The Economy of the Times
There had been recessions in Great Britain in 1755, 1762, and 1768, but the economic trend since the late 1740's had been upwards. However, the banks in both England and Scotland were constantly battling with how much gold and silver they needed to keep on hand to cover the quantity of paper that they were issuing. The Scot banks, due to this excess of issued paper, all had to endure the added expense of employing agents in London to collect money for them, ship the money by wagon to Scotland and insure that it arrived safely. To minimize expense and exposure to loss, the banks of Scotland, for a long time were very careful to require frequent and regular payment from all their customers, and did not care to do business with any persons they believed could not meet those requirements. However, the Bank of England, and even the more prudent Scot banks, reached a point where their discounting of bills had gone too far, and they had to extremely limit the credit that they gave.
The result was that public thought that the banks were far too conservative with loans, and not supportive of those people trying to improve, beautify and enrich the country. It was the duty of the banks, they thought, to lend for a long time, and to as great an extent as they might wish to borrow.
The Douglas, Heron & Company Bank
In the middle of this economic situation, a new bank was established in Scotland. The firm Douglas, Heron & Co. started the bank in Ayr, in November, 1769, with branches in Edinburgh and Dumfries. The branches operated separately under their own boards. The original shareholders included eminent men like the Governor, the Duke of Queensberry, the Duke of Buccleuch, the Earl of Dumfries, the Earl of March, Sir Adam Fergusson of Kilkerran, Patrick Heron of Heron, and the Honorable Archibald Douglas. But, there were no bankers on any of the boards.
As Adam Smith stated regarding the bank in his book An Inquiry into the Nature and Causes of the Wealth of Nations in 1828, "the design was generous, but the execution was imprudent, and the nature and causes of the distress which it meant to relieve were not, perhaps, well understood. This bank was more liberal than any other had ever been, both in granting cash accounts, and in discounting bills of exchange." It was the avowed principle of this bank to advance, upon any reasonable security, the whole capital which was to be employed in the capital improvement, even if the return is slow, as in the improvement of land. To promote such improvements was even said to be the chief, public-spirited purpose for which the bank was created.
The result was, that its coffers were never well filled. The bank was funded though two separate capital subscriptions, totalling £160,000, of which only 80% were actually paid. A large number of subscribers, when they paid in their first installment, opened a cash account with the bank, and then borrowed on this cash account. The bank directors, thought that they were obliged to treat their subscribers with the same liberal conditions that they allowed all other men. The bank then had to borrow from banks in London, and pay those banks interest and commissions.
In May, 1772, the directors, realizing their error, tried to retrench. But, in June, the London banking house of Neale, James, Fordyce, and Doune failed, putting several banks in Scotland in difficulties. The spiralling credit, by the time that the bank suspended payments on June 25, 1772, had resulted in incurred obligations of £800,000. The Ayr bank struggled for just over a year to retain confidence, but the Bank of Scotland, the Royal bank, and the British Linen Company, refused to accept the Ayr Bank's notes. In August, 1773, at a general meeting of the partners, they resolved on liquidation. The total loss of the partners, of whom there were 225, was £663,396 18s. 6d., and the shock was felt throughout Scotland.
Loss of Family Estates
Given that the stated purpose of the Douglas Heron Bank was to provide loans for people to improve their property, when the bank failed, loans were called in, and many land owners had to sell their property to pay off the loan. Additionally, when the whole loss of the bank upon each share was calculated, the figure was that a £500 share resulted in liability for another £2,100, exclusive of interest, to cover the bank's losses. Numbering among its subscribers were some of the most wealthy and influential men in the country. Still, many subscribers lost their estates in order to pay off this liability. And, those that could not cover the debt by the sale of their estate, ended up in prison. Among the lairds totally or partially ruined were:
John Carruthers invested £500 in 1 share in the Douglas Heron Bank when it was started in 1769. His uncle, William Douglas of Kelhead, bought 2 shares - £1,000. These shares carried unlimited liability. In order to pay his share of the liability, John Carruthers was forced to sell the estate, at excruciatingly reduced prices, due to the other estates that were being sold also. The estate passed into other hands. John Carruthers, last Baron Holmains, died 20 October, 1809.
Here are a few facts associated with the Ayr Bank of the Douglas, Heron & Company.