692





Record and Guide,





itovember 22,18d6





speciflc securitiea attacbed to tbem. Of tbese l,e64,000f. tbere were
«)0,0002. which one of tbe directors very can<iidly confessed must be con¬
sidered as totally bad. and which ought to have been written off long
before, but which still remained in the account as good debts. The
capital of the concern was 6^6,0002. nominally, but in reality it was consid¬
erably less than that; because in Ib47 tfaey faad been in trouble, and in
order to get out of tfaat tiouble they faad made a call of 52. to 11)2. a share,
wfaich was not paid upon some of tfae shares, which shares were forfeited
and taken by tfaem into tfae stock of tfaeir bank, to be reissued should occa¬
sion warrant their doing so. The consequence was that the subscribed
capital of the bank was about 6c'(),0002. Tbis statement at once showed that
any attempt to help tbem. short of taking up the whole concern and
liquidating it for tbem, would be perfectly useless. It was evident tbat
tfae whole capital was gone; and, looking at the character of the securities,
Mr. Hodgson came to tfae conclusion not oidy tfaat tfae capital was gone,
Imt that the bank was totally insolvent. Being very much struck witb tfae
extraordinary loss wfaich bad teken place in the bank, wbich, when a
private bank, be knew to faave been a very flourishing one, fae inquired
whether there was not some old sore of wfaich nothing faad as yet been
said. He was told that there was one; tbere was ratfaer a disincUnation
to mention what it was, but he felt it his duty to press it, and they told
him tfaey had a very large debt witb tbe Derwent Iron Company. He
inquired the amount of this debt, and foimd, much to bis astonishment,
that it amounted to 750,0002., tbe capital of the bauk being 600,OOC2. For
that debt tbere was a kind of security, which consisted of *'JiiD,OO0l, ut what
were called Derwent Iron Company's debentures, which were, bowever, in
reaUty, nothing bnt the promissory notes of the directors, there being
very few persons in this Derwent Iron Company. Tbe bank had also
100,0002. morteruge on the plant, and the remaining 400,0002. was totally
unsecured. In addition to this original debt, then mentioned, of
750,0002. tbere is^now another charge upon it of 197,0002. resulting from
bil'8 wbicb have not been paid, and which, in order that the Derwent
Iron Company migfat get tfaem discounted, tfae bank had indors<'d or
otberwise guaranty. These faave now come back, so tbat tfae total
Uabilitv for which the Derwent Iron Company is indebted to the bank
is about 947,0002., very nearly 1,000,0002. Tfae Derwent Iron Company
appears to faave been almost frcan the time of the conversion of the bank
into a joint-stock bank very intimately cojnected with it. Mr. Jonathan
Richardson, wbo was the moving spring of the wfaole bank, in fact tbe
person that managed everything, was, though not a partner in the Der¬
went Iron Company, very largely interested in it, as holding the royal¬
ties upon the minends which tney worbed. It appears that the concern
bas beeu worked extremely badly: thai it bas never made any proflts at
all, even in tfae very flnest years, f )r tbe ironmasters, and it has gone an
absorbing the money of tht bank unckecked by the directors.

Mr. Hodgsoa says that 1,000,0002. of securities were taken of the most
extraordinary nature for any bank to hold tfaat he ever &aw; tbat
1,000,0002. of securities, wfaich was tfae only tangible asset wfaich tfaey
had against the 2,600,0002. of liabilities, consisted of 350,0002. of tfae Der¬
went Iron Company's obligations, 250,0002. being debentures aud 100,0002.
mortgage on the plant. Tbey bad besides tfaese 100,0002. on a building
speculation at Elswick, near Newcastie, wfaicfa faowever was not a
primary mortgage, there being a mortgage of 20,0002. on that land
belongiug to Mr. Hodgson Hinde. Tfaey bad also auotfaer ICO,0002. on
otber building land and faouses in the neigfaborbood of Newcastle. They
bad about 350,0002. in securities of works and manufactures of different
sorts, aud they had about 50,0002. in navigation bonds guaranteed by the
railway, but wbicb railway was tfae only security to wbicb tfaey could look
in any given time to realize any sum of money; that made abf>ut 1,000,0002.
altogetber. The otber securities were absolutely unmarketable. This
bank had derived assistance from tfae Bank of England in tfae former crisis,
that of 1847. Almost exactly tfae same circumstences arose then wbicfa
arose in ISfi?. and almost from the same cause. Tbe bank, bowever, appUed
at tfaat time to the agent of tbe Bank of England at Newcastle, aud he, on
his own responsibility, made them a very large advance, which carried
tbem through; he taking at tfae same time a very considerable security
from tfaena m various mortgages, pretty mucb of the character whicfa has
been above mentioned, but bettor in quality, although not any mere bank¬
ing securitifs than tbese; between 70li,0002. and S0(i,0002. altogetber.

" Tbe whole of tfae advance made in 1847 was repaid to tbe Bank of Eng¬
land, was it not ?" " Yes. With regard to the late occasion I represent^
at tbe same time that though tfae bank could not be assisted, yet tfae fact
of ite failing, wbicfa it would do tfae moment it was known tbat tfae Bank
of England would not faelp it, would be at tfaat moment a very serious
tfaing lor the district, because it was so much connected with the coUieries
and ironworks tfaat it paid eve^ week, eitfaer lor persons wbo had balances
witb it, or for persons whose bills it discounted, and tbus gave them tbe
money, about 35,0002., on which tbe wages of 30,000 people were dependent;
and as tbeir pay-day was on Friday, and the bank would stop on the
Thursday, it was very desirable that something should be done to prevent
the confusion which would arise il there was no preparation made for that
conjuncture. In consequence of that the Bank of England requested me to go
down again that night with full powers to make ari-angemente witfa all
persons wfao m>ght bave any tangible and good security, though perhaps
uot perfectly regular security, so as to provide them with the means of
makmg tbeir pays on the Friday. I went don n accordingly and arranged
witfa almost everybody, or with everybody, I may say, to make such
advances as would enable tbem to meet tfae pays for tfaat week and for
the next should it be necessary. I ^so advised the manager of the
tavings bank to open his bank on Saturday for payments, though it was
not the usual day, aud authorized him to draw upon tbe Bank of England
for any sum of money whicb he might require for the purpose of
making any payment; but owing to the fact of the Bank of England
tbus enabling the proprietors, the coal mines, and tbe works, to make
tbeir weekly payments tbere was no run wfaatever upon tfae savings bank,
and everything passed off quite quietly.

" Was tbere auy limit to tbe authority wbich you faad from the Bank of
England to give assistance in Newcastle f " So, there was no limit, it
was left to my discretion to do what migfat be necessary. We knew very
well tfaat it Ct.uld not amount to a sum, under any circumsances, of mucn
more tfaan from .50,0002. to 70,0002."

" Are tfaere any otfaer particulars connected witfa tfae Newcastle Bank
wfaich you are able to lay before the Committee f ** I will, if the Com¬
mittee wish, give tbem the actual result of the accounts ol the bank wben
it was finally wound up in January tbis year bs compared vrith those in
November, 1857; it will show a Uttle difference. In November, 1867, tbe
UabiUties of tbe bauk were 2,600,0002.; these consisted of deposite,
1,350,0002.; accounte current, 1,150,0002 ; and estimated liabihtiea on
rediscounts, 110 0002. In Januai^, wben the bank \»as positively wound
up and the tfaing ascertained, it appeared tbat tfaere were of deposite
l,256j0002., in accounts current, 766,(X)02., and in UabiUties on rediscounte,
231,O0o2. The only great difference was in tbe accounts current, wbicb
were diminished about 4i 0,000£. This was principaUy, I beUeve, from the
fact that many persons wbo had accounte cun-ent had deposit accoimte
also; tbey kept two accounte, one of wbich had a balance in ite favor, and
tbe otber was overdrawn; therefore, one account being set against the
otfaer, it diminished it by so mucb, aud at tbe same time dinainisbed the
amount of overdrawn accounte; tfae assete wbicfa were estimated In Novem¬
ber at 2,V 0,0002. faad faUen in January to 2.000,0002.; and tfaere was one
peculiarity, wbicfa was, tfaat while tfae debt of tfae Derwent Iron Company
was taken as an asset in November at 7.')U,0002.. in January it was taken as
an asset at 947,0002., and that it is an asset of a very doubtful nature; the
position of the bank is much toorse in reality than is shown by th*
$taiement of ihe figures.





This disclosure was tbe result of an examination whicb lasted about two
hours; yet the bank had declared, at the last half-yearly meeting, a
divitiend of 7 per cent, making to the shareholders a statement tlie sub¬
stance of which showed a very prosperous state of things. Mr. Hodgson
mentions tLathe remarked on tbe fact ol their having declared a dividend
in June, wfaen it vtas admitted tfaat hall tbe capital was lost, and he asked
faow tfaey could faave doLe so; it was stated, in reply, tfaat tbere were so
many persons wfao depended entirely for tbeir Uvelifaood on tbe dividends
received, tfaat tbey really could not bear to face tfaem vritfaout paying any
dividend.

Each of these three banks bad been in peril in 1847, and thougfa
by tbe assistance of the Bank of England they were enabled to
surmount it they fell on tbe next occasion of severe commercial
pressure, under circumstances stiU more injurious. b3th to their
own proprietors and to the public. Two bUl-broking faouses in
London suspended payment in 1847; both afterwards resumed business.
In 1857 botb suspended again. The UabUities of one bouse in 1847 were,
in round numbers, 2,6^3,0002., with a capital of 180,0002.; tbe liabilities of
tbe same bouse in 1857 were 5,300,0002., tbe capitel mucfa smaUer, protmbly
not more tban one-fourth of what it was in ifH7. Tfae UabUities ol tfae
otfaer firm were between 3,000,0002. and 4,000,0002. at each period ol stq^h-
page, with a capital not exceeding 45,0002.

These five houses contributed fnore tban any others to tbe commercial
disaster and discredit of 1857. It is impossible for your Committee to
attribute the failure of such establishment to any otber cause tban to their
oum inherit unsoundness, tlis natural, the inevitable result of their own
misconduA:t.

Thus we bave traced a system under which extensive fictitious credite
bave been created by means ol accommodation bills and open credite,
great lacilities for which have been afforded by tfae practice of
joint-stock country banks discounting such bills, and rediscounting tfaem
with tbe biU brokers in tbe London market Upon the credit ol tbe bank
alone without reference to the quality of the bills otberwise. The redis-
counter relies on tbe belief tbat if tbe bank buspend and tbe bUls are not
met at maturity fae will obtain from tfae Bank of England sucfa immediate
assistance as wUl save bim from tbe consequences. Tfaus, Mr. Dixon
states: " In incidental conversation about tbe whole affair one of tbe bUl
brokers made tfae remark tfaat il it had not been lor Sir Robert Peel's Act
tfae Borough Bank need not have been suspended. In reply to that I said
that whatever mieht be tbe merite bf Sir Robert Peel's Act, for my own
murt, I would not nave been willing to lilt a finger to assist tfae Borough
Bank through ite difficulties il the so doing had involved tfae continuance
of sucfa a wretcfaed system of business as bad been practiced; and. I said, if
I bad only known faalf as mucfa ol tfae proceedings of tfae Borougfa Bank
while 1 waa a director (referring to the time previous to the 1st
of August, when I became a managing a director) as you must faave
known, by seeineagreat many of tfae bUis of the Borough Bank discounted,
you would never have caught me being a shareholder;" the rejoinder
to which was: " Nor wonld you bave caught me being a shareholder; it
was very well for me to discount tfae bills, but I would not faave been a
shareholder eitfaer."

Tfae subjoined iUustrative table supplies its own commentary:
Abstract Statement of the (Estimated) Position of Sixteen Firms wbo
Suspended Payment during the Monetary Crisis of 1857-58.

















Total Liabilities on Accept¬















Estimated




ances, Indorsements and




Estimated Amount of










CapitaL




Open Balances at Date
ofSuspeasion.




Gteneral Assete.





1    .




None.




jei07.C00




£14,000





s




None.




64,000




5,000





3




None.




66,000




8,000





4




£9,000




900,000




80,000





6




400




41,000




8,0C0





6     .




8,noo




180,000




1«,000





7     ..




7,000




ai«,ooo




87,000





8     ..




16,600




440,000




40,000





9     .




88,000




680,000




90,000





10     .




70,000




906,000




140,000





11




40,000




460,000




80,000





12




14,000




162,000




88,000





18




11,600




n!0,ooo




14.000





14




7,000




60,000




2,500





15     .




18,000




105,000




86,000





16     .




2,000




16,f00




8,000





821,400       ....        4,49A,000            .  ..                560,500

The foregoing disclosures are as beacon lights to warn against ths
dangers of the rocks and shoals and quicksands wbich beset tbe track of
modern adventurers in search of tfae Gtolden Fleece. Disclosures of tfae
kind could be multiplied almost ad infintum. But, once gold-fever set's
in, it rages until tfae moment of tfae crisis. And wfaat follows then?
We cannot answer tfae query better tfaan by quoting from ber " His¬
tory of the Thirty Years' Peace," Miss Martineau's description of the
consequences resulting from the terrible panic of 1825:

There are many now Uring (wrote that talented lady in 1846), wfao
remember tbat year vritfa bitter pain. They saw parente grow whitefaaired
in a week's time; lovers parted on tfae eve of marriage; Ugbt-hearted
girls sent forth from home as governesses or seamstresses; governesses, too
old for new situations, going actuaUy into the workhouse; rural gentry
quitting tfaeir lands; and wfaole families relinquishing every prospect in
life, and standing as bare under tbe storm as Lear and bis* strange com¬
rades upon the heath.

Must theee vicissitudes continue? A recent writer on tbe subject*
remarks:

If the crises must work tbeir vrill when they arise, bow are they to be
prevented in tbe future? The problem is difficult, yet not absolutely insol¬
uble. Tfae difflculty Ues more in moral tfaan in physical or ixade forces;
it ia tfae want of knowledge, and stiU more of owervation and reflection,
wbich generates real crises. . . . Crisis is not merely another word
for povoty. If tbe diminution of wealth is met by wise curtailment of
speculation even in ite legitimate form, property may dvrindle, but the
convulsions pecuUar to a crisis will not be developed. Then, again, if
farmers never drained except witb the surplus of a good faarvest, if manu¬
facturers never built new miUs except out of realized profite, if goods were
not produced except under a very strong presumption tfaat they were in
demand, if bankers never lent except upon solid and reaUsable security,
no crisis would ever desolate the world. Traden and bankers, like sailors,
have a difficult task in predicting tbe coming weather; and, likesaUors,
tfaey must try to acquire tbe sailor's eye—tbe faculty of discerning small
signs and judging their significance accordingly. The vital point is tbat
tbey should notice tfae right tbings, tbe causes which are at work in brew¬
ing mischief. They must be studied at tbeir origin. The difference
between tbe inteUigent merchant or banker, and the unintelUgent, lies in
tbe ability to understand tbe forces which make deposit and their with¬
drawals great or smaU—in the skill rerum eognoscere cattscu. Thia is a
wide study beycmd doubt. It ia easier, no doubt, to float down the stream
as it runs in tbe raretent, to make proflte and to let to-morrow take ite
chance, or to aee np some emi^ncal rule, acmie high-sounding .jargon,

*Mr. Bonamy friea, in No. cri. of the North British Review.





i?





^