Following up these general principles, he proceeded to show from the evidence led, that the director Potter, and the manager Stronach, were directly responsible for the falsifications on the balance-sheets, and that the other directors need not have been cognizant of them at all. After remarking upon the points favourable to the prisoners, such as their having derived no corrupt personal interest from their connection with the bank, and having taken no advances but such as from their commercial standing they were, generally speaking, legitimately entitled to, and their having stuck to their shares to the last, and paid the calls thereon till they were ruined, he left the case in the hands of the jury.
The jury, after an absence of two hours, brought in a verdict of guilty against Potter and Stronach of concocting and fabricating false and fictitious balance-sheets, and thereafter of using and uttering the same; and against the other directors of "using and uttering" only. Sen-tence was pronounced next day of eighteen months' imprisonment against Potter and Stronach, and eight months' against the others. This was in addition to the three months' imprisonment which all the prisoners (with the exception of Stewart, who was released on bail of ,£'15,000) endured previous to their trial.
As illustrative of the responsibilities of persons holding a fiduciary position acting ultra vires, it may be worth mentioning that the liquidators obtained a decree against all the directors for the sum of £6,231,000, for which amount they subsequently ranked on each of their sequestrated estates. This amount was made up as follows :-
Loss directly sustained by advances to nine particular debtors .....
Advances to shareholders on security of bank's stock made valueless by the loss incurred under the first item .
Loss incurred from bank's stock held by the bank itself ......
Loss incurred through investments in bonds and stocks of the Western Union Railroad Company and Racine "Warehouse and Dock Company.......
We have entered thus fully into the circumstances and surroundings of the failure of the City of Glasgow Bank as the event is one which will unquestionably prove to be a distinct landmark in banking history, because of the diversity of the issues involved and the magnitude of the losses. It stands out as the most gigantic failure which has ever taken place in the banking world, and as such we think it has demanded something more than a cursory notice.
To exhaust the subject, however, it will be necessary to examine the causes which led to the disaster; and we shall earnestly hope that the result of such examination may be, that in the future it will prove a beacon whereby others may steer clear of the rocks whereon the City of Glasgow Bank became a wreck.
Whenever a bank fails it is almost invariably found that the result has been brought about by some large involvements in the shape of advances on dead and unmarketable securities. In a previous section of this work, as we have already seen, the Western Bank of Scotland was brought down chiefly by having locked up over a million and a half of money by advances to four insolvent houses. The Borough Bank of Liverpool was brought down in the same way; and so was the Northumberland and Durham District Bank by a large lock-up with the Derwent Iron Company.
It has been over and over again enforced in the preceding pages that the most dangerous of all loans are those which are made against unmarketable securities, such as mills, iron-works, coal-mines, landed property, etc, and which from their nature are not likely to be repaid at maturity, but are likely to be asked to be renewed again and again for an indefinite period. Then a time of tightness in the money market comes, when it is necessary to realize every penny; and when this cannot be done, too often the bank and the debtor go down together. It has also been enforced that the granting of such loans is most often due to a want of decision and firmness on the part of the banker. The latter is perhaps assailed by an influential customer, who so presses his proposal for such a loan upon him, that, being unable to answer with an emphatic "No " when necessary, he allows himself, in a moment of weakness, to be persuaded to agree, and the mischief is then, in the majority of cases, done. For it is easier to get into a large loan than it is to get out of it, and when a loss is once made it requires a great amount of strength of mind to look it in the face and submit to it. The terupta-tion is to throw good money after bad on the off-chance that things will all come right some day. When we say this, of course we do not mean to imply that in every case it is inexpedient to "nurse an account." This is frequently done with the best results; but the determination to attempt it must be governed by circumstances, and in view of the fact, as experience has proved, that it is always a dangerous movement, and that the chances are always very much against the success of the result.
To locks-up of the kind above alluded to, the failure of the City of Glasgow Bank was largely due. We have seen who were its principal debtors, and it only remains to say that these gigantic totals were built up by degrees, and in the hope that the additional supplies would enable the debtors to ultimately wipe off the whole. As an example let us take Smith, Fleming, and Co.'s account. It transpired at the trial that that firm were indebted to the bank in 1870 to the extent of £150,000 only, which sum was entirely covered by securities. But in consequence of a serious loss by their Liverpool correspondents, Nicol, Duckworth, and Co., about that time, they determined to stop payment. In an evil hour, however, both for themselves and the bank, they communicated their intention to the latter, who, not liking the prospect of a possible loss, pressed them to go on, and offered them further help. This is an instance-not, perhaps, of the principle of nursing an account, but of the foolishness of nursing such an account in the way they did. Granting the propriety at this stage of carrying them on in the hope of setting them on their feet again (for it must be remembered that Smith, Fleming, and Co. had an enormous commission business which brought them in nearly £100,000 per annum), it altered the matter altogether when this could only be done at the cost of advancing them other £500,000. Unfortunately the bank did this, and thereafter they were compelled from time to time for years to add to their advances, until at the date of the stoppage they amounted to nearly two millions. The securities the bank took against this debt were of the most heterogeneous description, and embraced tea-garden property, and shares in steam, telegraph, oil, cotton, and tool-factory companies, besides debts of several failed firms. It is obvious how unsaleable many of these securities were, and consequently how exceedingly dangerous it must have been to have advanced against them.