Scottish Field, November 1969
courtesy of Simon Potter
(paragraphing by REW)

Financial Disaster: The Sad Story of the City of Glasgow Bank

Author: Alistair Borthwick

NINETY YEARS AGO this autumn five men came out of jail and found Scotland in the throes of the worst disaster it had known since the days of the Darien scheme. It was their doing. They had played ducks and drakes with so much money and dragged so many others down with them that never since has quite so much financial misery been caused by so few. They were the directors of the City of Glasgow Bank. Two more directors remained in the jail with a further 10 months to serve.

A great deal of fuss was made about their trial in January and February, 1879 - books were written and the newspapers were full of it - but there was nothing original in the story except the amount lost, which was £6,000,000. Indeed, it was the oldest story of them all, a board of directors who, instead of going honourably bankrupt, threw good money after bad in the hope of saving their business and their shareholders.

What gives it its interest to modern eyes is the aftermath, which no one bothered to write up except as stray snippets in the newspapers. Piecing them together to-day is a macabre experience.

Briefly the background was this. Some years before the crash the manager of the bank made very large advances to four companies engaged in the East India trade. They were doing well, but they were in a speculative business and world trade slackened. Soon they needed more money, and to protect its original investment the bank gave it to them. It gave them in all £4,000,000. Now it is possible, even probable, that the directors knew nothing about this, relying on an incompetent manager to do their work for them; but when they brought in a new manager three years before the crash they certainly knew what had been going on and they knew how deeply they were involved. They had arrived at a situation in which their fortunes and those of the four companies were bound together. If the companies failed, the bank failed.

They decided it was their duty to keep the companies afloat, and to this end they lent them close on £2,000,000 more. And to keep the money flowing in they cooked the books three years running and declared heartening dividends of 12 per cent. The books were the work of the new manager, Robert Stronach, and a director called Lewis Potter, and they were works of art. They showed bad debts as sound assets and gave securities at more than their true values, and then struck the balance by knocking a few millions off both sides of the ledger. This was ingenious. The balance remained the same, but as they dropped their worst debts from the debit side and most of their shakiest assets from the credit, the effect was much more reassuring than it had any right to be. They bought peculiar land shares in Australia and New Zealand, hoping they would show a profit some day, and they spent the gold they were required to hold against their banknote issue.

All this was done with the best intentions. Even the judge admitted it. He gave Stronach and Potter 18 months and the rest eight months, sentences which were received far from approvingly by the public. The law then took its normal course, but normality in the 1870s was such that the phase which now began was the worst of the whole disaster. The City of Glasgow Bank was not a limited liability company, and the things that happened in those days to the shareholders of bankrupt companies of unlimited liability were quite simply monstrous.

The first concern had, of course, been for the depositors, the people who had put £6,000,000 in the bank for safe keeping and wanted to have it back. To-day it would be simple: with no money to pay them with they would get nothing. Then it was another matter. However great the debt, it had to be found by the shareholders. In this case it looked as if a man with £100 invested in the bank had not only lost his stake but would have to find £850 more to meet the debt. Hence the list published by "The Glasgow Herald" only two days after the bank closed its doors. It gave the names and occupations of the shareholders, a matter of no interest in similar circumstances today but then of overriding importance, so important that it was one of the first solid pieces of information to be printed after the crash.

Who were these people? What kind of people were they? Big people? Little people? They were little people. There were 1400 of them to cover the enormous debt, and they were spinsters, married women, widows, executors, trustees, in for £100 or so and some for even less. They came from all over Scotland. They were tradesmen, farmers, ministers, doctors; and since the bank had been a favourite with family lawyers with estates to invest there were many children. These were the people who had to pay off the debt. They had not simply lost their money: they had lost eight -and-a-half times the amount they had invested as well. And they did not have it. The liquidators put out a first call for £500, and only one shareholder in nine could meet it.

But that was not the end of it. The law was explicit. If some could not find the money, the others would have to find it for them. The liquidators went about their work as the law demanded, like officials at an execution, everyone hating it but able to do nothing because it was the law, and it had started, and it could not be stopped. There was a touch of blackmail about it, too, because it was done by inches. The debt passed on. A second call was made, this time on the one-in-nine who had paid already, and again there were many who could not pay. Then a third call was made on the survivors. So it went on. In the end a handful of wealthy men were left. They paid £2750 for every £100 of stock held. It must be understood that these few wealthy men were the only people to come through it. There was no question of the others being impoverished: they were wiped out. They paid, and waited, and paid again, and waited until they could be squeezed no more and the debt passed to those who still had assets left. In 1879 no fewer than 599 shareholders surrendered their estates to the liquidators and left them to sell everything they had. In 1880 another 126 followed.

These people were utterly stripped. Their businesses, their savings, their houses, their furniture were sold from under them. In a single morning in 1879 Edmistons the auctioneers knocked down 104 life insurance policies. By the end of 1880 the depositors had been paid 17/- in the £1 and the shareholders were ruined. A chain reaction set in as debtors failed to pay debtors and bankruptcies multiplied among people who had no connection with the original crash. Forced selling pushed prices down and made the losses greater than they need have been. And, of course, human nature came out of it no better and no worse than usual. There was the young man from Renfrew who jilted his fiancée in case he should be liable for calls on her, but on the other hand there were the people who stood by their friends. There was a way out for the man with friends. They could pay the liquidators the value of his estate instead of seeing him sold up. It made no difference to the liquidators, who got their money either way; but it did mean the man could keep his business and use it to repay his friends gradually as time went on. Five hundred of the 1400 shareholders were rescued by their friends in this way. Much wriggling went on. The courts were choked with cases brought to avoid liability by showing that the holder of the bank shares had not authorised their purchase, or had bought them too late for their registration to be completed by the time the crash came. Most of the cases failed.

So great was the distress among the victims that the Lord Provost of Glasgow opened a relief fund, not to pay off the debt but simply to keep bodies and souls together. It raised nearly £400,000 and 955 shareholders were helped by it. The rest were being helped out by friends, or were in salaried work the liquidators could not touch.

Even the society gossip columnists had to take note of the times they lived in. One wrote, with complete seriousness: "The bank crisis has come at the very opening of the festive season and has completely upset arrangements in fashionable circles. Numerous West End dressmakers have little or nothing to do. Even though many people are quite able and willing to keep up the usual appearances, the spirits of a large section of their class are at a low ebb, and the giving of return parties would be a great hardship. Further, the heads of several of the best known households are in prison..." An unhappy Christmas, an unhappy New Year, a dreadful summer and autumn, and the following year of 1880 still to be got through somehow. Confidence was so shaken that it was one of the greatest financial disasters ever to afflict Scotland. And it need never have happened.

The public conscience had already been stirred by the plight of shareholders in bankrupt companies, and Parliament had wondered how to mitigate it. In such cases, it was argued, there was no money and someone obviously had to suffer; but it was fairer for the creditors to lose what they were owed than for the shareholders to lose enormous amounts they did not possess; or, to take the example of the bank, it was fairer that the customers should lose the cash they had put in for safe keeping than that the shareholders should be squeezed for money they did not have and had never had.

An Act was passed making it possible for companies to limit their liability to the amount of their stakes. A man's shares might become worthless, but he could not lose more. In 1879 the ritual of liquidation was no longer inevitable in the old cat-and-mouse form. The legislation was there, but some companies were slow to make use of it. One of them was the City of Glasgow Bank. There is a postscript to the tale, a report published by the "Herald" in the summer of 1879. It seemed there was an old lady in Edinburgh, worried to death because she had £2000 invested in the bank and did not know where she would turn when the call came from the liquidators. But she was now a happy old lady. No call came. Her agent had embezzled the money.