The Failure of the Bank of Bombay, 1840-1868

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1971

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When the American Civil War broke out and cut off the chief source of cotton to the European trade, the price of cotton rose and merchants and cotton dealers in Bombay were given the opportunity of realizing profits previously unheard of. These profits as they returned to Bombay, produced a plethora of wealth far beyond the requirements of a bona fide trade. Therefore an extraordinary means of investment became a necessity. People came to possess money for which they saw no legitimate vent and so hunted out new schemes in which to invest their money. Diverse, bubble concerns sprang up and Bombay went mad with the spirit of speculation. Shares rose to a price which invariably led to the formation of more, and credit was extended and speculation encouraged. The Bank of Bombay, chartered in 1840, one of the three Presidency Banks of India, played a prominent role in fostering this speculation. Under a new charter, Act X of 1863, which relaxed its previous strict banking code and with weak, unknowledgeable officials as managers who had come under the corruption of Premchund Roychund, the greatest entrepreneur of the island, the bank broke every sound principle of business finance. The Government of India seemingly the protector of the bank, in truth had no effective control over the bank's practices. The panic which followed the cessation of hostilities in America brought about a reaction in prices in Bombay. Buyers could no longer be found for shares in the market place and soon the new companies were forced to liquidate. The Bank of Bombay unfortunately continued to practice unsound banking practices, and kept on advancing money on poor security. Finally in January 1868 the Bank of Bombay went into liquidation. It returned only about one-fiftieth on a fully paid share. A Royal Commission chosen by Governor General Lawrence performed an investigation into the causes of the failure of the bank. The report issued by this Commission condemned the management of the bank and the unorthodox banking procedures granted by the Government Act of 1863, citing the exceptional nature of the times which should have caused more vigilance on the part of everyone concerned with the bank. The new Bank of Bombay, Limited, which was chartered shortly thereafter, flourished, profiting by its predecessor's example and reverting to a strict charter and wise, experienced management.

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