The City of Glasgow Bank was a bank in
Scotland
Scotland (, ) is a country that is part of the United Kingdom. Covering the northern third of the island of Great Britain, mainland Scotland has a border with England to the southeast and is otherwise surrounded by the Atlantic Ocean to the ...
that was largely known for its spectacular collapse in October 1878, which ruined all but 254 of its 1,200 shareholders since their
liability was unlimited.
History
![City of Glasgow Bank cheque1877](https://upload.wikimedia.org/wikipedia/commons/4/46/City_of_Glasgow_Bank_cheque1877.JPG)
The bank was founded in 1839
with an initial capital of £656,250 (equivalent to about £46 million 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 1870ss the bank had grown to have the third-largest branch network in the United Kingdom.
As was common at the time its shareholders had unlimited liability and so they were jointly liable to cover any debts and were called to inject additional funds to cover any losses.
The bank's principal office was established in Virginia Street,
Glasgow
Glasgow ( ; sco, Glesca or ; gd, Glaschu ) is the most populous city in Scotland and the fourth-most populous city in the United Kingdom, as well as being the 27th largest city by population in Europe. In 2020, it had an estimated popul ...
in 1842 and moved to Glassford Street in 1851. During the
Panic of 1857
The Panic of 1857 was a financial panic in the United States caused by the declining international economy and over-expansion of the domestic economy. Because of the invention of the telegraph by Samuel F. Morse in 1844, the Panic of 1857 was ...
, the bank had to suspend operation but later reopened and continued trading. For a long time before the bank's closure,
dividends were paid at 9%-12%.
Collapse
On discovery of a £7,000 deficit (equivalent to £½ million at 2005 prices), the Bank's operations were suspended in November and December 1877, when by agreement with the other Scottish banks, the New York agency was closed. All seemed well, and in June 1878, the bank announced that there were now 133 branches and deposits of £8 million (= £600 million at 2005 prices), and it declared a 12% dividend.
On 2 October, however, the
directors
Director may refer to:
Literature
* ''Director'' (magazine), a British magazine
* ''The Director'' (novel), a 1971 novel by Henry Denker
* ''The Director'' (play), a 2000 play by Nancy Hasty
Music
* Director (band), an Irish rock band
* ''D ...
announced the bank's closure. An examination after the closure showed net liabilities of over £6 million (equivalent to £500 million at 2005 prices), together with extensive loans on poor security and speculative investments in Australasian farming, mining stocks and American railway shares. In addition, false reports of gold holdings were made to the authorities, balance sheets and profit and loss statements were falsified and the share price was held up by secret purchases of the bank's own stock.
So successful was the deception that on the Bank's last business day, its £100 shares were selling at £236.
The directors were arrested and tried at the
High Court in
Edinburgh
Edinburgh ( ; gd, Dùn Èideann ) is the capital city of Scotland and one of its 32 Council areas of Scotland, council areas. Historically part of the county of Midlothian (interchangeably Edinburghshire before 1921), it is located in Lothian ...
in January 1879. Their sentence was pronounced on 1 February. The Manager, Robert Stronach and Lewis Potter, who had been a director of the bank since its establishment, were found 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.
Scores of Glasgow businesses failed as a result of the
bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
, 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).
Depositors and note holders did not suffer, as other banks accepted their notes, and deposits were protected by the shareholders' liability.
The 1200 shareholders and their families suffered greatly. Their liability was unlimited, and the failure ruined most of them.
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.
Wider effects of the collapse have been seen in the growth of
limited liability
Limited liability is a legal status in which a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a corporation, company or partnership. If a company that provides limited liability to it ...
and a temporary banking liquidity problem, and a longer-term reduced trend in bank deposits across the UK.
The legalities of the collapse and liquidation were overseen by
Alexander Bennett McGrigor.
The liquidation of the US assets, primarily holdings in railroad stock which amounted to $5,000,000, were handled by
John Stewart Kennedy
John Stewart Kennedy (January 4, 1830 – October 30, 1909) was a Scottish-born American businessman, financier and philanthropist. He was a member of the Jekyll Island Club (also known as The Millionaires' Club) on Jekyll Island, Georgia a ...
's firm J.S.Kennedy & Co.
Archives
The bank's archives are now held in the
Archives of the University of Glasgow
The Archives of the University of Glasgow (GUAS) maintain the historical records of the University of Glasgow back to its foundation in 1451. Its earliest record is a charter dating from 1304 for the lands of the earliest mention of record-ke ...
.
Scotland’s ghost of banking meltdown past
'www.sundayherald.com'', retrieved 2008-12-23
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
Jessie Bell (1857 – 23 January 1917), later Jessie Mansergh, was an English writer born in Liverpool, who wrote under her married name Mrs George de Horne Vaizey.
Life
De Horne Vaizey was the daughter of Scottish insurance broker David Bell, and ...
's 1910 novel ''A Question of Marriage''.
Ken Follett’s "A Dangerous Fortune" pages 252,270,273,274,436
References
External links
Report of the Trial of the Directors of the City of Glasgow Bank, 1879
*
{{DEFAULTSORT:City Of Glasgow Bank
Banks established in 1839
1878 disestablishments in Scotland
History of Glasgow
British companies disestablished in 1878
1878 in Scotland
Companies based in Glasgow
1839 establishments in Scotland
Defunct companies of Scotland
Defunct banks of Scotland
Economic history of Scotland
1878 in economics
British companies established in 1839
Banks disestablished in 1878