THE FIRST LESSON OF THE GLASGOW BANK.
THE first effect of the Report upon the affairs of the City of 1, Glasgow Bank, drawn up by Messrs. Anderson and M'Grigor, and published on Saturday, upon ordinary minds is not,. we suspect,.one of indignation, so much as of intellectual perplexity, deepening rapidly into despair. It reveals so dearly an evil in Banking management with which legislation is in- competent to deal. 'Where are the limits of human stupidity, especially among experienced business men ? Here are a dozen Directors, Managers, and Accountants, all of the class esteemed able, all men of long experience in business, thorough knowledge of figures, and extensive acquaintance with men, who all appear to have entered into a combination, or to have allowed them- selves to be drawn into a combination, to fling away money in millions and risk penal consequences to themselves, for the sake of others with whom some of them, at any rate, can have had no connection whatever. The management of the City of Glasgow Bank—we impute nothing to indi- viduals — trusted with eight millions of deposits, and doing an enormous business, through more than a hundred branches, actually lent £5,792,000 to four firms, on securities estimated—and as is hinted, probably over-esti- mated—at £1,522,000, or say, in round numbers, a fourth of the sum lent. Among these securities, or others upon which money was advanced, appear the most extraordinary items,— huge estates in Poverty Bay, New Zealand ; " heritable proper- ties" in Rangoon, Kurrachee, &c. ; bonds of tenth-rate American Railways,—of that sort which may pay when the country is filled up ; "the property of the Racine Warehouse and Dock Company," now worth a tenth of its cost ; and all manner of things; upon most of which no ordinary man of business would advance! sixpence without, collateral. security, and the best of which were " lock-ups," landed properties on the other side of the world, which could no more be turned into cash when required than contingent reversions can, or than unopened mines. In fact, they could hardly have been turned into cash at all, for the mere possession of such things, if revealed to any discount house or bank manager of ordinary sagacity, would have made him dangerously suspicious of the concern offering them in pledge. The management must have known perfectly well that in lending these vast sums on these " wild cat " securities, as Americans call them, they were breaking every known principle of banking finance, and acting, at all events, as reckless trustees ; yet they did it, and not only did it, but sanctioned the most astounding falsifications of the Bank's accounts to conceal the loans, even at last employing the gold which they were bound by law to return as in their coffers to meet notes. They actually made bad debts of seven millions and treated them as assets, without, so far as appears, putting the seven millions—or any considerable portion of them—into their own pockets. We have no wish to prejudge the accused, one way or another, and may frankly say that we believe some of the number to have been rogues and some victims, but this much at least is certain. The management has not and never expected to have in its own pocket the money it lent so recklessly. One can under- stand men stealing millions, or swindling to get millions, or " accommodating" themselves with millions ; but why men of ordinary ability should fool away millions in order that other persons, no matter whether connections or not, should have those sums to play with for fortunes, which, when obtained, would not go to the bankers, almost passes comprehension.
The falsification of accounts, when the money was gone, is much easier to comprehend. The management were desperate then, but why should they have let the money go, and go in such amounts—amounts appalling even to Bank Directors—and on securities which, to all of them, must have appeared the merest trash ? Of course, there may be revelations yet to come showing that the management, or part of it, had much more direct interest in the borrowing firms than is yet apparent ; but on the surface of affairs, Smith, being trusted by a large constituency, robbed it in order that Brown, his friend or connection in business, might have an undue chance of making a fortune. It is inexplicable.
We press this point partly because it has not been pressed enough, partly because it reveals one of the greatest dangers which beset huge banking operations. The number of men who can manage such extensive affairs, who have the necessary knowledge and prudence, and above all, the nerve to invest bor- rowed millions well, is by no means so great as is supposed. A great many good business men very capable in their own trades are very stupid when taken out of them, and a great many more are, especially in old age, very deficient in nerve. That undoubtedly, apart from any want of honesty to be hereafter shown at their trial, was the first defect of the City of Glasgow Bank Directors. They had neither the courage to face a loss, nor to reveal it. They went on from year to year endeavour- ing to recover it by further loans to insolvent houses, and to conceal it by further falsifications of the accounts. Against want of nerve and stupidity legislation is powerless, as also it is against the paralysis of self-interest. We are obliged, in the practical business of life, to assume that a man will do what it is his clear interest to do, but as regards Banking this assumption is constantly proved not to be true; The new Director will not reveal what he discovers about his colleagues, though it is his interest to do so. The honest Director will not insist upon reform, though it is his interest to do so. The entire Board will not refuse risky undertakings intended to cover past losses, though it is their interest to do so. Directors will not even look into business directly under their eyes, though it is not only their interest to do so, but they know better than anybody that if they do not do it, they will be ruined. No Joint-Stock Bank ever fails without the clearest proof that some one Director, or it may be some one section of the Direction, has habitually neglected his own clear interest upon some crucial point, and has sanctioned acts which in his private affairs would have seemed to him mad- ness. Whether, as we half suspect, men become feebler in committee, or whether the sense of duty to oneself dies away under joint responsibility, we do not know ; but the fact is certain that while many Bank Directors are rogues, many more become blind to the clearest suggestions of their own interest and security. The difficulty of preventing fraud in such circumstances, when clear-headed men grow silly, and selfishly keen men grow trustful, is exces- sive, and will yet be found the greatest obstacle to perfectly safe banking. The root-error of the Glasgow Directors is one with which Parliament is wholly unable to deal. It may pass any laws it pleases, but if banking is to go on at all, bankers must lend the money they receive, and must be their own judges of adequate security. If they cannot be trusted even to do that, they are of no use, and had better disappear in favour of a vast State Bank, with branches like post-offices, guaranteed deposits, and permission to lend money on Consols and bars of bullion alone. They must be permitted to do so much, and yet in that permission was the downfall of the City of Glasgow Bank. If all its Directors had been perfectly honest and perfectly sol- vent, still the Bank must have gone down under these loans, which it is impossible to prove, legally, to have been fraudulent. Who is to know what any Director thinks, or, indeed, may be- lieve he knows, about the value of Poverty Bay, or lands in Burrachee, or Dock properties in the Far West? He may be as innocent as a child, and yet be scattering millions which do not belong to him as senselessly as if he were burying them in the hope of making a gold-mine. Private bankers commit such follies on a small scale every day. Francis Baring, afterwards Lord Ashburton, bought, as Vincent Nolte reports, all the land round the Lake of Mexico for £40,000 on account of his firm, thinking he was making a fortune, and it took all his father's political in- fluence and knowledge of men to get the bargain rescinded by the Mexican Legislature. These particular Directors may be tried and some of them convicted for conspiracy to deceive, for falsifying accounts, and for various other offences, but they cannot be punished for acts the intent of which is locked in their own breasts, but which, nevertheless, were fatal to the prosperity of the Bank. In those acts they were only doing injudiciously the very business they were set to do.
Every other offence connected with Banking may be met, but we confess we despair of any provision which shall effectually prevent the reckless or fraudulent lending of -capital under pretext of lending it on security, short of a State Audit, to include a thorough examination of securities ; and it is precisely this which borrowers, as well as lenders, will most strenuously resist. The shareholders cannot be admitted to examine such transactions, for if they are they will talk, and the Bank's business will be gone. Securities cannot be registered like mortgages, for there would be no time ; and if there were, publicity of that sort would he too much disliked, and firms in momentary difficulty would be made insolvent by mere panic, or by tricky revela- tions of the property they had pledged. No one but a State Auditor could be trusted to check such loans effectively, and no Parliament that we have ever had would trust an Auditor with power to discredit a great Bank publicly, while private remonstrance would pass by as the idle wind. The Directors know quite well already that they have no business to lend money on Botany Bay estates and shares in a Salt Lake Dock. There is no guarantee possible except the choice of honest and competent Directors, and the mode of choosing them becomes more difficult every day. How are a miscel- laneous lot of capitalists, doctors, clergymen, widows, little shopkeepers, and trustees, to know the man who in a far-off city will manage their property well ? They must in practice take the advice of their Board, which, if not dishonest, will advise better than they can judge ; and the Board will therefore be chosen more or less, and much more rather than less, by co- optation. Every Board is so chosen, and if it were not, would be chosen by a system of canvassing, and of debating the affairs of the Bank, which would break any Bank in pieces. We can see no help except, as we said last week, in a certainty of punishment for fraud—which will in no way stop loans on " bogus " securities—and are driven to advise small investors to steer clear of unlimited Bank shares. After all, the stupidity of the Glasgow Bank Directors, who lent millions on inconvertible property, is surpassed by that of the Bank Shareholders, who gave for shares they could know nothing about, shares involving unlimited liability, prices only frac- tionally less than they would have given for shares in the Bank of England. No man not rich enough to ask questions of his bankers, and compel answers, has any business with shares in a Bank of unlimited liability ; and if he is rich , enough, he had much better leave them alone. The risk is prodigious, even when compared with the return.