THE FAILURE OF THE CITY OF GLASGOW BANK.

New Zealand Herald, Volume XV, Issue 5309, 21 November 1878, Page 3

THE FAILURE OF THE CITY OF GLASGOW BANK.

Wf. quote the following from leading articles of the Times :— In itself the City of Glasgow Bank failure is one of the greatest, and, we fear, one of the most disastrous and discreditable, of the kind which have been recorded in our mercantile history. It can hardly compare with the gigantic downfall of Overend's, but it is quite on a par with tho Western Bank failure in 1857, which precipitated the panic of that year. 'l'lio liabilities of the Western Bank to the public were only about eight millions sterling ; but the City of Glasgow Bank, at the date of its last balance sheet in June owed ten millions, and possibly more, as it is found that the acceptances, which were set down in the balance-sheet at one and a-half millions, are now nearly three millions. At tho same time it appears that the bank has advanced in money or credit, in three accounts only, over five millions sterling. One linn has had £2,200,000, another £1,700,01-0, a third £1,300,000; so that in each of two cases the bank has lent more than its whole cipital and reserve, which are stated at £1,450,000, and in a third case it ha 3 lent nearly as much as that amount. It is a relief, after reading such figures, to bo told, in our City Article to-day, that tho deficit which the shareholders will have to make good "will not much exceed two millions." We hope that this may not bo too sanguine an estimate. While the shareholders were thus losing their whole capital, and this great deficiency of two millions has been also accumulating, tho directors and managers of the bank have been paying dividends of 10 and 11 per cents, the last dividend of all bein" at the rate of 12 per cent, per annum ! We must wait for fuller details befcire we can say exactly what the folly and imprudence of the bank's direc'ors and managers have been, and ho -v they have been gradually led from one false step to another. But ot.ouph is known to jus ify us iu the severest coiidemintion. On the surface of the reports they have evidently been guilty of some of the gravest offein es against good banking management. Everyone must be struck by the magnitude of the advances made to one or two customers only. It is a cardinal rule of prudence, from which no business I na , n should ever depart, nor to risk his whole means on the credit of any single customer. It ia au aggravation of the ofFencc that some of these huge advances appear to have been on naked civdits, while the security most favourably spoken of, that of real property in Australasia, is no such security as a should ever have touched. We doubt

whether this security will realize whit is so conndently hoped from it; but, cood as it may be, it is monstrous that a .Scotch bank should have accepted it for a fourth of the deposits it was bound to repay at call. Another feature of gross mismanagement [ is one about which there may be some dispute, because not a few other banks have committed a similar blunder ; but it is onf-, nevertheless, on which the plainest speaking ia necessary. ' We refer to the amount of the bank's acceptances, which are stated to hive been nearly three millions sterling, or cqu.-.l to between a fourth and a third of the deposits. We should not say that in all ct?es it i 3 wronp; for a deposit bank to accept bills. As au auxiliary convenience in the working of some customers' accounts, it may be expedient; to accept bills to a moderate extent ; but it is quite plain that, when the acceptances grow into au amount equalling a considerable proportion of the deposits, a deposit bank is no longer in the absolutely safe position it ought to hold. When it doi s so, it uses its credit twice over. Having lent the deposits made with it, it proceeds still further, and lends the name with which the customer obtains money from othci people. The result is a most serious inflation of credit, whatever the "securities" thebank obtains against its accr-ptauce. AVh it is worse, as some of the most careful bankers in the City have perceived, the circulation of its acceptances exposes the credit of a bank to the danger of a wholly different sort from the danger it runs by mere deposits. Its deposits, as a rule, are likely to be from non-banking people, whose faith is not easiij' shaken, and whose operations in paying in and drawing out can be calculated on with some certainty. A bank with a good list of depositors may sustain the heaviest losses and so become discredited in Lombard-street, yet its credit outside enables it to go on, and perhaps retrieve its position. But a bank which accepts largely, when anything goes wrong is instantly viewed with disfavour by its neighbours, whose opinion is nevertheless absolutely necessary to its existence. 'Its acceptances being being no longer discounted, the customers who depended on them are unable to pay, and they practical Income to the bank for payment.

In se'lf-dcfence tlie banks wi)l now, no doubt, as suon as possible, withdraw tin: support they h<ive given to firms of uncertain solvency and the advances they have made upon doubtful sec»ritie3. But the withdrawal will not be eliVcted without diUi oulty. Housph that have been propped up by tlio assistance of the hanks during the period of stagnation that- has lasted nmv f.»r nearly four years are likely to come to tin* ground when they fiud their accustomed support takeu away.

Tlie 1> i ai dof Trade returns for September, of which we publish an abstract in our Money Market Article, are still very lY»r from encouraging. We have not yet, it seems, reached the lowest depth of. the depression from which industry :tnd commerce have been sutTering since 1574. It is true that there is an increase in the importation of commodities of ordinal consumption, — such as ccreals, cattle, dead and preserved meat, butter and cheese, tea and coffee, tobacco and wine. Of these larger quantities have been imported during last month than were imported during September, 1877. The fall in prices, apparently, lias browguc about an iucrcuse in consumption, which may, perhaps, be regarded as evidence of au improvement in the purchasing power of the community. Jsut this n of litile moment iu comparison condition of the great industries country, and with respect to these thy testimony of the Board of Trade returns fails to yield us any coinfoit. The imports of raw cotton aro less by upwards of one-fourth than they were in the corresponding month lank year. Tlie imports of flax aud hemp have fallen off by one-iifth. The evidence of the principal exports points in the same direction. Cotton piece goods, linen and jute manufactures, iron and steel, hardware and cutlery, all shew a decline both in quantity and in value, and the decline in value is much greater than that in quantity. The outlook for trade is, therefore, very dark, and this is now generally acknowledged. In spite of succesnivo reductions in the rate of wages and in the pricc of raw materials, our manufacturers seem to b3 losing their hold on the foreign markets. Since nearly all other nations, except the French, make the same complaint, it is probable that the real causes are that those markets have been overflooded with goods and that the purchasing power of all countries is lessened by the collapse of an artiticial prosperitj'.