Chartered in 1856, by 1881 the bank was sinking fast. Known as the "Old Bank" the Bank of Prince Edward Island was the first to be chartered on the Island and was considered by many to be the safest and most stable of the handful of banks operating on PEI by the 1880s. Ultimately, though, the story of its demise becomes a classic example of how NOT to run a bank. A precis of the account of the bank's failure can be read below.
Following the bank's demise, the building was taken over by other banks in Charlottetown, then became federal government offices for the Department of Marine and Fisheries and later served as a Customs House.
The first hint of trouble appeared when the cashier, Joseph Brecken, departed for Saint John, New Brunswick, on 21 November [1881] and failed to return to work the following Monday. As Brecken explained to his wife:
I know what people will say about me. I deserve it all and plead guilty. Where customers got the thin 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 dismissed from the bank. I therefore commenced my downward course by telling lies and ended by making false accounts.
A subsequent audit discovered that the bank had lost almost $300,000, with one outstanding account still to be calculated. For more than a year the cashier had deliberately deceived the directors. He had granted loans to customers whom the directors considered untrustworthy, recording these transactions in a secret bill book while continuing to take the regular bill book to the monthly meetings.
After the board of directors had refused a $1,000 loan to Shedd and Moore Lobster Shippers, for example, Brecken granted them $42,000 the very next day. Although the directors had also ordered that John Hughes' liability to the bank should not exceed £4,000, the cashier's secret bill book for 1881 detailed ten entries over three months allocating more than £31,000 to Hughes. At other times, Brecken deceived the directors about a potential borrower's credit to provide
him with additional discounting privileges. Each month the cashier presented the bank's overdrafts to the board for inspection, but here again Brecken omitted some names and reduced the apparent debts of others. When Brecken absconded, the bank held approximately $250,000 in 100 overdrafts, of 64 of which the directors knew nothing. The president's announcement that he would soon be checking the books in preparation for a semi-annual dividend distribution sparked the cashier's sudden departure.
Although Brecken had deliberately deceived the board, several out-of-province newspapers placed the bank's failure squarely on the directors' shoulders. As with recent banking scandals in Newark, Boston, Kansas, Toronto, Saint John, and Glasgow, Scotland, the losses were blamed on the directors' "culpable negligence", poor business practices, and the tendency to place too much trust in
one person.
H.J. Cundall, whose father had been the bank's cashier for 20
years before 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 anticipated". The board of directors, in general, was not a particularly competent body in financial matters. Only one director knew much about accounting, and Joseph Hensley admitted he did not understand double entry
bookkeeping. In addition, despite the worsening recession, the bank had continued distributing its profits in dividends, while allowing its reserves to decline.
From the University of New Brunswick