WHEN BIG BANKS BREAK.

Taranaki Daily News, Volume LIV, Issue 73, 16 September 1911, Page 9

WHEN BIG BANKS BREAK.

FINANCIAL' DISASTERS THAT IIAVII! DISMAYED DEPOSITORS. YWien the Birkbeck Hank recently suspended payment smother was added to the long list of bank panics. This same bank has had experience of them before. It's only a few months since there was aAitermined run on it, but the BirkMsk safely weathered the storm.

There was a previous three-days' run in IBU2, when only a timely loan of half a million sterling from theßank of England saved the Birkbeck from the disgrace of shutting its doors.

The greatest smash in the history of England was in 1806, when the finn of Overend, Gurney and Go. put up its shutters. This powerful banly had been a rival even of the Bank of England. Its fall made the Bank of England itself tremble, and only the assistance of the Government saved it from smashing too. The rivalry between tile two great banks had been very keen. The Bank of England had tided its rival over a panic in 1857, but then announced' that it would never assist a "discount bank" again. Overend, Gurney and Co. were determined to have, their revenge. Quietly tlicy ran up their credit account at the Bank of England till it was over three millions, and then, one morning, presented a cheque demanding the whofe sum in cash. The Bank, though in those days it held a very much smaller cash reserve than now, contrived to pay, but it did not forget; or so the City said when Overend, Gurney and Co. found, in 1800, they were nineteen millions short, and appealed for help. The Bank of England refused and in the awful panic that followed every bank in the region of Lombard street had its run. Soon the Bank of England trembled, too, as all the other banks started drawing on its cash reserve.

In 1890 there was nearly a smash before which even the Overend, Gurney and Co. disaster would have paled. In that year Lord Revelstoke, a director of the great banking firm of Baring Bros,, discovered that the firm's liabilities to the public came to the tremendous sum of 128,000,000. Imprudent speculations in Argentine had been the chief cause. The sum was so large that even the Bank of England declined to guarantee it. But they would try, if all Lombard Street would support them. So, for the first time in history, the Bank of England chiefs consented to receive the heads of other banks in their sacred parlour. The other banks would cheerfully have made an example of Barings' for letting themselves be caught so short of cash, but they knew that if they did they themselves would be the first to suffer. So they agreed to guarantee the Bank of England against loss up to fifteen millions if the Bank would undertake the responsibility of the whole twenty-nine. So Barings' turned the corner, and every bank manager in England wiped his forehead. It was in 1878 that the awful smash of the City of Glasgow Bank took place. For years the directors had made ends meet only by constant fraud and cooked accounts. They had been sinking hundreds of thousands in firms they were privately interested in, all of which went bankrupt. The bank tottered on for a while by presenting false returns to the Government, and publishing false bal-ance-sheets, the auditors helping. But at last the smash came, at a moment when the bank owed the public £7,000,000. The directors were imprisoned, and a subscription of nearly half a million was made for the victims, nearly all of whom were very poor. The shareholders, equally poor, came out even worse, for the bank was "unlimited," so that the shareholders were all ruined, their little all having to go to pay the depositors. It was after the (Jlasgow smash that banks hastened to become "limited."

To anyone interested in bank panics' it is important to know what the Bank Act is. On the three occasions when the Bank of England was in danger of shutting its doors—in 1847, 1857. and 18(Mi—it was only saved by the Government "suspending the Bank Act." The Bank Act dates from 1814, and is an Act which governs the issue of notes,, etc., by the Bank of England. Among other things it decrees that the Bank must have five sovereigns in its strongrooms against every single fiver. Nowadays, the Bank keeps a cash reserve of some thirty millions or more. It was the Overend-Gurnev affair that taught the Bank that this was the best way to avoid panics. For the Bank is in a peculiar position. As it is the bank with which all other banks bank, a run on any bank means a drain on the Bank of England's gold. Nowadays, the reserve is so gigantic, that a run .on another bank does not make the Bank shiver'for its own safety. The national bank will never see a queue outside again. If it did, the mere announcement that the, Government were willing to suspend the Bank Act would be, as lias been proved before, quite sufficient to restore confidence.

People talk of the Government being behind the Bank of England. It is not really so. AH the help it would give in a time of crisis would be to permit the Bank to break the law by the suspension of the Bank Act.

.It is a curious fact that a bank panic comes round every ten years or so. It takes a trade boom ten years to rise and fall, and at the ebb' the badness of business and vague rumors as to the effect of bad trade on the banks makes people anxious. They want lo see their money in yellow gold. There was a panic in 1847, 1857, 1800, 1878, and ISSM>, while the case of the Charing Cross Bank in 1!1U) is too recent to mention. Neve is a piece of good advice. If ever there is a. run on your bank, don't join the queue and spend hours in the street, .lust go to the nearest bank and open an account, giving a cheque on the bank that is in trouble. If it is sound, .and being helped, your new bank will cheerfully accept your cheque as so much hard cash, and your anxiety is over. A bank alwav.s knows.