City of Glasgow Bank

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The City of Glasgow Bank was a bank in Scotland, largely known for its spectacular collapse in October 1878, ruining all but 254 of its 1,200 shareholders, whose liability was not limited.

General[]

A cleared cheque from 1877

The Bank was founded in 1839,[1] with an initial capital of £656,250 (about £46m at 2005 prices). It aimed to cater particularly for small savers, with its branches opening in the evenings to receive deposits. It was part of a wave of bank formations that saw 16 Scottish banks established between 1825 and 1840. By the 1870s the bank had grown to have the third largest branch network in the United Kingdom. As was common at the time it's shareholders had unlimited liability so they were jointly liable to cover any debts and shareholders are called to inject additional funds to cover any losses.[2]

The principal office was established in Virginia Street, Glasgow in 1842, and moved to Glassford Street in 1851. During a banking crisis in 1857 the City of Glasgow Bank had to suspend operation but was then able to reopen and continue trading.[3] For a long time before closure dividends were paid at 9%-12%.

The collapse[]

On discovery of a £7,000 deficit (= £½ million at 2005 prices) the Bank's operations were suspended in November and December 1877, until by agreement with the other Scottish banks the New York agency was closed.[4] All seemed well, and in June 1878 the bank announced that there were now 133 branches and deposits of £8m (= £600 million at 2005 prices), and declared a 12% dividend.[1]

On 2 October, however, the directors announced the bank's closure.[5] An examination after the closure showed net liabilities of over £6m (= £500 million at 2005 prices), together with extensive loans on poor security, and speculative investments in Australasian farming, mining stocks and American railway shares.[6] In addition, false reports of gold holdings were made to the authorities, balance sheets and profit and loss statements falsified, and the share price held up by secret purchases of the Bank's own stock.[7] So successful was the deception that on the Bank's last business day its £100 shares were selling at £236.[7]

The directors were arrested and tried at the High Court in Edinburgh in January 1879. Sentence was pronounced on 1 February. The Manager, Robert Stronach and Lewis Potter, who had been a director of the bank since its establishment, being guilty of falsifying and fabricating the balance sheets of the bank, and were given eighteen months imprisonment each. The other five directors were found guilty of uttering and publishing the balance sheets, knowing them to be false, and were sentenced to eight months imprisonment.[1][7]

Scores of Glasgow businesses failed as a result of the bankruptcy and shareholders were called to make good the bank's losses. The case of one shareholder who sought to mitigate the consequence by arguing that he had become a shareholder through the fraud of the bank's agents was appealed unsuccessfully to the House of Lords ("Houldsworth's case", 1880, 7 R. (H.L.) 53).[8]

Depositors and note holders did not suffer as other banks accepted their notes and deposits were protected by shareholders' liability.

The 1200 shareholders and their families suffered greatly. Their liability was unlimited and the failure ruined most of them.[2] A public subscription was set up to help the shareholders, almost all of whom were bankrupted by the disaster, in the form of a national relief fund which received £379,670 in donations by 1882.[9]

Wider effects of the collapse have been seen in the growth of limited liability and a temporary banking liquidity problem,[10] and a longer-term reduced trend in bank deposits across the UK.[11]

The legalities of the collapse and liquidation were overseen by Alexander Bennett McGrigor.[12]

The liquidation of the USA assets, primarily holdings in railroad stock which amounted to $5,000,000, were handled by John Stewart Kennedy's firm J.S.Kennedy & Co.[13]

Archives[]

The Bank's archives are now held by the University of Glasgow[14] [15] [16]

In literature[]

The Bank's collapse was vividly represented in the 1948 trilogy The Wax Fruit by Guy McCrone (dramatised by BBC Radio 4 in 2010). It also features in Mrs George de Horne Vaizey's 1910 novel A Question of Marriage.

Ken Follett’s "A Dangerous Fortune" pages 252,270,273,274,436

References[]

  1. ^ Jump up to: a b c "City of Glasgow Bank". British Banking History Society. Archived from the original on 30 January 2014. Retrieved 5 June 2014.
  2. ^ Jump up to: a b "Desperate adventurers and men of straw: the failure of City of Glasgow Bank and its enduring impact on the UK banking system" (PDF). Bank of England.
  3. ^ Grossman, Richard (2010). Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. Princeton University Press. p. 96. ISBN 978-1400835256.
  4. ^ "Records of City of Glasgow Bank, bankers, Glasgow, Scotland". University of Glasgow Archive Services.
  5. ^ "Bank must restore confidence". The Scotsman. 14 September 2007. Retrieved 5 June 2014.
  6. ^ Lloyd Pritchard, Muriel F. (1970). An Economic History of New Zealand to 1939. Auckland: Collins. p. 155.
  7. ^ Jump up to: a b c Rosenblum, Leo (December 1933). "The Failure of the City of Glasgow Bank". The Accounting Review (subscription required). 8 (4): 285–291. JSTOR 238146.
  8. ^ Nehme, Marina; Hyland, Margaret (2008). "Houldsworth: An Obsolete Piece in the Legislative Puzzle". University of Western Sydney Law Review. Retrieved 22 March 2016.
  9. ^ "Receipt for donation to relief fund". The Glasgow Story.
  10. ^ Manfred Pohl, Sabine Freitag, ed. (1994). Handbook on the History of European Banks. European Association for Banking History. p. 1145. ISBN 9781781954218.
  11. ^ Cottrell, P. J. (2004). Roderick Floud, Paul A. Johnson (ed.). Cambridge Economic History of Modern Britain. 2. p. 274. ISBN 9780521527378.
  12. ^ http://www.theglasgowstory.com/image/?inum=TGSA00218[bare URL]
  13. ^ "JS Kennedy and the city of Glasgow bank". Dissertations in economic and business history.
  14. ^ https://www.nytimes.com/1878/10/04/archives/recent-heavy-failures-the-breaking-of-the-city-of-glasgow-bank-its.html[bare URL]
  15. ^ https://web.archive.org/web/20081205063706/http://www.hbosplc.com/abouthbos/History/bos_history.asp. Archived from the original on 5 December 2008. Retrieved 23 December 2008. Missing or empty |title= (help)
  16. ^ Scotland’s ghost of banking meltdown pastwww.sundayherald.com, retrieved 2008-12-23 Archived 24 December 2008 at the Wayback Machine

External links[]

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