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It is ironic that this glorious portrait was published in Meachams Atlas (1880) just as the Bank was about to enter its final crisis.

The Island's First Bank by Douglas O. Baldwin and Helen Gill

8= banking on Prince Edward Island, today controlled by huge conglomerates headquartered in Central Canada, was once served by five locally-owned and -operated institutions. These banks served Island communities well for the most part, and contributed to the province's economic expansion in the latter part of the 19th century. The Bank of Prince Edward Island was both the first insti-tution established in the colony, and the first one to fail. An examination of its 26-year history reveals a great deal about the benefits and shortcomings of small, locally-owned banks.

At mid-century the Island was enjoy-ing an economic upswing. A need for circulating currency was felt, as was a need for a local bank, given the colony's distance from the Halifax banks.

In the spring of 1854, a private bill sponsored by James Peake and eight other prominent merchants and

shipowners was introduced in the Legislative Assembly to incorporate a joint-stock banking company. The general enthusiasm that met this proposal was demonstrated by the As-sembly's decision to waive the usual fee for private incorporation, "inasmuch as the establishment of a Joint Stock Bank will tend to promote the interests of all classes." The idea of controlling their own financial system, rather than hav-ing to rely upon the notes and monetary policies of mainland banks, appealed to the patriotic (and mercenary) senti-ments of the politicians.

While the principle of the petition was accepted, the provisions of the bill sparked considerable discussion. Many rural members in the Legislature feared that the Bank would monopolize the money market, and would be able to charge whatever interest it pleased. The prospect of having the Island 's monetary supply controlled by a few

Charlottetown merchants was also un-satisfactory.

After several amendments, the bill to incorporate the Bank of Prince Edward Island was passed on May 1, 1855. But when it reached Britain the Treasury objected to nearly three-quarters of the act, and royal assent was refused. Part of the problem was that British regula-tions for colonial bank charters had been ignored; for example, the shareholders should have been liable for at least double their investments. The Treasury ordered that if the Bank was unable to meet its financial obligations within 60 days, it would lose its charter.

On the Island, the Bank's supporters reacted with annoyance and even hostility. Thomas Heath Haviland, who had guided the bill through the House, considered British objections "frivolous in the extreme." Others wondered why clauses rejected in the Island bill had been accepted in similarly constituted mainland banks, such as the Bank of Westmoreland (New Brunswick), incor-porated in 1854. The Islander reported that because of

the ignorance and impertinent in-terference of the home authorities, the 80,000 inhabitants of this Colony will not be permitted to have an incorporated Banking in-stitution . . . except on terms to which monied men are not very likely to subscribe.

Inevitably, the politicians swallowed their pride and revised the bank bill. But again the bill was rejected, this time due to ambiguities regarding limitations on real estate holdings, and the Bank of Prince Edward Island was not incor-po ra t ed unt i l Apri l 14, 1856. Meanwhile, the city's business and political elite had met in March and subscribed almost half of the Bank's shares. By May 12 all three thousand shares had been purchased. When half of the Bank's capital of 30,000 was paid up, the Bank of Prince Edward Island opened its doors on August 13, 1856. Incautious proceedings

The Bank was immediately success-ful. In the first year, notes in circulation jumped from £9,000 to £38,800, and total assets more than doubled from £30,700 to £72,100. Thanks to an active discounting market, the Bank made a profit of £2,400, and in June, 1857, declared an eight per cent dividend.

This success derived largely from the Bank's financial services of discounting (cashing notes or bills of exchange before maturity at a discounted rate) and exchange (currency transactions). These services were in demand because of the Island's strong export market, which was dependent upon markets in Great Britain and the United States.

Late in 1857, crop failures abroad created an economic recession that quickly spread from Britain to the United States and British North America. The Bank of Prince Edward Island, along with several other Cana-dian banks, was forced to restrict dis-count advances to its best customers, in order that cash outlays not exceed in-come. The situation worsened as poor weather conditions prevented Island farmers from bringing their produce to market, and a slump hit the shipping and timber trades. Many firms that owed the Bank declared bankruptcy. Monthly profits, which had never drop-ped below £370, fell to £133 in December, 1857, and the Bank of Prince Edward Island was forced to close its doors.

The misfortune could also be blamed on poor management — what James Peake referred to as "incautious proceedings." Unknown to the other directors, the Bank's president, Ralph Brecken, and the cashier, William Cun-dall, had loaned more than twice the Bank's capital to a London shipbuilding company, Keel and Roberts, with only unfinished vessels as security. When this firm failed, the Bank found that it was overextended.

The news shocked the Island business community. James Peake, for example, had considered the Bank of Prince Edward Island "the safest in America," and Henry Cundall wrote in his diary just a month before its collapse that he would be glad to possess more than his 40 shares in the Bank, so highly were they rated on the market. While depositors rushed to the Bank to withdraw their money, those holding its bank-notes sought to convert them into other cur-rency as merchants refused to accept the Bank's currency.

To protect their dwindling capital, the Bank's directors requested permis-sion from the government to suspend specie payments until the panic sub-sided. Suspension was refused, but the Treasury agreed to bolster sagging con-fidence in the Bank by continuing to ac-cept its bank-notes in payment for

customs duties and other obligations. However, as the run on the Bank con-tinued unabated, the directors took ad-vantage of its charter (which allowed suspension for up to three months) and stopped all financial transactions.

During the winter the Bank reorganized its finances with the help of James Peake. Peake loaned the direc-tors £500, promising an additional £3500 within six months, and also per-suaded several London banks to loan needed specie to the Bank.

Although some shareholders were still dispirited and wished to wind up the Bank's affairs, at their annual meeting in March, 1858, it was decided to re-open because of the institution's "vital importance to this community and the Island at large. . . ." William Cundall remained as treasurer, but President Brecken stepped down. Director Daniel Hodgson, who felt personally disgraced by the Bank's problems and was ashamed to be seen on city streets, refused to stand for re-election.

The next year was a period of careful retrenchment. Bank loans were reduced from 90 to 60 days, remittances were contracted, and land and ships acquired from defaulters were sold. Due to the fluctuating shipping industry, the direc-tors turned to fishing and agriculture which, they hoped, "may fairly be regarded as forming the foundation of a safer and more legitimate trade for the colony."

In the fall of 1859 good harvests and a ready American export market improved financial conditions, and'the Bank of Prince Edward Island was able to declare an eight per cent dividend. The Dun and Bradstreet rating improved from "perfectly safe" to "good and strong." Henry Cundall purchased an additional £400 in Bank stock and ad-vised a London widow to do the same.

The period from 1860 to 1881 was marked by satisfying profits and ap-parent stability. This success reflected the general prosperity of the Island. Good harvests and excellent markets in the United States stimulated the agricultural industry, and shipbuilding blossomed.

Partly as a result of this success, and in keeping with the banking boom on the mainland, four more banks were es-tablished on the Island between 1862 and 1871: the Farmers' Bank of Rustico (1862), the Union Bank (1864), the Bank of Summerside (1866), and the Merchants Bank of Prince Edward Island (1871).

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The Growth of the Bank of Prince Edward Island, 1858-1881

Year 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 1879 1880

, 1881

(Source:

Notes in Circulation £33,000

34,000 43,000 44,000 41,000 51,000 63,000 36,000

33,000 25,000 32,000 33,000 32,000 55,000 NA

$ 93,000 134,000 154,000 133,000 120,000 100,000 161,000 177,000 196,000

Dividend (%) 8 -5 8

10 10 8'/2

16 15 15 15 15 15 15 15 15 14 10 10 10 10 10 10 8

Bank of Prince Edward Island Minute Book, 1858-1881)

Total Assets £70,000

77,000 90,000 97,000 90,000

112,000 138,000 109,000 114,000 99,000

111,000 114,000 127,000 163,000

$385,000 368,000 637,000 723,000 674,000 687,000 655,000 657,000 701,000 835,000

Second failure In March, 1880, on the eve of the

Bank's twenty-fifth anniversary, the directors proudly reported that the Bank of Prince Edward Island had "been instrumental in no inconsiderable degree in advancing the commercial and industrial interests, and developing the resources of the Province at large." The immediate prospects, however, were not bright. The recession that had started in Great Britain in 1873, and had then spread to the United States and Central Canada, finally arrived in Prince Edward Island in 1878. The shipping in-dustry was soon prostrated and the depression quickly spread to all other branches of business, causing several large commercial failures.

The Bank also suffered as gross annual profits, which had not dipped below $40,000 from 1875-78, fell to $23,000 in 1879 and to $17,000 the next year. Deposits declined, the Bank's discount department was inactive, and the value of real estate held as security depreciated. The directors therefore cautioned the cashier to limit loans and to check cus-tomers' securities carefully.

Despite the depression, the Old Bank (as it was popularly known) was con-

sidered the safest investment on the Island. The business community was thus caught unprepared when the Bank suspended specie payments on 28 November 1881.

It transpired that the cashier, Joseph Brecken, had departed for Saint John, New Brunswick, on November 21 and failed to return to work the following Monday. His flight was apparently sparked by the president's announce-ment that he would soon be checking the books in preparation for a semi-annual dividend distribution. A subse-quent letter to his wife explained Brecken's actions:

I know what people will say about me. I deserve it all and plead guilty. Where loan customers got the thin [edge] of the wedge in, I had to go on advancing in order . . . to get the whole monies due the bank back without loss. This every person promised to do. I had to keep these facts from the directors or I would have been dis-missed from the bank. I therefore commenced my downward course by telling lies and ended by mak-ing false accounts.

While Brecken's judgement was ob-viously poor, there was no suggestion that he had personally profited from the mismanagement.

Henry Cundall and William MacLean, the Merchants Bank's cashier, were immediately called in to examine the Bank's affairs. They discovered that the Old Bank had lost almost $300,000 with one outstanding account still to be settled.

Brecken had deceived his directors for over a year. He had granted loans to customers that the directors considered unworthy, and recorded these loans in a secret bill book while continuing to pre-sent the regular bill book to the monthly meetings. After the directors refused Shedd and Moore Lobster Shippers a $1,000 loan, for example, the cashier granted them the large sum of $42,000 the next day. And while the directors had also ordered that John Hughes's liability to the Bank not exceed £4,000 ($20,000), the secret bill book for 1881 shows loans to Hughes totalling £31,000 ($155,000).

Furthermore, Brecken had lied about the credit rating of several potential borrowers in order to allow them ad-ditional discounting privileges. In listing the bank's overdrafts for inspec-tion by the directors each month, Brecken omitted some names and reduced the apparent debts of others. When he absconded he left some $250,000 in 100 overdrafts, 64 of them unknown to the directors.

Management failure Despite Brecken's unbankerly ac-

tions, several mainland newspapers placed the Bank's failure on the direc-tors' shoulders. As with recent banking scandals in Newark, Boston, Kansas, Toronto, Saint John, and Glasgow, Scotland, the losses were blamed on the directors for "culpable negligence," poor business practices, and a tendency to place too much trust in one person. Henry Cundall, whose father had been the Bank's cashier for 20 years when he died in 1877, wrote to a colleague in Montreal that the Bank's failure spoke "little for the intelligence or business capacity of the Directors. I had no faith in them myself but the collapse came sooner & was more complete than I an-ticipated."

In fairness to the Board of Directors, the Bank had experienced an unusally rapid turnover in key personnel in the previous five years. The most important

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loss was the 1877 death of William Cun-dall, the Bank's cashier since incorpora-tion. CundalPs talents and integrity contributed greatly to the Bank's solid image, and the Board came to rely implicitly upon his judgment and business acumen. When his son Henry declined to succeed him in the position, the directors promoted assistant cashier Joseph Brecken, son of the Bank's first president, who had been with the Bank for six months, following three years ex-perience in the Bank of British North America in Halifax and Saint John. In 1876 both Daniel Brenan, the president, and George Moore, who had been the Bank's only teller, passed away. Brenan was replaced by Judge Hensley, but during the Bank's crisis in the fall of 1880 Hensley left for England to recover his health, and John Longworth was the acting president during the Bank's crisis.

The last change in leadership was most unfortunate for Hensley had been an extremely conscientious president. Each morning he went to the Bank and took care of all foreign correspondence. Following this task, Hensley consulted the Bill of Exchange Book and ex-amined the credit of each person who had purchased exchange. If the customer was unknown to the Bank, the president telegraphed the Union Bank of London or consulted the Dun, Wiman Mercantile Agency Reference Book. Hensley also checked the Cir-culation Book each week to ascertain who had overdue drafts, and to initiate their collection. All overdrafts and dis-counts were laid before the directors at the monthly meeting for inspection and instruction. The Bank's charter, however, required the cashier to prepare a twice-weekly "delinquent list" of all customers who owed money to the Bank, and for the president to read the names aloud before the Board of Direc-tors.

John Longworth was less diligent than his predecessor. He went to the Bank "nearly every morning" to see if he were needed, but left the books to the cashier. Under Longworth, cashier Brecken carried on the Bank's cor-respondence, prepared the weekly balance sheets, and managed all ex-change and fluctuations in circulating notes. The Circulation Book was not kept up after Judge Hensley left for England.

The Board of Directors was not par-ticularly competent in financial mat-ters. Only one director knew much about accounting, and President

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Hensley admitted he did not understand double-entry booking. In addition, despite the worsening recession, the bank continued distributing its profits in dividends, allowing its reserve to decline.

Efforts at resumption The Bank's charter allowed the direc-

tors 90 days grace before resuming specie payments. Several groups of in-vestigators now estimated the Bank's losses at $389,500, with one large ac-count in England left to be valued. The interested parties met to make plans to raise the necessary money for the in-stitution to resume business. On 17

January 1882, a large number of the Bank's creditors agreed to leave their deposits in the Bank for three years at four per cent interest. Two weeks later the directors offered to contribute $75,000, and the shareholders promised to pay $100,000 (nearly $40 per share). These negotiations received general ap-proval from all three levels of govern-ment, the other local banks, and the Island's leading businessmen.

The Bank's future now rested upon the willingness of the shareholders, depositors, and directors to live up their agreement. Early in March, the direc-tors had paid $67,000 of the agreed $75,000, and the shareholders had con-

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tributed $85,640 of the promised $100,000. Although these payments were a burden on some people's finances, they were better than losing everything. The Daily Patriot (12 February 1882) pointed out that the payments

will no doubt entail great hardship upon very many. It will take away the greater part of their incomes from not a few, but it will save the Bank from ruin, will enable it to resume business and realize its as-sets, will save the Stockholders from the second call on their stock, which they certainly would have to pay in case the Bank went into liquidation, and will enable the Depositors and other creditors to be paid in full, losing their in-terest only. The other alternative — liquidation, means not only ab-solute ruin to many Stockholders, and a loss of at least 50 percent to the Bank's creditors, but also general and wide spread loss and disaster to the business of the en-tire Province.

However, nothing could be done until the John Hughes account in England was settled, so Louis H. Davies, Bank director and provincial MLA, was sent to London to settle it. The Bank's statutory period of suspension was ex-

piring, so a delegation was dispatched to Ottawa and obtained a further exten-sion of 90 days. In mid April, however, the province was shocked by news that the Bank needed a further $300,000 to resume business: a new proposal was designed which asked the directors to contribute $75,000 and the shareholders $100,000. The depositors were re-quested to rebate 30 per cent of what the bank owed them — with the pos-sibility of receiving 70 per cent if the scheme was successful. The Bank's future now rested with its depositors, but before any further action was taken, news arrived from London that the Hughes account had been settled: the company was indebted to the Bank for $90,000 and had no means to repay any of it. All hopes of resumption were lost, bankruptcy was now unavoidable, and on May 30, 1882, a petition to wind up the Bank was filed in court.

Prior to this date provincial newspapers had avoided blaming any individual or group for the fiasco. The press had con-centrated instead on fostering the co-operation necessary to restore the Old Bank's financial health. Now the flood-gates of despair and unhappiness were opened wide. Dr. R. McNeill, New London, wrote vituperative letters to the editor which were printed in several newspapers. In one (Summerside Journal 30 August 1882) he stated:

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The wail of the widow and the orphan is crying out for vengeance if reparation be not made. The Directors of the Bank either knew the Bank was being ruined, or they did not. If they knew its con-dition they should stand before the world convicted of fraud. If they did not know it are they not guilty of gross and criminal negligence? Why are the Directors appointed in a Bank if not as a safeguard in the management of the institution?

The citizens' indignation was fueled by many references to the widows, orphans, and poor people who were now in distress because of the "ruinous mis-management of the men in whom they trusted."

Every rumor designed to illustrate' the d i r e c t o r s ' immora l i t y was publicized. They were accused of incur-ring inordinate expenses in winding up the Bank's affairs, of paying the cashier to leave the city, of not attempting to extradite him, and of engaging all the city's lawyers, at the Bank's expense, to prevent depositors from taking legal ac-tion against the directors. "To buy up lawyers," the Summerside Journal prophesized, "may put off the day of reckoning for a season, but justice and God will not be mocked."

The consensus was that the directors were guilty of neglect and mismanage-ment, and that they should not attempt to escape their responsibilities. A meeting of the Bank's creditors early in 1883 stated:

That during the life of the late William Cundall, the President and Directors of the Bank of P.E. Island had nothing to do — and they did it, and therefore the duty they had to perform was done without their doing it; but that since his demise . . . the President and Directors have received $2,000 per annum among them for duties which they had to do and have not done; and that this meeting considers they have received $2,000 per annum for duties they have not performed and that as honest men they ought to refund it to the Creditors of the Bank.

(Examiner, 10 January 1883)

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Bibliographic Note The Bank of Prince Edward Island's

Minute Books are the best single source of information. Useful insights into the Bank's internal policies are provided in the Peake-Brecken Papers, H.J. Cun-dall's diary and letterbooks, and the In-solvency Papers (all at the PAPEI). Local newspapers, Executive Council minutes, debates in the Assembly and the Legislative Council are also valuable sources. Off-Island sources include the Monetary Times (Montreal), the Bank of Nova Scotia Archives in Toronto, the Dun and Bradstreet credit ratings at Harvard University, and the Adam Shortt Papers in Ottawa.

Special thanks go to Tom Spira and Peter Rider for their helpful sugges-tions, and to the National Museum of Man's Charlottetown Project.

The Bank's former headquarters at the intersection of Great George and King Streets today houses Holland College offices.

The directors agreed to refund $3,000 each — much less than the $10,000 each had received since Cundall's death — in return for immunity from prosecution.

The liquidation procedures dragged on for five years. Finally, in April, 1887, the last dividend was declared. After disposing of the Banking House, auc-tioning the Bank's securities, and cashing its mortgages on land, sailing vessels, and factories, the liquidators were able to return 60 cents on every dollar on deposit.

Impact of the failure The immediate result of this failure

was a loss of confidence in banks generally, which resulted in a brief run on the remaining Charlottetown-based institutions, the Union Bank and the Merchants Bank. Because the Old Bank was heavily involved in promoting ship-building, fishing, breweries, and starch and lobster factories, its collapse had a paralyzing effect on trade. Deposits in the Charlottetown Savings Bank, which was operated by the Dominion Govern-ment solely as an interest-earning depository for the savings of the work-ing class, increased dramatically — ap-parently because people had lost faith in other banks. This lost confidence was

also reflected in the declining value of the Union Bank's stock.

Although the Bank of Prince Edward Island's demise might be considered a golden opportunity for other financial houses, it served instead to shake their confidence in the long-term future of small local banks. Also, the Old Bank was largely indebted to the other banks and they were not able to realize on their claims for several years, and then only 60 per cent.

On October 2, 1883, the Union Bank — in sound financial shape but feeling vulnerable to the vicissitudes of world trade — amalgamated with the Bank of Nova Scotia. Branch banking had begun on Prince Edward Island. In 1901 the Farmers' Bank of Rustico lost its charter, and the Bank of Summer-side joined with the Bank of New Brunswick. When the Merchants Bank was swallowed up in 1906, Islanders would soon discover the truth of the Ex-aminer s warning in 1883 that it would be unwise to allow foreigners to monopolize provincial banking, because "outside interests more powerful than the interests of the Island may, at times, influence the policy they may adopt with reference to our people."

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