THE CRASH

Once upon a time,
they jailed bankers

One hundred and thirty years ago tonight, a Scottish bank collapsed. Douglas Wood recounts a scandal of current resonance.

During the recent turmoil in financial markets mention has often been made that there hasn't been a run on a British bank for more than 100 years. Beyond that there seems to have been little curiosity about what happened before. It's possible the reference could be to the City of Glasgow Bank whose collapse caused great misfortune in the west of Scotland in the late 19th century, an episode worth recalling. The problem then was not restricted to depositors queuing round the block wanting to withdraw their savings.
     Contemporary reports tell of people gathering in Glasgow's Buchanan Street waiting for the first edition of the evening paper for news of what was happening. Earlier that day the City of Glasgow Bank closed all its branches 'until further notice' amid rumours that it had collapsed. The scenes could have been 2007 but this was in fact October 1878 and the beginning of Glasgow's biggest financial crisis of the 19th century – the failure of the City of Glasgow Bank.
     There had been no warning signs, at least none as far as the general public was concerned. Its downfall was unexpected, caused by problems that today have become familiar. Lending far outstripped the sums held on deposit, some loans were very large, a significant amount of the debt was overseas and some of the borrowers had questionable reputations – circumstances we have now come to understand as 'sub-prime'. The directors of the bank had managed to conceal the problems but were eventually driven to make a desperate appeal to the other Scottish banks for help. But the necessary help was not forthcoming and the bank's doors had to close. With a substantial network of branches across Scotland the fallout from the bank's failure was widespread, but the impact was most severe in Glasgow. Many companies and organisations with deposits went out of business and most of the shareholders, who ultimately held unlimited liability, were financially ruined.
     The City of Glasgow Bank came into existence in 1839, one of many local banks established throughout Scotland as trade and commerce developed from the early 19th century. It grew to have a network of 133 branches spread across Scotland as well as four in the Isle of Man. Like many others it was licensed to print its own bank notes. Banking had a reputable history in Scotland. The banks were trusted and City of Glasgow enjoyed a status in keeping with that reputation. But it seems that within banking circles the collapse was less of a surprise. Many had reservations about how it conducted its business and rumours of difficulties had often circulated in the banking community, but a repetition of them had not aroused particular interest on this occasion. After all, the bank's £100 shares had recently been trading at up to £240 and the dividend to shareholders had been increasing steadily each year. Only four months before its collapse the bank had announced a further rise in the dividend to 12%.

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