The Crash of Arbuthnot & Co

ABOUT MIDWAY down Rajaji Salai, there rises the nondescript high-rise that the Indian bank built as its headquarters. Its entrance on Arbuthnot Street is as unprepossessing as the lane that remembers a 19th Century Madras name that many bore with distinction.

Arbuthnot's was the A in the ABP of South Indian commerce in the 19th Century. Parry's was the oldest and Binny's was a little younger, but Arbuthnot's, the youngest, grew the fastest, became the biggest agency house in the Madras Presidency and was the first to succeed with establishing industry on a sound footing in the South. The company's beginnings were in 1800 when George Arbuthnot, 1st of Elderslie, an Aberdeenshire Scot, arrived in Madras and joined the firm of Francis Latour & Co established in 1777. Preceding George Arbuthnot in the partnership was Jon de Monte, a Portuguese from Pondicherry via San Thome, who became one of the biggest land and property owners in the Madras of the time. When Latour decided to retire, the firm became Arbuthnot, de Monte & Co. in 1810 and, on the latter's death in 1821 it became Arbuthnot & Co. Sixteen Arbuthnots who were relations of the founder were associated with the firm before it collapsed in 1906.

The firm was started by 1 George Arbuthnot, 1st of Elderslie and family members who were partners or associated with the firm were his wife's brother (2 John Fraser), and brother-in-law (3 Patrick vans Agnew), Patrick's son (4 John vans Agnew), George's son (5 William Reierson Arbuthnot Sr) and his sons (6 Reierson Arbuthnot and 7 Malcolm Alexander Arbuthnot), George's son (8 George Arbuthnot) and his son (9 James Woodgate Arbuthnot), George's nephew and son-in-law (10 John Alves Arbuthnot) and his son who was also George's grandson (11 William Arbuthnot), George's great nephew (12 Sir William Wedderburn Arbuthnot), his nephews (13 Archibald Francis Arbuthnot, 14 William Urquhart Arbuthnot and 15 Robert John Hunter), William Urquhart's son (16 Reginald James Hugh Arbuthnot) and Archibald's son (17 Sir George Gough Arbuthnot).

While generations of Arbuthnots worked in the business and others it founded as far away as Calcutta, another branch of the family distinguished itself in the military and civil services. Amongst them were an acting Governor of Madras, a commander of the Madras Army and one who went on to become a Governor of the Bank of England. The entrepreneurial wing of the family had by the mid-19th Century established the Madras Portland Cement Works, the Bangalore Bricks & Tiles Works, the Reliance Engineering Works, the Chittalvasal Jute Mill and several other manufacturing units. It had also established itself as a bank, the thousands of depositors it attracted considering it as sound as the British Government.

In charge of the firm as the 20th Century dawned was Sir George Gough Arbuthnot, six times member of the Madras Legislative Council, seven times Chairman of the Chamber of Commerce, Madras, Fellow of the Madras University and the leader of European Society in Madras. The firm invested lavishly in daring enterprises, such as searching for gold in the Nilgiris and Anamalais, investing in American railway projects and new South African goldfields, and in the plantation crops of the West Indies, amongst other ventures. No one questioned any of this during all the years it had been going on. But when P. Macfadyen & Co., London, Arbuthnot's correspondent and associate in England and an old Madras hand, killed himself on 20th October 1906, there were a flood of questions. The only answer was the two firms petitioning the courts on the 22nd to be declared insolvent. This was not a crisis; this was a south Indian disaster that was to have ramifications in many other colonies where South Indians played a major role as financiers.

When the auditors appointed by the Official Assignee began examining Arbuthnot & Co's accounts, they found the firm had 2,300 operating accounts in India with balances of Rs 2.75 million and about 4,000 fixed deposits with claims amounting to Rs 25 million. Its assets estimated at Rs. seven and a half million were considered as being "beyond all belief, worthless, which crumble to dust when touched". And its liabilities, to almost everyone who was anyone in Madras, including Governor Sir Arthur Lawley, amounted to Rs 27 million. This was the biggest crash in Indian banking history till then.

Reporting on the first days of the crash, The Hindu, a newspaper wrote, "The consequences of this sudden and disastrous failure (will) mean the ruin of many hundreds of families in southern India. The firm was the most popular one in Madras until the new firm, Arbuthnot Industries, was started. At this time there was a shrewd suspicion in the minds of some that all was not as it should be. But the public confidence in the integrity of the firm was so great that its transactions did not in any way suffer. An enormous business was being done and vast sums of money belonging to Maharajas, Rajas, and Zamindars, the well-to-do official classes, the Governments of native states, public charitable endowments and private trusts, mutual benefit funds and Nidhis, besides the small hard earned investments of the earning classes were all there... To the vast majority of the investors who with their helpless dependants can be counted by the thousands in Southern India, the insolvency of the firm is a calamity which might well nigh mean their ruin".

When the paper on 23rd October reported Patrick Macfadyen's death, it angrily wrote, "The public will be shocked to hear that a man who was at the head of a firm of merchants who enjoyed for such a long period and in such abundant measure their wholehearted confidence and respect should have caused the wreck of so many homes and unspeakable anguish in many households. It will be true to say that it is sufficient to blast for a long time to come the reputation of Englishmen for probity and righteousness."

Macfadyen was in the habit of speculating in high risk ventures. Neither he nor Sir George brought any capital into the partnership and Macfadyen & Co was effectively the London branch of Arbuthnot & Co. When profits occurred, they were distributed without regard to the losses which remained on the books at full value. It is thought that Macfadyen was responsible, but Sir George had been at the very least inattentive. He and Mr J M Young (a salaried partner who appeared to make no decisions) were the only partners when the firm collapsed and Sir George was tried and sentenced to 18 months R.I.. At the time The Hindu thundered, "For a dozen years now, the business of Messrs. Arbuthnot & Co. has been a swindle of the vilest description. The firm has kept on a banking business under false pretences, decoying innumerable innocent men and women into investing in its rapacious maw all their hard earned savings and earnings, money which the members of the firm could have had no reasonable prospect of repaying in full. How many widows, orphans, old pensioners, Government officials and others have been lured into the net of the pretended pompousness of this firm to deposit their moneys in, not knowing that Messrs. Arbuthnot & Co. was but a white sepulchre?"

Parry's, which owed the public Rs 2.5 million, was able to withstand the run that followed the Arbuthnot crash, but Binny's, which owed Rs 4 million, almost went under, being saved only by passing into the hands of Sir James Mackay, later to become the Earl of Inchcape.

The most significant thing to come out of the scandal, however, was the Indian response to the feeling that "European integrity and honesty (have come) under a cloud". It was a response led by a young vakil (one who legally represents another, but less thann a qualified advocate), V. Krishnaswamy Iyer, later to become an eminent lawyer and then a High Court Judge. Moving on from representing several Arbuthnot creditors, he got together eight prominent citizens of Madras and together they resolved "that a bank which depended on the savings of those in the South had to be incorporated locally and managed by Indians who were locally known and respected". Born of these and subsequent deliberations was The Indian Bank Limited, registered on 5th March 1907 and opening its doors for business on 15th August, the city's "first Native Bank". Initially funded by several Chettiars, it later became known as "the Chettiar bank".

In 1909, the bank acquired for Rs 135,000 the handsome pillared-and-pedimented Arbuthnot Building and moved in. Prospering thereafter to become one of the `Big Twelve' of Indian banking, the bank razed Arbuthnot memories in the 1960s and built on the site a high-rise that in 1970 marked its growth. Its progress since then has been uneven.

A book "The Fall of Arbuthnot & Co" by Rangaswamy Srinivasan has been published by EastWest Books (Madras) PVT. Ltd. 571 Poonamallee High Road, Aminjikarai, Chennai 600 029, India. ISBN: 81-88661-40-6

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