George Arbuthnot: The banker who laid bare the myth of British integrity

“Messrs. Arbuthnot & Co. have suspended payments."

The seemingly innocuous statement signalled a financial and moral catastrophe for the city. For nearly a century, Arbuthnot & Co. had been the symbol of British integrity and financial security in South India. Thousands of merchants, landlords, charities, and even ancient temples had entrusted their life savings to the firm.

At its helm was Sir George Gordon Arbuthnot, a knight of the British Empire, a prominent civic leader, and one of the most powerful men in the Madras Presidency. Often cited as an antithesis to "corrupt Indian merchants," he was the living embodiment of the moral superiority the British claimed to colonial finance.

But within days, that entire facade of rectitude was brutally exposed.

The empire’s banker

Born in 1848 into a prominent Scottish family, George Gordon Arbuthnot arrived in India at a time when the British Empire’s commercial reach was at its peak. The firm acted as a banker, agent, and financier for colonial trade with deep links to London. Arbuthnot was its esteemed public face.

Yet, beneath the veneer of respectability, the company’s books were a lethal maze of reckless speculation and deception.

When the Madras High Court examined its records, the picture was grim. The firm was a financial phantom, running a classic Ponzi-style operation where new deposits were used to service old obligations and maintain the illusion of solvency. Auditors later cited by arbuthnot.org confirmed the extent of the fraud: "Its assets estimated at ₹7½ million were considered as being ‘beyond all belief, worthless, which crumble to dust when touched’. And its liabilities … amounted to ₹27 million."

Investigations revealed that Arbuthnot was siphoning depositors’ money to prop up failing ventures and cover personal debts, with fictitious entries disguising the crippling losses. The victims were often small depositors. One case, The Official Assignee v. Krishna Bhatta (1910), recounted the tragedy of a villager who lost his lifetime’s savings of ₹1,500 when the firm failed just before his deposit matured.

But the party had to end at some time and in October 1906 it did. As the firm’s insolvency rumours spread, panic-stricken crowds, including merchants and members of the colonial elite, gathered outside the company’s gates. An article in DTNext notes: "This was not a crunch; this was a national catastrophe... Even the Governor of Madras, Lawley, lost a lot of his savings."

The losses ran into crores and affected over 7,000 depositors in one of the largest banking collapses in India’s history at the time. The scandal eventually reached London when on 11 December 1906, member of parliament J. M. Maclean raised the alarm in the House of Commons, noting that "about four crores of rupees are involved in the present crisis". George Arbuthnot was arrested and charged with misappropriation and falsification of accounts. His 1907 trial at the Madras High Court was a public spectacle confirming his treachery.

Despite the magnitude of the fraud, Arbuthnot’s punishment was remarkably light: 18 months' rigorous imprisonment. His partner, J.J. Lloyd, simply fled to England and successfully evaded trial altogether. To many Indians, this confirmed a bitter suspicion: British justice protected its own. Arbuthnot quietly returned to England after serving his short sentence, dying in obscurity in the 1920s. While British accounts framed him as a "tragic figure" who overextended himself, in Indian memory he was the face of colonial exploitation masquerading as benevolent capitalism.

The Indian banking awakening

While the collapse of Arbuthnot & Co. left a deep psychological scar, it also catalyzed a nationalist awakening. A group of nationalists and lawyers, led by V. Krishnaswamy Iyer, resolved that Indians could no longer entrust their savings to foreign firms. In a direct and powerful response, they founded The Indian Bank in 1907 as the first major indigenous financial institution in South India. It was an act of deliberate rejection of colonial finance, particularly when, two years later, the new bank bought the pillared and pedimented Arbuthnot Building on First Line Beach.

The crash spurred a larger movement, serving as a critical trigger for the creation of other Indian-owned banks like Canara Bank and Bank of Baroda. As historian Sriram V. notes: “The crash of Arbuthnot & Co. in 1906 was perhaps the most important trigger in the movement to create Indian banks owned and managed by Indians themselves."

For more such stories, read The Enterprising Indian: Stories From India Inc News.