Diamonds and gold, and the closure of the Paarl Bank in 1891

The Drakenstein Heemkring has over the years collected a fair number of personal letters and artefacts. Recently, while sorting out the Marais file, we came across two letters written by Abraham Marais to his children. Marais was a director of the Paarl Bank, and the letters were written during one of the most dramatic periods in South African banking history. Here are two extracts:

18 Des. 1890 … Gy zult wel uit het Advertentieblad vernomen hebben van de ramp die ons getroffen heeft door de sluiting van de Paarlsche Bank, Den panischen schrik onder de menschen met den val van de Union en Cape of Good Hope Banken was zoo vreeselyk groot, dat de vaste deposita houders van Oost en West hun geld by ons en de WP Bank hier kwamen afgeven. Zoo dat van 1 July tot 1 Dec over de £40 000 over de toonbank aan goud moesten uitbetalen … Verleden Zondag 14 Dec hebben volgens besluit van de Synode een biddag in den namiddag waren de hede kerken alhier propvol – 

22 Jan. 1891 …Al de zaken des tyds draaijen om een spil, de goudvelden en goud aandeelen.

Boom and bust

Wild speculation in first diamond shares, and later gold shares, greed and an unregulated banking environment created the financial crisis which led to the collapse of one of the Cape’s oldest bank – the Cape of Good Hope Bank, as well as a number of small private banks. It all started with Kimberley’s diamond rush.

People flooded the northern Cape town and took enormous financial risks to ride the wave of good fortune. Between 1878 and 1891 the Cape exported more than £4m worth of diamands. With so much money to be made, banks provided start-up capital without asking for any security.

In 1881 Paarl’s Westelijke Provincie Bank – situated where Roodeberg Pharmacy is today -held £16,000 in cash deposits as security against loans of £339,000.

The early warning signs of rising debt among diamond speculators were quickly overshadowed by the frenzied rush to own gold shares. By 1888 there were 19 Transvaal gold companies trading on the London Stock Exchange. In 1889 telegraph lines between Johannesburg and Cape Town were said to be so overloaded, the exchange had a backlog of more than 7,000 messages.

A bank inspector had this to say about the situation in 1889: :It is a matter for regret that so large a portion of bank business has to do with gold script speculation, and so small a proportion with commerce and trade.”

The bubble finally did burst in a rash of insolvencies and bankruptcies.

The shock waves culminated in the closure of the Union Bank in August 1890, followed by the Cape of Good Hope Bank. By December 1890, Paarl Bank had also closed its doors. By the end of 1892 there were only four banks left in the Cape Colony: the Standard Bank, the Bank of Africa, the African banking Corporation and the Stellenbosche Distriks Bank.

The situation in Paarl

In 1890 the Westelijke Provincie Bank was Paarl’s largest bank, and supported by many of the town’s wagon industries and prominent wine farmers. The bank was however not immune to the banking crisis, and in 1891 it was taken over by the African Banking Corporation.

In 1891 the Bank of Africa also opened a branch in Paarl.

Standard Bank’s Paarl branch opened in 1878, and had among its clients the founder members of the Genootskap van Regte Afrikaners. When the Paarl Bank was liquidated, Standard Bank bought the former’s premises on Main Street (adjacent to the Heemkring).

So by the end of the 19th century, Paarl only had three banks left: the Standard Bank, the African Banking Corporation and the Bank of Africa.

Paarl Bank

The Paarl Bank was founded in September 1853, and was liquidated in March 1891. The directors at the time were JA Bernhardi (chairman), PC le Roux, SV van Niekerk, PB de Ville,       J Blignaut, AJ Marais (Jzn), G Joubert (Wzn), GJ Malherbe and FJ Hugo (Pzn).

On the 31 January 1891 the Paarl District Advertiser ran the following advertisement: De Paarlsche Bank in liquidatie – buitengewone belangrijke publieke verkoping van zeer kosbare vaste en losse goederen aan de Paarl op Maandag 9 Februarie.

Earlier that month the liquidators’ report attributed the bank’s collapse to “ernstige fouten van oordeel”.

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