appears that some of the funds so obtained were misapplied in several cases, and a sum of £6220 was not accounted for.

In reviewing this crisis, it is evident that much of its intensity was due to the unadvisable conjunction of mercantile with banking business, which had always been a prominent feature of private banking. It may be thought that an over-issue of notes was a leading feature in the failure of the bank. But this was not so. A vigorous and sustained effort at over-issue was made all along; but the effort failed by the physical impossibility of making the public hold more notes than they required. The system of exchanges, moreover, expedited the return of the notes for payment. All the Edinburgh houses which fell, with the exception of the branch of the Ayr Bank, were general traders and speculators, as well as bankers. Although Douglas, Heron & Co. were not directly engaged in mercantile pursuits, they were entirely under the influence of the mercantile spirit. Their existence began, and their business was conducted, in close alliance with merchant banking. The collapse of 1772 effected a thorough revolution in this matter; and, although private banking again assumed a very active existence, its subsequent career witnessed a complete severance of the hitherto somewhat indistinctly defined departments of banking and commerce.

The essential errors of the Ayr Bank were—trading beyond their means; divided control by permitting branches to act independently; forcing the circulation of their notes; giving credit too easily; ignorance of the principles of business; and carelessness or iniquity of officers.

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