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History of Banking in Scotland
Chapter XXII - Consolidation of Scottish Banking - The Crisis of 1866

The political experience of Great Britain from 1857 to 1866 was one mainly of peace; but in other quarters of the globe several severe wars occurred which sometimes endangered its neutrality. Indeed, throughout this period it may be said that Britain's condition was rather one of armed neutrality than of perfect concord with the other powers. In 1859 France and Sardinia conducted a successful campaign against Austria, which was the commencement of the formation of the kingdom of Italy. In the middle of the same year Britain went to war with China, one incident of which was the repulse of our fleet off the Peiho. This war was continued almost throughout the succeeding year, during which Garibaldi commenced his career as the great liberator of Italy, at Marsala, in Sicily. The most important event in the world's history for the year 1860 was, however, the secession, on 19th December, of the State of South Carolina from the great American Union—an action which was speedily followed by the secession of the other Southern States of the Union. Early in 1861 the seceding States numbered eleven, united as an independent political organisation, under the designation of the Confederated States of America. The civil war which ensued assumed enormous proportions: it was protracted and bloody, involving vast expenditure; and its direct and indirect effects on the trade and financial conditions of the world were very great. At one time, moreover, Britain was on the eve of a rupture with the Federal States, owing to the violation (8th November 1861) of the neutrality of one of her mail steamers by the American warship San Jacinto,—an incident popularly known as the Trent affair—two commissioners from the Confederated States being forcibly taken from the British vessel while on their voyage from Havanah to Southampton. Before the close of the year, however, reparation having been made by the Federal Government, all danger of war had passed away. A small war with the natives of New Zealand broke out at the close of 1863, and another with Japan in the succeeding year, in which the French, Dutch, and United States fleets were allied with the British. In January 1864 Britain was nearly involved in war with Prussia and Austria, in defence of Denmark; but, at some sacrifice to her prestige, she refrained from an interference which must have been attended with very serious results. The close of the American civil war was signalised by the assassination (April 14) of President Lincoln. Prussia and Italy were at war with Austria in 1866, but in that conflict Britain had no direct interest.

Meanwhile the arts of peace had been progressing satisfactorily. No great inventions or discoveries revolutionised the conditions of trade or society, but existing facilities were developed and availed of to a great extent. An important step in ocean navigation was taken in the building of the Great Eastern steamship, which was launched on the Thames on 31st January 1858. Unfortunately this great project was beyond the knowledge of its designers and the requirements of the time; and it proved an almost total financial failure. The Great Eastern was practically useless until the comparatively small value to which it fell permitted it, in after years, to be successfully employed in the laying of ocean telegraph cables. This department of business was developed very widely during the period of which we are treating. On 5th August 1858 the first Atlantic cable was successfully laid, and congratulatory messages were interchanged between Britain and the United States. This was speedily followed, however, by the grievous disappointment of a total cessation of communication, through some flaw which the electricians of that time were unable to deal with. In other quarters of the world telegraph cables were laid with more success.

From an economic point of view, the period extending from 1857 to 1866 displays the usual features of depression, activity, speculation, and collapse; but, probably owing to the greater complications consequent on advancing civilisation, and to the disturbing influence of the striking political events to which we have referred, these characteristic transitions are not so clearly marked as in some previous periods. One noticeable point is that the period of depression following the crisis of 1857 was of unusually short duration. Within two years a marked advance of prosperity had occurred; and the Times was able to record that, with the exception of the shipping interest, "every branch of industry is flourishing as abundantly as at any former period, and the England of 1860 is richer, stronger, and better contented than the wealthy and prosperous England which in 1850 commanded the respect and envy of the world." Increasing commercial activity reached the phase of speculation in 1862 and 1863, when bubble companies—principally banking and trading —became numerous, and foreign loans formed the subject of a monetary mania.

In the former year, however, a serious counteracting influence came into play. This was the so-called "cotton famine," consequent on the blockading of the ports of the Confederate States of America. By this event the cotton industry of Lancashire was paralysed, and large numbers of operatives were thrown out of employment. The nation came nobly forward to avert the danger of starvation which threatened the working classes of the district; and, although great loss occurred by the cessation of this industry, the nation was able to bear the strain with surprising ease. The money market, however, became much affected towards the close of 1863, and during almost the whole course of the next year the value of money was very high. Indeed, it may be said that, at this time, there occurred one of those semi-crises sometimes observable during the course of a decennial period. This speedily passed away, and the nation resumed its career of prosperity unchecked, until inflated credit and over speculation brought about their invariable sequel. It is probable that joint-stock enterprise received a great stimulus by the passing of the Companies Act of 1864, under which the formation and incorporation of all kinds of companies was much simplified.

The record of banking in Scotland during this period is marked in the main by increasing prosperity, development, and consolidation. Only one instance of adverse experience occurred ; and it belongs properly to the immediately preceding period. The Edinburgh and Glasgow Bank—whose career we have already sketched—got into a condition of embarrassment in the middle of 1858. Half of the capital (£500,000) had been written off on 4th February, but the bank found the attempt to recover from the discredit into which it had fallen during the recent crisis hopeless; and it was fain to seek repose by amalgamation with the Clydesdale Banking Company. This operation conferred no benefit on the shareholders of the Edinburgh and Glasgow Bank, for they received no consideration for the goodwill of their business. They were indeed freed from danger of calls; but they lost their whole right of property in the bank. Had they shown sufficient courage in facing their difficulties, they might have come out of the struggle in a much more satisfactory manner. [It is said of one of the directors that, after the board meetings, he used to call on a stockbroker of his acquaintance to discuss the situation. The clerks, with youthful intelligence, were quite alive to their opportunity ; and, when the director was closeted with their principal, used to make a pretext for entering the room, so as to be able to leave the door open. They thus heard the conversation, and were kept au courant of the state of affairs at the bank. They were not likely to be more reticent than the director himself. The story was told in later years by one of the clerks.] As it was, the new connections secured by the Clydesdale Bank through this amalgamation, obtained practically without any outlay, had a material effect in improving their business. The number of their branches was increased by more than twenty offices of the Edinburgh and Glasgow Bank, many of which were believed to be very profitable concerns.

Another amalgamation secured by the Clydesdale Bank was that of the Eastern Bank, in January 1863. In this case a very handsome price was paid for the business, principally in stock of the former bank. By these two purchases the authorised circulation of the Clydesdale Bank was extended by £170,293. [Previously the authorised circulation of the Clydesdale was £104,028; that of the Edinburgh and Glasgow, £136,657; and that of the Eastern, £33,636, making £274,321 in all,] Next year (20th February 1864) the Dundee Banking Company was amalgamated with the Royal Bank of Scotland—the transaction being accomplished by a transference of stock of the latter bank to the Dundee Bank shareholders. The Royal Bank thus acquired six new branches, and an increase of authorised circulation to the extent of £33,451, raising it to £216,451. The Dundee Bank had a paid-up capital of £100,000, held by 74 partners, selling at 60 per cent premium, with a dividend of 10 per cent. About the middle of 1864, the City of Glasgow Bank increased its capital from £670,869 to £850,000 by the issue of new stock to the shareholders at a premium of 30 per cent. [Courant, 2nd June 1864.] The Commercial Bank of Scotland added £400,000 to its capital by two allocations of stock, by way of bonus, to its proprietors, each to the amount of £200,000 —the first being made in 1859, and the second in 1864. This was accomplished by a transference from the reserved profits of previous years, and occasioned much adverse criticism on the part of previous shareholders who had sold out in ignorance of the existence of so large an accumulation of profits. The paid-up capital thus became £1,000,000. This proceeding was quite in accordance with traditional usage, the old banks having repeatedly acted in this way. But the more open system of accounting to shareholders, adopted by the Scottish banks shortly after this time, and since established as a yearly practice in the publication of balance sheets, makes one now regard such a transaction as a relic of a bygone age; as, indeed, it has become otherwise, through the practical impossibility now of making such large profits as were then obtainable.

On 6th February 1863, the Scottish banks conjointly took an important step, which had probably been forced upon them by the largely-increased extent of their branch systems. This was a general instruction to their branches to follow at once changes made by the Bank of England in the minimum rate of discount. The effect of this was to bring the banking system of Scotland into more immediate sympathy with the monetary system of the world than had formerly been the case. It was also an evidence of the increasing importance of Scottish banking as part of that system.

One phase of the Western Bank liquidation which came prominently forward at this time has more than special interest; that is the endeavour made to secure some value for the right of note-issuing, the exercise of which had been lost to the shareholders by the failure of the bank. This was no small question, for not only did the authorised issue amount to £337,938, but, under existing conditions, the right to issue practically conveyed the power to carry on the business of banking. So early as April 1858 application was made to Mr. Disraeli as Chancellor of the Exchequer to give whatever legislative sanction might be required to enable the bank to dispose of the privilege of issue to one or more of the other banks of issue in Scotland. But the application was refused. The hope of making something out of this lapsed right was, however, maintained for some years; and on 11th February 1864 a bill was introduced into Parliament to divide the authorised circulation among the other Scottish banks in proportion to their existing authorised issues. In his report presented in February 1864, the liquidator, Robert Lumsden, referred to the question and stated that a deputation had waited on the Chancellor of the Exchequer (Gladstone). He had, however, refused to recognise the right as a matter of law, but expressed his willingness to consider the application on other grounds. [Courant, 26th February 1864. Bankers' Magazine, 1864, pp. 310, 366, and 475.]

Later in the year, a provisional committee which had been formed for the resuscitation of the bank, applied for a free grant of the lapsed right of issue; but this the Treasury declined to accede to. As is well known, all the efforts made in this direction came to nothing. Indeed, in face of the 12th section of the Act of 1844, it is difficult to understand how the negotiations went as far as they did. Doubtless the warm feeling of sympathy for the injured shareholders which existed, must have prompted the desire to afford them every chance of obtaining this mitigation of their losses.

An effort at legislation in connection with Scottish banking (in its currency aspects) was made in 1864, by the introduction of a bill by Sir John Hay, with the object of making Bank of England notes a legal tender in Scotland. The Chancellor of the Exchequer discouraged the attempt, and when Mr. Adam Black, one of the members for Edinburgh, seconded by Mr. Dalgleish, moved its rejection, it was withdrawn. [Memoirs of Adam Black, Nicolson, Edinburgh, 1885.]

The activity manifested in the formation of banking companies, to which we have referred, affected Scotland to a slight extent. No new native bank was proposed; but two or three companies were formed in England whose object was, more or less, to do business in Scotland. Probably the first of these was the Scottish and Universal Finance Bank, Limited. It does not, however, concern us much, for notwithstanding its designation, it appears to have been more anxious for a name than for a local habitation that was Scottish. It was really a finance company, not a bank. In 1865 it is referred to as bankrupt. Another was the Mercantile and Exchange Bank, Limited, established in Liverpool early in 1863. It opened a branch in Glasgow which it withdrew eighteen months later. In the same year the London Bank of Scotland, Limited, was formed, which had branches in Edinburgh and Glasgow. Proceedings for the amalgamation of these two by merging the London Bank in the Mercantile were proceeding, and the former was actually put into liquidation with that object, when the suicide of the manager of the Mercantile Bank caused delay for investigation. [Courant, December 1864.]

The proceedings, were resumed, however, when an arrangement was made that some of the branches of the London Bank (including the Edinburgh Office at No. 17 Princes Street) should be taken up by a specially formed company, the London and Scottish Bank, Limited. Within about six months, being pressed for payment of £2000, this new venture applied for, and obtained, a winding-up order. The Mercantile and Exchange Bank was in difficulties in 1864, which, however, it overcame. The character of its business may be gauged by the fact that in 1866 its directors congratulated the shareholders that their losses did not exceed £131,337 : 10 : 2. The London Bank acknowledged losses to the extent of £65,554. The extent of these banks' business in Scotland is not revealed; but it was not supposed to be much. On the other hand, the aggregate business as shown by a balance-sheet of 1866 was considerable for a two years' career; and there is reason to think that the want of success, in England at least, was due to ignorant management. This English invasion of Scotland was followed by a return visit on the part of the Scots which will form the subject of a subsequent chapter.

The year 1866 is described in contemporary history as "gloomy, eventful, and ominous." In its financial aspect it was one of great disturbance in the money market, of bankruptcies of merchants and of bankers. The year opened with the bank minimum rate of discount at 7 per cent, from which it was soon raised to 8 per cent. It thereafter gradually fell to 6 per cent until May. It then rose with great rapidity. On 3rd May the rate was placed at 7 per cent, on the 8th at 8 per cent, on the 11th at 9 per cent, and on the 12th at 10 per cent. At that point it stood until 16th August, when it fell to 8 per cent, and thereafter gradually diminished to 3½ per cent at the close of the year. Symptoms of the approach of a state of crisis seem to have become apparent towards the close of 1865; but it was not before the commencement of the new year that anything of a marked character occurred. Then one or two English country banks failed. Subsequently uneasiness began to exist in London. The Joint-Stock Discount Company, Limited, suspended payment on 7th March, with liabilities amounting to £3,657,229, and other bankruptcies took place.

But the phase of crisis was not reached until 10th May, when Overend, Gurney & Co., Limited, failed, with liabilities to the extent of £18,727,915. This was a crushing blow, for not only was the amount involved enormous, but this discount house was relied on as a strong establishment. The shock to credit was almost unprecedented, and general panic ensued. The Agra and Masterman's Bank, Limited, and the Consolidated Bank, Limited, were forced to suspend for the time being; and the Bank of London and other establishments went into liquidation, while even the strongest were doubted. The credit system was thrown into a state of paralysis. But this was not long continued. The Government, taught by experience, at once authorised the Bank of England to exceed the limits of their circulation fixed by the Act of 1844, on condition of the minimum rate of discount being raised to 10 per cent. This was done on 12th May, and the panic was at an end when men knew that accommodation could be procured. Thus, for the third time, the great banking Act of 1844 was infringed, under the responsibility of the Government, for the salvation of the business of the nation.

The crisis did not affect banking in Scotland to any serious extent. No panic occurred, nor did any distrust in the banks manifest itself. Indeed, the banks rather gained than lost by it; for while they benefited by the high rate of interest, their credit was improved by the steady way in which they came through this time of trial. Shortly before this the National Bank of Scotland had been tempted to essay an inroad on the London field, which was successfully carried out; and it is understood that, as a result of this crisis, their business there was established on an extensive basis. It was the commencement of an invasion which was continued by others of the Scottish banks in later years, and which led to complications, involving a good deal of heated controversy on the part of English bankers which has now happily cooled down.

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