The Failure of the Bank of Bombay, 1840-1868
The Failure of the Bank of Bombay, 1840-1868
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Date
1971
Authors
Lovell, Carol Grace
Advisor
Gordon, Donald
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DRUM DOI
Abstract
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.