The Collapse of the Graaff-Reinet Board of Executors During the Great Depression (1929-1934)

THE COLLAPSE OF THE GRAAFF-REINET BOARD OF EXECUTORS DURING THE GREAT DEPRESSION (1929-1934)

A. de V. Minnaar Human SciencesResearch Council

INTRODUCTION

As the Depressiondeepened during 1930 and 1931 severepI ressurewas exerted on the liquidity and viability of financial instirutions allover the world. After the Wall Street Crash in 1929 runs on banks had occurted in America and in May 1931 the Kredit-Anstalt Bank in Vienna failed. InJuly 1931the Darmstadter Bank in Germany closed its doors. On 21 September1931 Great Britain abandonedthe gold standard.]In South Africa many people withdrew their available funds and sent them overseasin the hope that when South Africa abandoned the gold standard these funds could be brought back with handsomeprofit. The gold standardcrisis put almostunbearable pressure especially for wool, fell to such an extent during 1929-1933 on South Mrican financial instirutions especiallythose in that most,farmers were unable to reduce their yearly over- the small towns of the rural areas.A casein point wasthe drafts. They became so short of ready cash ~hat they were Graaff-Reinet Board of Executors(established 1 August not even able to pay the interest on their loans. 1856) which suspendedall paymentsand closedits doors So, during the Depression with the farmer (as debtor to on 20 October 1931.2 It was later placed under judicial the company creditor) unable to pay interest on his loan, managementbut its failure wasthe first of its kind in South the company in turn could not pay any interest to its deposi- Mrica and focusedattention on othersuch companies which tors. What complicated this situation was the practice of ,,:erefound in most of the smallertowns of the Cape Pro-VInce.ceding. A client would borrow a certain amo~I1tfrom the company, and register his bond in its favour. The problem These country boardsof executorswere usually formed often arose that the company would be unable to find a with small capital for the purpose, primarily, of acting as depositor for the whole amount; so it would split the loan executorsof deceasedestates. This duty, however,became, among a number of creditors by means of an "underhand in time, secondary,and their main businesswas done in cession' " so called as it was a cessionthat was not registered receiving sums of money on deposit, generally giving a in the Deeds Office in Pretoria to save the stamp duty and higher rate of interest than the commercialbanks. These registration fee (a sum of about £5). Further complications funds were then invested in mortgageson property and in arose if one creditor wanted to withdraw from a loan. Then discounting bills of a long duration, which were renewed another unregistered cession took place. In this way a com- again and again. Usually no adequateprovision was made plicated systemof cessionshad been built up over the years. to have a fair proportion of their assetsin a liquid form. Becausethe companies were regarded as responsible for ad- They relied upon obtaining advancesfrom the commercial ministering these loans, seeing to it that the various interests banksto meetclaims falling due or when depositswere with- were paid and collected, they were held responsible by their drawn, giving as securitya pledge of their mortgagebonds. fixed deposit depositors for the payment of interest pay- However,as the Depressionworsened and deepenedthe ments on the loans made with the fiXed depositors' commercialbanks were not alwaysprepared to increasetheir monies.4 advances,and, sinceso many farmerswere in arrearswith On this financial maze the Depression wreaked havoc. the interest on their mortgages,the banks were not keen Many creditors, needing their money, demanded the pay- to acceptsecurities which at the same time would tie up ment of their cessions. The situation then arose that the their funds for an indefinite period. This is basicallywhat company, unable in the difficult times to find another happenedin Graaff-Reinetwhere the collapseof the Graaff- creditor to take over the cession, had either to call in the ReinetBoard of Executorscaused a greatdeal of uneasiness entire loan or to take over the cession itself. Both Graaff- in other small towns whose boardswere experiencingthe Reinet companies, preferring to keep bonds running, chose sameproblems.3 the latter course and took over the cessions themselves, paying out the fiXed depositors from their own reservefunds. The situation was aggravated by the non-payment of interest BUILD UP TO THE CRISIS by farmers. As the companies were held responsible for interest payments to their fiXed depositors they began using During the boom period of 1924-25many farmersof the their liquid assetsto pay this interest. It did not help to Graaff-Reinetdistrict had taken out loansand bought land sequestrate any of the farmers and to have forced sales, as at highly inflated prices.The Graaff-ReinetBoard of Execu- both Graaff-Reinet financial institutions found themselves tors and its rival the Midland Agencyand Trust Company selling farms not for their purchase value but merely to Ltd (established30 March 1864)had readily advancedthe recoverloans. As the Depression deepened they found they required monies to the farmers. During the droughts of 1927-28the farmershad takenadditional loansto seethem through the lean years.By the time the Depressioncame, mostfarmers had quite substantialdebts. However,a farmer 1 F.P. CHAMBERS.Thisageofconjlict: the Westemworld-1914to the present (New York, 1962),pp. 327-328. in debt wasnothing unusual. He would, generally,run his 2 A. DE V. MINNAAR.Grlll1ffReinet and the Great Depression farming operations on a bank overdraft settling all his (1929-1933)(M.A., RhodesUniversity, 1978), p. 55. accountsannually, when he receivedhis wool chequeat the 3 CommercilJ/Builetin, 9(106), November 1931,p. 225. end of the year.The problem wasthat farm produceprices, 4 MINNAAR,op. cit., pp. 51-52.

CONTREE19 25 could not even sell the farms as there was no-one to buy to the Companies' assistance provided the government them. 5 guaranteed payment."12 Unfonunately on his return to So, even though the local finance institutions' assets the minister of Finance, with this proposal from the banks, exceededtheir liabilities, they ran into a liquidity problem. the minister refused to consent that the government would As their problems increasedso too did the rumours circu- guarantee the repayment of any such 10ans.13 lating in Graaff-Reinetand the district. The directorsof the Somehow the two trust companies in Graaff-Reinet Graaff-ReinetBoard of Executorsslowly became aware that carried on through 1931. At a meeting held on 12 Septem- their company was heading for a crisis. Applications for ber 1931 of all the directors of both companies, plus the extensionsof time to pay intereston loansincreased drama- managersof the local banks and the executivesof the Graaff- tically in 1930 over those in 1929.6 In July 1930 the Reinet Chamber of Commerce and the Graaff-Reinet Wool company's secretary,H.J. Pienaar,was instructed to write Growers' Association, an attempt was made to find some to the S.A. Mutual InsuranceCompany and the Guardian solution to the financial problems of the two companies. Assuranceand Trust Company to ascertainwhether they But no viable solution shott of liquidation was. found. 14 were prepared to grant the Board a loan of £20 000 for a The previous day the Board of Executorshad received a letter period of five years.7The S.A. Murual would only consider from Close advising them that the Standard and Barclays a loan subject to a pledge of bonds approved by it. The Banks were anxious to come to the Board's assistance; but Graaff-ReinetBoard of Directorsaccepted these conditions they insisted on an investigation of the Board's position by and cededten selectedbonds ranging from £1 200to £5 000 Close. I) The Board's directors offered this solution to the to the S.A. Mutual.8 While this loan helped to alleviate meeting on 12 September and it was accepted as being the their immediate liquidity problems, :JEtersix months they only course to follow in the situation.16 wereforced to take anotherloan of £12 000 from the same company.9 THE COLLAPSE

The announcementon 21 September1931 of GreatBritain's abandonmentof the gold standard acted as, catalyston ""'.~ this precariousposition and brought the crisis to a head. Thosedepositors who had surplusfunds withdrew them and .~ sentthem overseasto London. At a meetingof shareholders k of the Board of Executorsin February 1932 the chairman, T.E. Murray, reponed that the sum of "£100000 in cash" had beenwithdrawn the previousyear, the major pan after 21 September1931.17 The withdrawal of thesefunds wasthe last disasterin a dangeroussituation. Desperateattempts were made to stave off collapse.On 16 October1931 Close strongly advised the directorsof the Boardof Executorsto enterinto negotiations with the Midland Agencywith a viewto amalgamatingwith At this (third) building of the Board of Executorsin Grl1l1ffReinetthe them. IS But before anything could be concluded a run run occu1TedinOctober 1931.* developed on the Board of Executorsand on 20 October Both the Graaff-Reinet Board of Executors and the Mid- 1931 it suspendedall payments and closed its doors.19 land Agency and Trust Company were so worried about the As the situation developedit was touch and go whether situation that they held a round table conference of their the Midland Agency would also succumb to a financial respective directors, a totally unprecedented move conside- collapsebut fonunatelythe directorswere equal to the crisis. ring the intense rivalry between them. As a result of these On 21 October 1931,as the newsof the Boardof Executors' deliberations, a deputation from both institutions was difficulties spread,a run began on the Midland Agency. elected to enlist the services of J .E.P. Close, a well-known This withdrawal of funds was arrestedby the appearance accountant of Cape Town, who was to endeavour to find at the entrance to the Midland Agency building at 22 ways and means of obtaining". ..government assistance Church Street,of one of its directors,P .A. Luckhoff, and for both institutions against the possibility of investors of money withdrawing capital in the shape of f!Xed deposits on a large scale.' , 10 He offered to interview treasury ~ Ibid., p. 52. officials and to put the position of the two companies before 6 Graaff-ReinetBoard of Executors(GRBE) minute-books (stored at them. He then proceeded to Pretoria and interviewed the the officesof SyfretsTrust Ltd, Graaff-Reinet): Minutes of annual general minister of Finance on 7 August 1931. Unfortunately the meetingsfor 1929-1931. minister, while sympathetic, was unable to offer any assis- 7 Ibid.: Minutes, 4.7.1930, p. 291. tance, on the grounds that, if given in one case, it would 8 Ibid: 18.7.1930,pp. 297-315. 9 Ibid.: 23.12.1930,pp. 374-376. have to be extended to other trust companies and building 10Ibid.: 23.7,1931, pp. 35-36. societies which might also demand assistance. On the sug- II Midland Agencyand Trust Company(MATC) minute-books(stored gestion of the minister, Close also interviewed the g~neral at the offic~ of SyfretsTrust Ltd, Graaff-Reinet): Minutes, 23.8.1931,p. manager of the Land Bank, who gave him the assurancethat 219. 12GRBE: Minutes, 26.8.1931, p. 56. the Bank would be prapared to lend any farmer, who 13Ibid. applied, an advance not exceeding £2 000.11Close did not 14Ibid.: 12.9.1931,p. 69. stop there but went on to interview representatives of both I~ Ibid: 11.9.1931,p. 68. the Standard and Barclays Banks. He was able to get from 16Ibid: 12.9.1931,p. 69. them the tentative proposal that they would' 'possibly come 17Ibid: 29.2.1932, p. 107. 18Ibid.: 16.10.1931,p. 97. * All photographsfrom the E. Whitlock Collection, Graaff-Reinet. 19Wellwood (Graaff-Reinet district) farm diaries, 20.10.1931.

26 CONTREE19 the chairman, Dr D. Massey, who were able to persuade tually he converted the claims of all creditors into ;£50 the crowd not to withdraw their deposits.2OFunher, at an debenture shares and the existing securities of the Board emergency meeting of the directors of the Midland Agency of Executors were placed in the care of debenture trustees. on 28 October 1931, it was decided to impose a moratorium A list of all the names of creditors was drawn up. These on all capital payments.21 names were placed in a drum, and once a month a number of names were drawn to determine whose debenture was to be paid. The lucky ones would then be paid out the sum JUDICIAL MANAGEMENT of ;£50 from the funds that were slowly being accumulated by the careful administration of the judicial manager.2~ The Agency's rival institution, the Board of Executors, Later this system was dropped as investor clients claimed however,found it too difficult to continue. The directors, their securities had nothing to do with debentures. They on the advice of).E.P. Close, decided to apply to the maintained that the debentures should only have been SupremeCoun for an order placing the Company under issued to those who had ordinary deposits with the Board judicial management.22Dissent immediately arose between of Executors. Close then proposed the creation of two classes the supponers for outright liquidation and those wanting of sharesas an alternative to liquidation. This proposal was the companyplaced under judicial management. A com- in some measure a prolonged settlement arrangement. The mittee, working for the former course,was formed under original shareholders received an " A " class share having a the leadershipof G.B. Minnaar. This committee secured certain paid up value and "B" class shares were given to the servicesof a lawyer, C.H. Maasdorp,to act for them depositor creditors, which were in partial settlement of in pressingfor liquidation. They were able, asa preliminary claims; fo'r the balance they were given debentures. After move, to securean order on 29 October 1931 that the this arrangement the dissatisfaction subsided 'and the situa- Board's assetsbe frozen.23However, the opponentsof this tion improved since no creditor lost his investment, although move were able to count on the suppon of Dr K. Bremer, from 1931 to 1934 no interest was paid on any. In 1935 MP for Graaff-Reinet,and H. Urquhan, the mayorand also assetswere unfrozen and all were paid out their deposits a past vice-chairmanof the Midland Agency, ~d other and investments.26 prominentcitizens. This latter groupwere able to haveClose confirmed asjudicial manageron 19 November 1931. To allay the fearsof thosewho doubted the efficacyof judicial CONCLUSION managementa specialimpanial advisorycommittee consis- ting ofD. Parkes,Dr). Rubidge, W. Nicol, D.G. Collet The failure of the Graaff-ReinetBoard of Executorswas in and A. Murray was appointed to check on the judicial many waysthe worst episodeof the Depressionfor many manager.24 inhabitants of Graaff-Reinet as it was then the biggest ) .E.P. Closeimmediately set about trying to unravelthe fmancial institution in Graaff-Reinet.The whole population financial problemsof the Boardof Executives,especially the of Graaff-Reinetand of the district sufferedfrom this finan- confusionover the cessions.But his efforts in this direction cial crisis in one way or another. Especiallyhard hit were met with difficulties. He discovered that cenain bonds the many whose only income was the interest from their registeredin favour of the Board of Executorshad been set investmentswith the Board of Executors.Those who had aside by meansof underhand cessions(i.e. unregistered). spreadtheir funds betweenall the financial institutions in He adopted the attitude that thesebonds belongedto the Graaff-Reinetfared slightly better. Board of Executors,but cenain creditors maintained that It wasbecause of this financial disasterthat at the begin- the Board had no claim to them. The judicial manager,in ning of March 1932 Dr Karl Bremer, the local MP, intro- order not to createpreferences, held that all claimantswere duced the CompaniesAct 1926 Amendment Bill into the to become concurrent creditors. But the bond holders 1932parliamentary session. This Bill wasdesigned to assist claimed preferential rights, that is, a right to voice an a company, which had been obliged to askthe courts for opinion on how their bonds should be administered. Soon judicial managementpower, to keep going until it found accusationsof undue preferenceswere being hurled at the itself in a more favourable position. This would prevent judicial managerthough Closetried to be completelyimpar- thesecompanies going into liquidation which in turn would tial and scrupulouslyfair. He stressedthat creditorshad to prevent a large number of debtors being suddenly called be patient and bide their time till mattersimproved. Even- upon to pay up their bonds.27A number of small companies did seekjudicial managementduring the Depres- sionand this helped them to surviveand alsoprotected de- positorsdependent upon interestincome to get through the difficult depressionyears. So the collapseof the Graaff- ReinetBoard of Executorshad significancenot only for the inhabitants of Graaff-Reinetbut also for the wider South African public.~

20 M . INNAAR,Op. CII., p. 55. 21 MATC: Minutes, 28.10.1931, p. 260. 22 GRBE: Minutes, 26.10.1931, pp. 103-104. 23 MINNAAR, op. cit., p. 57. 24 GRBE: Minutes, 29.2.1932, p. 108. M . 2) INNAAR, op. cII., p. 58. 26 Ibid., p. 59. The Midlllnd Agency IInd Trust Com pliny Buildings lit the time of the 27 UNIONOF SOUTHAFRICA. HOUSE OF ASSEMBLY. DeblZles, 4.3.1932, col. grellt depression (1929-1934). 1868.

CON1REE 19 27