The Guelph Banking Company and wide open banking

The following is a re-print of a past column by former Advertiser columnist Stephen Thorning, who passed away on Feb. 23, 2015.
Some text has been updated to reflect changes since the original publication and any images used may not be the same as those that accompanied the original publication.

There have always been people who do not hold bankers in particularly high esteem.

Even so, few today fear losing their deposits, or picking up their paper to read that their banker has been charged with fraud. Such was not the case in the 19th century, when, other than providing protective tariffs, the government kept its hands off business.

The Banking Act provided some rudimentary regulation of chartered banks, but actual supervision was non-existent, and the chartered banks themselves soon found ways around the scanty regulations.

The Canadian government issued charters to 19 banks in the two decades after Confederation. Some were solid, well run institutions; others were not.

Most began with a promise to open numerous branches in the smaller cities of Ontario such as Guelph, where local boosters kept up a continual cry for more banking facilities.

Guelph’s leaders complained in the 1870s, with some justification, that their banking facilities did not meet local needs. There were three branches in the city in the early ’70s: The Bank of Montreal, the Bank of Commerce, and the Ontario Bank. The Ontario had only limited resources, and the Montreal periodically restricted its credit in southern Ontario in favour of other investments.

Two of the new banks, both of dubious virtue, jumped to fill the void in Guelph: the Federal Bank in 1875, and the Central Bank in 1884.

Of the two, the story of the Central Bank in Guelph is the simpler one. The Central commenced its branch office, hiring respected local resident G.W. Sandilands as manager, and outfitting an office on Quebec Street that was by far the fanciest bank office in Guelph.

Plagued by bad loans, mainly to brokers and speculators, and by stock manipulation, the Central Bank closed in November 1887. It had never grown to be more than a minor bank. Guelph was one of only seven branches. These were taken over by other banks.

The Ontario Bank took over the Guelph accounts, and in March 1888 moved into the former Central Bank premises on Quebec Street, which were much superior to its own.

The closure reduced Guelph from five banks to four, but there was bigger trouble on the horizon. In January 1888 the Federal Bank posted notices that it was unable to pay customers withdrawing money. The Federal Bank was substantial in size, controlling between eight and ten per cent of the bank assets in Ontario, with a chain of 13 branch offices. The closure froze the accounts of dozens of retailers and manufacturers, and had a crippling effect in cities such as Guelph, where it had a major presence.

The Federal Bank had been limping a little since 1884, when bad loans to stock brokers and a lumber company in Michigan almost brought it down. These revelations undermined to an extent the Federal’s claim that its focus was industry in smaller cities.

To increase its business, the Federal Bank supported a network of private bankers, some 25 of them at the peak. These were local businessmen who simply rented an office, hung out a sign saying “Bank”, and began taking deposits and writing loans. The Federal loaned money to these private banks; the private banker in turn loaned it to his own customers.

There were advantages to the Federal Bank in doing this: private banks distanced it from the provisions of the Bank Act, which did not permit real estate as collateral, for example.

As well, a private bank could hide dubious loan accounts from bank inspectors and its own auditors. Private banks were not subject to any inspection or reporting requirements.

The Federal Bank sponsored one of these private banks in Guelph. The proprietor, W.H. Cutten, had been trained as a lawyer, and in the 1870s had been a partner in the Guelph office headed by Donald Guthrie.

About 1881, Cutten abandoned law, and purchased the Guelph mortgage, insurance and investment business of Kerr and McKellar. The senior partner, A.T. Kerr, went to Toronto and set up as a stock broker. Cutten maintained contact with him, and made a number of speculative investments jointly with Kerr.

Soon after he bought the business, the Federal Bank set up W.H. Cutten as a private banker, supporting him to the extent of $50,000 (equal to four or five million today). Operating as the Guelph Banking Company, Cutten began taking savings deposits, paying 6% interest, 2% higher than the chartered banks.

Over the next two years Cutten built up a substantial business, equal to that of some of the chartered bank offices in Guelph. He specialized in loans to farmers for cattle, and in business loans to small firms that had been snubbed by the chartered banks, or that had little collateral to offer.

All in all, these were risky loans, and Cutten was able to charge interest rates far higher than the chartered banks.

The financial troubles of the Federal Bank in 1884 forced them to cut back on credit to the Guelph Banking Company. By employing his social connections among the well-healed, Cutten replaced these funds with loans from three or four members of Guelph’s social elite, totalling some $40,000.

For the next three years, all seemingly went well. The Guelph Banking Company filled a niche that had been created by the chartered banks. In reality, though, Cutten was building a house of cards. He did well with some speculative investments with A.T. Kerr.

It was the old story. A couple of lucky investments convinced Cutten that he had a brilliant business mind.

Subsequent investments in stocks and real estate, always on margin, turned out less well. Cutten began to juggle his dwindling resources to cover himself as best he could. He mortgaged all his own real estate for as much as he could obtain. He made no distinction between his own funds and those of the depositors in the bank.

But his supply of cash was dwindling, and the walls were closing in. The Federal Bank experienced a fresh round of troubles in the fall of 1887, and credit to the Guelph Banking Company was cut again.

Early in January 1888, the Federal Bank announced that it would suspend payment to its depositors. Still in a weak position with stagnant loans on its books, the Federal collapsed as a result of a run on deposits following the failure of the Central Bank.

Rumours circulated that the Federal was as weak as the Central, and skittish depositors queued up to grab their deposits while they could.

The situation could have been serious in smaller centres like Guelph, but the Federal’s senior staff in Toronto consulted with other bankers in Toronto.

The result was a guarantee of financial support by a consortium of banks, led by the Bank of Commerce. Chartered bankers did not want another embarrassment after the failure of the Central Bank two months earlier.

As well, the federal government was about to start discussion of revisions to the Bank Act. It had every incentive to show that the banking industry could take care of its own problems without more regulation and supervision.

The Federal branches opened after a couple of days, before the consequences to small businesses became acute, and normal business resumed. The Dominion Bank agreed to take over the Federal’s Guelph office, and did so at the end of March 1888, retaining all the staff.

Few residents of Guelph doubted that Cutten’s Guelph Banking Company would go down with the Federal Bank. His close connections with it were well known, and rumours of his dicey business practices were rife. It was only a matter of time. Street corner gossip and bar room bets predicted that he wouldn’t last until the end of the month. They were right.

Next time: The failure of W.H. Cutten’s Guelph Banking Company, and a few days in court.

*This column was originally published in the Wellington Advertiser on Feb. 4, 2000.

Thorning Revisited