City of Glasgow Bank

The City of Glasgow Bank had been hiding losses for at least a decade — bad loans to American railroad and land speculations, papered over by overstated gold reserves and fabricated balance sheets, with the directors secretly buying the bank’s own shares to keep the price up. By 1878 the gap between what it claimed to own and what it actually owed had passed £6 million. None of its annual audits had caught any of it.

When the bank announced its closure on 2 October 1878, the liquidators found the full scale of the fraud. The catastrophe for ordinary investors lay in the bank’s structure: it operated under unlimited liability, so each share carried calls of roughly £500 above its face value — and most of the 1,200 shareholders were bankrupted overnight, all but 254 of them. Seven directors and the manager were convicted at Edinburgh’s High Court in 1879, though their sentences ran only eight to eighteen months. The disaster shocked Parliament into passing the Companies Act 1879, which let banks adopt limited liability — so that a bank’s failure would never again destroy its owners so completely.