The Glasgow bank scandal which saw managers jailed
On October 2, 1878, branch managers of the City of Glasgow Bank (CGB) received the following message from their director, Robert Stronach.
'Bank has stopped payment. Close your door at once and pay nothing.'
So began the dramatic collapse of the CGB, an event which led to the restructuring of the Scottish banking system, and which historians have described as the most significant commercial banking failure in the UK prior to the 2008 financial crash.
The effect of the bank's collapse on its 1819 shareholders, whose liability for the bank's losses was unlimited, was severe.
Bank manager Robert Stronach (Image: Glasgow City Archives)
An investigation into the CGB's affairs was immediately ordered, and in mid-October 1878 the bank's managers, directors and secretary were arrested and charged with 'wicked and felonious fabrication and falsification' of CGB's accounts.
At time of collapse, CGB had the third-largest branch network in the UK, with 133 branches across the country.
The bank was established in 1839, and had its headquarters in the Merchant City. As was common practice in Scottish banking at the time, shareholders' liability was unlimited – meaning that they were required to cover any discrepancy between assets and liabilities.
When CGB collapsed, the investigation of the bank's accounts revealed this debt to be £6.2 million – about £608 million in today's prices.
It fell to CGB's shareholders to foot the bill. Historian Sydney Checkland describes how shareholders were called to pay £2750 per £100 share, with the result that ultimately only 254 of the 1819 shareholders remained solvent. The effects of the collapse were not limited to Glasgow – the Dundee Evening Telegraph reported that 'the failure of the City of Glasgow Bank has come upon the community of Scotland like a thunder-clap'.
Image – Trial Report, Front Cover, 1879 (Image: Glasgow City Archives)
Two questions immediately arose: how had this happened, and who was responsible? The investigation into the bank's accounts soon revealed some of the ugly truth of the calamitous affair.
While rumours had been circulating about the state of CGB's accounts, few on the outside could have foreseen such a disastrous collapse – indeed, just a few months before its failure, the bank's published balance sheet showed it to be in good shape.
Investigators revealed CGB's balance sheets to be a tissue of falsifications.
For years, the company's directors had been 'cooking the books' to conceal the dire consequences of reckless lending and risky speculative investments.
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The report into the trial of the bank's directors, held at Glasgow City Archives, excoriates the directors who 'converted a great banking institution into a mere machine for abstracting money from the pockets of a too confiding public, in order that it might be lavished upon their friends.'
Duke Street Prison interior, 1959 (Image: Glasgow City Archives)
The fall from grace of the supposed 'men of virtue' at the top of CGB was swift.
On October 19, the same day as the report of the Investigation Committee was published, the arrest of the bank's managers and directors was 'quietly effected', and the seven men taken to Duke Street prison.
The trial report describes how, on January 20, 1879, in front of a 'crowded and expectant court' in Edinburgh, 'the manager and directors of the City of Glasgow Bank were placed at the bar, to answer the charges of falsehood, fraud and theft preferred against them.'
Trial Report, Not Guilty, My Lord, 1879 (Image: Glasgow City Archives)
The seven accused each pleaded not guilty. After a long and complicated trial, which the Lord Justice Clerk admitted had 'perplexed' even him, the jury were instructed to retire and consider their verdict.
They were given the difficult task of ignoring the significant sympathy that the situation of CGB's shareholders had aroused in the public, and dealing dispassionately with the evidence.
On February 1, 1879, all seven accused were found guilty, to varying degrees, for the fraud, falsification and mismanagement that had led to the bank's collapse. The longest sentences, of 18 months, were handed to Stronach and Potter, for actively falsifying CGB's balance sheets.
The crash of CGB and the public sympathy for its shareholders led to significant reform in the Scottish banking sector.
The Companies Act of 1879 was brought about as a direct result of the collapse of CGB, and led to a system of limited liability for shareholders. The Act also required that the balance sheets of banks be subject to external audits, in an attempt to prevent a repeat of one of the greatest failures in Scottish banking history.
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