The dangers of our credit system are apparent to everybody; but when critics point to the panics which have occurred since the Act was passed, and make deductions therefrom to the effect that the Bank may find itself in a similar plight should another such whirlwind develop, they usually forget that, though the same danger exists, our banking companies are now much more prudently managed, and that the directors of the Bank of England, having the misfortunes of the past to guide them, are thoroughly acquainted with the delicacy of the machine they manage, and are, consequently, less liable to err.
We have seen that the joint stock banking movement began in 1826 under conditions which were far from favourable, and the companies, like the Bank of England itself, having to learn their business as the movement progressed, naturally committed many blunders; but when the dangers of banking were better understood failures became much less frequent, and after 1866 they were few and far between. The credit of the joint stock banks vastly improved in consequence, and confidence in their stability soon began to take the place of distrust. But in 1878 the failure of the City of Glasgow Bank and of the West of England Bank, together with some half-dozen private bankers and banking companies, undoubtedly revived old prejudices and created a feeling of unrest among depositors and shareholders.
The City of Glasgow Bank, it will be remembered, was in trouble during 1857, but in 1878 both its customers and shareholders had reason to regret that it ever opened its doors again, for the gravest irregularities were disclosed when its affairs were examined, false balance sheets having been certified by auditors and directors during a period of over four years; and once again the public was startled out of its sense of security by the discovery that some bank directors and auditors were not less peccant than the majority of the human race when hazardous speculations landed them in financial difficulties.
The directors of the City of Glasgow Bank finding themselves out of their depth, clutched at the proverbial straw, and, like a weak individual who starts with the best of intentions, they were speedily sucked into the vortex of crime. By the Act of 1845 the directors were bound to hold gold against any excess in the amount of the bank's circulation fixed thereby, but they overcame this difficulty by the simple expedient of making false returns to the Government. Having once crossed the line which separates the sheep from the goats the rest was easy.
With an utter disregard for the interests of the shareholders, the directors advanced huge sums to firms in which they were pecuniarily interested, and, as these firms did badly, they were compelled either to bolster them up with additional loans or to allow them to fail. They chose the latter alternative, and, as might have been expected, the bank's assets rapidly dwindled, millions of pounds in the shape of bad debts being disguised on the right hand side of the balance sheet as cash in hand, Government securities, and so on. The business of the bank soon degenerated into a mere gamble, and during the latter part of its career the institution was only kept in existence by the continuous perpetration of frauds.
Of course the longer the game (it can be dignified by no other name) continued the more desperate were the efforts it called forth, and just before the end the directors hit upon the brilliant idea of conducting a big gamble in Australia, in the vain hope that a decided success would obliterate the mistakes of the past; but about this time rumour was active, and when it was noticed that the bank's acceptances were being hawked all over the City, holders of its paper became suspicious. The bill brokers naturally do not like putting all their eggs in one basket, but endeavour to get as many good names as possible, so that, should a particular firm meet with misfortune, they may be in a position to bear the loss. When, therefore, the City of Glasgow Bank's paper was offered freely, they refused to place more of its bills in their cases, and, inquiries concerning the bank being made in consequence, the end soon came.
Though the revelations which followed generated a feeling of intense nervousness among bank shareholders and depositors both in Scotland and this country, and undoubtedly caused a slight panic, the country was spared a crisis. The Scotch banks, in order to prevent the run extending to themselves, encashed the notes of the delinquent institution, and advanced liberally to those persons whose money and securities were held by the City of Glasgow Bank. In this manner a serious panic was averted.
The Bank of England raised its rate immediately danger was threatened, and on the 14th October, 1878, the rate touched six per cent., but it fell to five per cent. in November, and money was exceptionally cheap during the next two years. The West of England Bank had also advanced its resources in a reckless manner, and it failed badly in consequence; but the Scotch scandals were not repeated, and the public gradually regained confidence in the banking companies.
When it was clearly seen after the failure of the Glasgow Bank, how easily a large bank, unless it be most cautiously and prudently managed, can ruin its members and customers, the public hesitated to hold shares in an unlimited banking company. For a time the prices of bank shares fell considerably, and fiction became tediously full of heroines and heroes who lost their fortunes by holding just one share in the Glasgow Bank. It was the "just one share" that proved so thrilling, and accentuated the sadness and the danger of possessing shares in an unlimited bank. The risks of a banking business were discussed on every side; and, after this failure, the unlimited banking companies took steps which enabled them to affix the desirable word "limited" to their registered names.
From the time of the failures of the City of Glasgow Bank and the West of England Bank until 1890, when the Baring crisis suddenly opened the eyes of the public to the dangerous gamble which was taking place in South American securities, the money market enjoyed a period of comparative calm. Speculation since 1885 had increased in volume, and the prices of securities steadily rose; but early in 1890 it became apparent that continuous speculation had inflated prices and created a situation which could not last. The Bank rate during the autumn of 1889 was exceptionally high, and remained at six per cent. from 30th December, 1889, to 20th February, 1890, when it gradually descended, but this fall only proved the lull before the storm, which raged furiously in the November following.