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CHAPTER II.: BANKING IN SCOTLAND. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 2 A History of Banking in Great Britain, the Russian Empire, and Savings-Banks in the U.S.
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BANKING IN SCOTLAND.
The Beginnings of Banking—The First Bank Charter—Attempts at Monopoly in Banking—Creation of the Royal Bank—Great Over-Issue of Notes—Their Consequent Depreciation—Statute of 1765, to Cure the Depreciation—Currency Restored to Par Permanently—The Notorious Ayr Bank—Great Revival of Prosperity, from Sound Banking—Suspension of Gold Payments by the Three Public Banks—A Clearing House Established—Eulogium by the House of Lords on Scottish Methods.
UP till 1695, there were no such persons as “bankers” in Scotland. The records of commerce are so scanty, that we are unable to say whether the custom of discounting bills of exchange had been introduced into Scotland before then. But if there were any persons who discounted bills of exchange, they did so with the money itself, and therefore they were technically money lenders or bill discounters, and not “bankers,” who, as we have shown, invariably purchase money and debts by issuing their own circulating credit in exchange for them.
The successful institution of the Bank of England led to the project being formed to establish a bank in Scotland. Mr. John Holland, a merchant of London, was the author of the scheme, and he got eleven Scottish merchants to join him. On the 17th July, 1695, they obtained an act of the Scottish Parliament, authorizing the Crown to grant them a charter of incorporation They were however purely a private company, and had no connection with the State. The authorized capital was £100,000, and they received a monopoly for twenty-one years.
As the Scots were supposed to know nothing about banking, it was provided that, for a certain number of years, the governor and twelve directors should be English, and the deputy governor and twelve directors should be Scots. However, it was soon found that the Scots took so kindly to the business that the arrangements were changed, and all the directors were Scots; but thirteen trustees were chosen to manage the English business and affairs in London. The first call was for £10,000. The bank at first received no money from the public. They found that, on the subscription paid in by their shareholders, they could maintain £50,000 of their notes in circulation, which John Law justly said was equivalent to an augmentation of capital to the country. Their notes were at first for £100, £50, £20, £10 and £5.
In 1696, they opened branches at Glasgow, Aberdeen, Dundee and Montrose, but not finding them to pay withdrew them. In 1704 they began to issue £1 notes. It appears that, up to this time, their profits were very large. A rival pamphlet states the dividends at thirty-five, forty and fifty per cent., and accordingly these profits attracted competition. In 1716, the monopoly of banking granted by their charter expired, and no attempt was made to renew it. Several bodies of persons tried to force an amalgamation with them, but their offers were steadily refused.
At the time of the Union a considerable number of persons, both civil and military, were creditors of the Crown; and the equivalent sum stipulated by the act of Parliament was not sufficient to discharge their claims. In 1714, they obtained an act of Parliament to constitute their debts; but no Parliamentary provision was made to satisfy them till 1719, when £10,000 was set apart for the purpose, to be paid annually in preference to all other claims. The act of 1719 empowered his Majesty to incorporate the proprietors of the debt into a body politic or corporate, with powers to do and perform all matters appertaining to them to do, touching or concerning the said capital sum, and the yearly sum payable in respect thereof, as his Majesty by the said letters patent should think fit to grant. In pursuance of this act, the proprietors were incorporated in 1724.
This was one of the bodies of persons who tried to force themselves on the Bank of Scotland. When they were repulsed by the bank, they petitioned the King to grant them powers of banking. This petition came to the knowledge of the bank in 1726, and they did everything they could to oppose it. A cry was got up against them that they were hostile to the House of Hanover; that they charged too high interest for their loans; that they were too particular in the securities they required; that they would not lend on their own stock, and other things. To all these various charges they, or a friend for them, replied. They said that such a thing as two banks in one country was never heard of, and that if Scotland had two banks, England should have ten. By this time they had called up three-tenths of their capital, or £30,000, and they alleged that that was sufficient to circulate all the credit that could be required in Scotland. They very justly said: “For the quota of credit in a banking company must be proportioned to the stock of specie in the nation, learned and understood by long experience, and not extended to a capital stock subscribed for, which cannot in the least help to support the company’s credit, if the specie in a nation decay.”
The last call which had been made was partly paid up in the bank’s own notes, just as the subscription to the new stock of the Bank of England had been partly paid up in its own notes. An outcry was raised against this, but the directors well answered: “But the objectors do not at all consider this point. For the payments are many of them made in specie, and bank notes are justly reckoned the same as specie, when paid in on a call of stock; because, when paid in, it lessens the demand on the bank. Thus the directors, from their own mercantile instinct, and equally innocent of Roman law and the profound principles of algebra which were not then discovered, perceived the great doctrine of Roman law that the release of a debt is in all respects equivalent to a payment in money: or that − × − = + × +. It was also said: “A certain stock of specie circulating in the country is needful for currency of payments in markets, and among the meaner sort of people, bearing a due proportion to what is running on paper credit upon the faith of the banking company. Notwithstanding the opposition of the Bank of Scotland, the charter with the powers of banking was issued to the Equivalent Company on the 8th of July, 1727, with a capital stock of £151,000.
Granting that all the charges against the Bank of Scotland were futile and groundless, we may well rejoice that its monopoly was not allowed to continue. A writer who professed to be independent of either bank touched the right point in reply to a statement on behalf of the old bank: “The power of monopolies is, I believe, an exploded doctrine. Did ever any nation make an exclusive bank perpetual, or for longer than twenty-one years—or, if such an instance can be given, was the measure right? * * * If the old bank should reply, ‘We are in possession, and what have we done to have our possession disturbed?’ the answer upon the abstract question is plain by another question, ‘What have we, the other subjects, done to be secluded; or by what law are we secluded from the advantages you enjoy’?” The writer then says, after comparing the rival companies: “The obvious reflection which arises from comparing these two is, that these candid and fair dealers have also dealt profitably for themselves, as is but reasonable. They have taken very good payment for all the services they have done to the nation; and what title they, or any other set of men, have to an hereditary or indefeasible monopoly of banking, is hard to understand. * * * As ready as our Parliament was at the Union to accommodate petitioners, a perpetual monopoly of banking was a thing so manifestly pernicious, that no private man could have the assurance to aim at it, far less could any parliament be so unthinking as to grant it.”
On the south of the Tweed, there was found a parliament so unthinking as to grant a monopoly of banking to a single company for 130 years, and the consequences fully justified the opinions of the sagacious Scot. A monopoly in banking is as utterly pernicious as any of the monopolies which the parliaments of Elizabeth and James I. rebelled against. Scotsmen may feel justly proud that they resisted it from the beginning. Scotland was allowed to develop her system of banking by the talents of her native men of business, unmeddled with by Parliament; and it is now recognized and admitted by all persons of authority that she possesses the best organized system of credit and banking in the world. The alarm and jealousy created by the new bank soon wore off, as it was discovered that, so far from injuring the old bank, the inevitable consequence followed, which an enlarged experience of commerce would have enabled us to predict; it increased the prosperity of both banks. The stock of the old bank rose to 400 per cent. and that of the new bank also rose very high.
The Royal Bank, as it was named, had only been in existence two years when it invented a further development of the system of banking which, in the unanimous judgment of all persons who know that country, has done more to develop its resources and promote its agricultural and general prosperity than any cause whatever. This is the system of cash accounts, or cash credits, of which we have given a full exposition elsewhere. This system deserves the most attentive consideration, because it is entirely of the nature of accommodation paper, which has fallen into such disrepute in England from the enormous abuses of it which have taken place. It also realizes all the advantages which are practicable from the schemes of land banks, which were devised by the seething brains of Chamberlen, Briscoe, Law and others. It has advanced the wealth of Scotland by centuries. It is a striking instance of the aphorism of Demosthenes: “If you were ignorant of this, that credit is the greatest capital of all towards the acquisition of wealth, you would be utterly ignorant”; and of the aphorism of Daniel Webster: “Credit has done more a thousand times to enrich nations than all the mines of all the world.”
In 1731, the Bank of Scotland again tried to establish branches at Glasgow, Aberdeen and Dundee; but, after two years, was obliged to discontinue them, and the plan was not tried again till 1774. The unlimited power of issuing “promises to pay,” placed in the hands of hostile parties who had not acquired sufficient practical experience of the subject, naturally led to great over-issues. To protect themselves from the consequences of these over-issues, as well as from the attacks of each other, the Bank of Scotland, in 1730, introduced a clause into their notes, making them payable at the option of the directors at the end of six months after demand, with the legal interest up to that time. This practice was adopted by all the other banks; for the manifest advantages of banking were so strikingly displayed that, after the expiring of the monopoly of the Bank of Scotland, banking companies started up in all directions, and inundated the country with their notes. When the holders of the notes demanded payment of them, the companies threatened to take advantage of the optional clause, unless the demanders would content themselves with a part of what they wanted. Moreover, as there was no restraint on the amount of their notes, many of the companies issued notes for 10s., 5s. and even lower than that. In Perthshire, there were notes for 1s. and even for 1d.; and the Perth Banking Company was founded partly to put an end to that nuisance. The inevitable consequences followed; these paper notes drove all the gold and silver out of the country, and the exchange with London fell. Adam Smith says: “While the exchange between London and Carlisle was at par, that between London and Dumfries would sometimes be four per cent. against Dumfries, though this town is not thirty miles from Carlisle. But, at Carlisle, bills were paid in gold and silver; whereas, at Dumfries, they were paid in Scotch bank notes; and the uncertainty of getting these notes exchanged for gold and silver coin had thus degraded them four per cent. below the value of coin.” At this time, owing to the degraded state of the English coin, the foreign exchanges were against England; and the market price of gold was £4 per ounce; so that the whole depreciation was about six and a-half per cent. Thus, we see that the Scottish bank notes were practically inconvertible; and, in reality, bills of exchange were payable six months after demand—a circumstance of great importance, and one which must be specially observed, as this instance was brought forward by Sir Robert Peel in introducing the Bank Act of 1844, and he was not rightly informed of the circumstances.
The manifest consequences of this state of matters followed. All the gold left the country, as it always does from an excessive issue of inconvertible paper, and the banks were all obliged to employ agents in London to collect money for them at an expense of seldom less than one and a-half or two per cent. Adam Smith says: “This money was sent down by the wagon, and insured by the carriers at an additional expense of three-quarters per cent., or 15s. on the £100. These agents were not always able to replenish the coffers of their employers as fast as they were emptied. In this case, the resource of the banks was to draw upon their correspondents in London bills of exchange to the extent of the sum they required. When these correspondents afterwards drew upon them for the payment of this sum, together with the interest and commission, some of these banks—from the distress into which their excessive circulation had thrown them—had sometimes no other means of satisfying this draft but by drawing a second set of bills either upon the same or upon some other correspondents in London; and the same sum, or rather bills for the same sum, would in this manner make more than two or three journeys, the debtor bank always paying the interest and commission upon the whole accumulated sum. The gold coin which was paid out, either by the Bank of England or by the Scotch banks, in exchange for that part of their paper which was over and above what could be employed in the circulation of the country, being likewise over and above what could be employed in that circulation, was sometimes sent abroad in the shape of coin; sometimes melted down and sent abroad in the shape of bullion, and sometimes melted down and sold to the Bank of England at the high price of £4 per ounce. It was the newest, the heaviest and the best pieces only which were carefully picked out of the old coin, and either sent abroad or melted down at home; and while they remained in the shape of coin, those heavy pieces were of no more value than the light, but they were of more value abroad or when melted down into bullion at home.”
At this period, the Scottish banks had got themselves into a very alarming condition, from their ignorance of the true principles of regulating a paper currency, as well as of the effect of an excessive issue of inconvertible paper in depressing the exchanges and causing an export of gold; and not perceiving that, while in this state, bringing gold into the country was like pouring water into a sieve, like the toil of the Danaides. They had been far too prodigal in granting cash credits and allowing them to be converted into dead loans, without observing the rules which were specially applicable to them. And everything seemed to show that matters would get worse, as numerous other companies were forming to add to the currency, which was already excessive. United in a common danger, the two principal banks agreed to combine their influence and obtain an act to put a stop to the abuse. By their influence the Act, Statute 1765, c. 49, was passed, suppressing all notes under 20s. and prohibiting these to be issued with the optional clause, and enacting that all such notes should be payable to the bearer on demand. The banks also curtailed their cash credits very extensively and called up fresh capital. Owing to these combined measures, silver immediately reappeared in circulation; the value of the Scottish currency was restored to par, and from that time to the present, although the issue of bank notes was absolutely free until 1845, the Scottish currency has never varied from par.
The Bank of Scotland and the Royal Bank continued to be the only chartered banks in Scotland till 1746. In that year the British Linen Company was incorporated for the purpose of carrying on the manufacture of linen and banking in connection with it. The company, however, soon found, what ample experience has since confirmed, that the same company should never carry on banking and another business at the same time. They soon found it expedient to discontinue their linen manufacture and confine themselves to banking; and it has since become one of the most powerful and wealthy of the Scottish banks, but it did not introduce any new feature into Scottish banking. These three banks, the Bank of Scotland, the Royal Bank and the British Linen Bank, are the only banks in Scotland which are constituted with the full powers and privileges of a corporation—that is, their liability is limited to the amount of their subscription; and the members are not liable, in their private capacity, for the debts of the corporation beyond their subscribed stock.
In 1770, that abominable system of accommodation paper, which is the sure precursor of mercantile convulsion, was first fully manifested on a great scale. The Scottish banks had learned a very wholesome lesson, and contracted their issues within the bounds of prudence. This was a source of prodigious annoyance and vexation to a multitude of speculators and adventurers. The increased prudence which the banks exercised in granting advances, not only alarmed but enraged their projectors in the highest degree. Adam Smith (Wealth of Nations, Bk. II. ch. 2) gives a long account of the circumstances of the country at this period, and describes the foundation of a new bank, the notorious Ayr Bank, which was designed to remedy the distress which was owing, its projectors said, to the ignorance, pusillanimity and bad conduct of the banks, which did not give a sufficiently liberal aid to the spirited undertakings of those who exerted themselves in order to beautify, improve and enrich the country. This new bank comprised the Duke of Hamilton and many other proprietors of immense wealth, and it was based upon the fallacy that, because the capital and property of its proprietors was undoubted, it might therefore issue notes to any extent without depreciation. It was the avowed principle of this bank to advance upon any reasonable security the whole capital which was to be employed in these improvements, of which the returns are the most slow and distant, such as the improvements on land. This bank accordingly issued its notes with the utmost profusion, and very soon found them coming back on it for payment. To meet these demands, it began to draw upon London; and when the bill became due, it paid it by another bill, together with interest and commission. It continued to exist for two years, and it had then £200,000 of its notes in circulation and £600,000 in drafts upon London, for which it paid eight per cent. in interest and commission, while it gained five per cent. on its own notes.
The exports of 1771 and 1772 rose to a height which they did not again reach till 1787. While commerce was in this apparently prosperous, but in reality, bloated and diseased condition, on the 10th June, 1772, a partner in one of the great London banks, Neale & Co., decamped with £300,000. This man was a Scotsman named Forsyth, who had a large Scottish connection; these were blown upon by the failure of their London agent, and a complete commercial panic set in. The Ayr Bank had branches in Edinburgh and Dumfries. On the 17th a run began on its Edinburgh branch, and it stopped payment on the 25th, along with a crowd of speculators. The whole of Scotland was shaken to its foundation. The liabilities of the Ayr Bank amounted to £800,000. There had been no disaster similar to it since the Darien scheme, and there was none like it again till the failure of the Western Bank. The credit even of the other banks was almost gone. Besides the three public banks, only three private ones survived. It is said that the winding up of this unfortunate bank was not completed until 1830.
By the Act, Statute 1774, c. 32, the Bank of Scotland was authorized to double its capital. At this time the least fear of any Jacobite rising had died away. The measures taken after the suppression of the rising in 1746 had introduced peace and civilization into the remotest districts of the Highlands. Scotland shared in the great outburst of industrial energy which had developed itself in England, and had been the cause of the immense multiplication of country bankers. In this year, the Scottish banks began to throw out branches in all directions to promote agricultural improvements, and henceforth Scotland increased in wealth by gigantic strides produced by the system of cash credits. By the Act, Statute 1784, c. 12, the capital of the Bank of Scotland was raised to £300,000. By the Act, Statute 1792, c. 25 it was raised to £600,000; and by the Act, Statute 1794, c. 19, it was raised to £1,000,000; and by the Act, Statute 1804, c. 23, it was raised to £1,500,000, of which £1,000,000 was called up. All this shows how the industry of the country was increasing.
The news of the suspension of cash payments by the Bank of England in 1797 reached Edinburgh on the 1st March. The managers of the public banks met at Sir William Forbes’ to consider what was to be done. It was agreed to follow the example of the Bank of England and suspend all payments in cash. A public meeting of the principal inhabitants was called by the Lord Provost, and attended by the Lord President of the Court of Session and the other dignitaries. The meeting came to the unanimous resolution to support the credit of the banks and to receive their notes as specie. This resolution was advertised in the papers and sent to all the principal towns. This resolution caused a little commotion at first, but it soon subsided; and during all the period of the revolutionary war the suspension of cash payments continued; and not a single action was ever brought against them to enforce payment, although they were unprotected by any act of Parliament; and in a short time business proceeded more prosperously than ever. By the admirable system of the Clearing House, which the Edinburgh banks had adopted in 1776, the Scottish bank note currency never varied from par with the Bank of England note. The next occurrence which we may mention was the foundation of the Commercial Bank in 1810. At this time the high Tory regime was at its highest and palmiest state, and the banks were alleged to carry their politics into their business. Whig bills of exchange were looked upon with very cold and unfavorable eyes. The Whig party then determined to found an opposition bank, which was named the Commercial, which has since attained as high an estimation as any of the older ones in public opinion. This bank subsequently obtained a charter, but the liability of its shareholders was specially declared to be unlimited.
The long and dreadful catalogue of failures in England in 1825, chiefly caused by the monopoly of the Bank of England preventing large and solid banks being founded, and which were attributed to the issues of £1 notes by the country bankers, caused the Ministry to intend to abolish £1 notes in Scotland and Ireland at the same time as they did those of England. But this raised such a ferment, headed by Sir Walter Scott, that the Government consented that committees of both Houses should be appointed to consider the subject. The result was so eminently favorable to the Scottish banking system, which had been freely developed by practical men of business without the interference of the Legislature, that the attempt was abandoned. The report of the Lords said that: “With respect to Scotland, it is to be remarked that during the period from 1766 to 1797, when no small notes were by law issuable in England, the portion of the currency of Scotland in which payments under £5 were made continued to consist almost entirely of notes of £1 and £1 1s.; and that no inconvenience is known to have resulted from this difference in the currency of the two countries. This circumstance, among others, tends to prove that uniformity, however desirable, is not indispensably necessary. It is also proved by the evidence and by the documents that the banks of Scotland, whether chartered or joint-stock companies or private establishments, have for more than a century exhibited a stability which the committee believe to be unprecedented in the history of banking; that they supported themselves from 1797 to 1812 without any protection from the restriction by which the Bank of England and that of Ireland were relieved from cash payments; that there was little demand for gold during the late embarrassments in the circulation, and that, in the whole period of their establishment, there are not more than two or three instances of failure. As, during the whole of this period, a large portion of their issues consisted almost entirely of notes not exceeding £1 or £1 1s., there is the strongest reason for concluding that, as far as respects the banks of Scotland, the issue of paper of that description has been found compatible with the highest degree of solidity; and that there is not, therefore, while they are conducted upon their present system, sufficient ground for proposing any alteration with the view of adding to a solidity which has so long been sufficiently established.” The report of the committee was adverse to any legislative interference with the system of Scottish banking. This report is somewhat too couleur de rose, inasmuch as it takes no notice of the dreadful catastrophe of the Ayr Bank. It is known as a fact that a whole multitude of joint-stock and private banks started up in Scotland during the period of great industrial energy after 1766, but we are not aware that there is any record of their numbers. But, in 1826, besides the three public chartered banks with forty-four branches, there were twenty-two joint-stock banks with ninety-seven branches, and eleven private bankers in Scotland, or in all 194 banking offices.
No interference with Scottish banking took place till 1845, when Sir Robert Peel, having carried his Bank of England Charter Act and Joint-Stock Banking Act, which has since been totally repealed, with scarcely a breath of opposition, determined to regulate those of Scotland and Ireland as well. The principal provisions of this Act, Statute 1845, c. 38, are as follows:
(1.) All persons had been prohibited by the Statute 1844, c. 32, from commencing to issue notes after the 6th May, 1844, in the United Kingdom, and all such persons in Scotland as were lawfully issuing their notes between the 6th May, 1844, and the 1st May, 1845, were to certify to the Commissioners of Stamps and Taxes the name of the firm and the places where they issued such notes.
(2.) The commissioners were to ascertain the average number of such bankers’ notes in circulation during the year preceding the 1st May, 1845.
(3.) Such bankers were authorized to have in circulation an amount of notes, whose average for four weeks was not to exceed the amount thus certified by the commissioners, together with an amount equal to the average amount of coin held by the banker during the same four weeks. Of the coin, three-fourths must be gold and one-fourth silver.
(4.) In case the bank exceeds the legal amount, it is to forfeit the excess.
(5.) If two or more banks unite, they are authorized to have an issue of paper to the aggregate amount of issues of the separate banks, as well as the amount of the coin held by the united bank.
(6.) Notes of the Bank of England not to be legal tender in Scotland.
The reader will see that there are some striking points of difference between the restraints laid upon the English and Scottish banks; for, while the former are bound down to an absolute fixed limit of issue, the latter are permitted to issue to any amount, provided they hold an equal amount of coin above their authorized issue. Moreover, if any number of banks unite, they may have an aggregate authorized issue equal to that of the separate banks; but in England, if the number of partners of the united bank exceeds ten, they forfeit their power of issuing notes altogether. This absurd restriction as to the number of partners in a bank was never in force in Scotland, and is simply one of the methods by which the banking system of England was sacrificed to the Bank of England. It must be observed that the coin required to be held against the amount of notes in circulation above their authorized issue is in no way appropriated to their payment of these notes; it is merely a rough-and-ready method of compelling them to hold a greater amount of gold in proportion to their general liabilities. Whether this act has in any way conduced to the greater security of the Scottish banks, we will not take upon ourselves to say. All we can say is, that the two most dreadful calamities in Scottish banking, many times exceeding that of the Ayr Bank, have occurred since it was enacted. But it is the cause of one great nuisance. All payments in Scotland are made at two fixed terms—the 15th of May and the 11th of November. To effect these payments the banks have to issue millions of notes, which are emitted and get into circulation in the morning and are retired before evening. But for this one day’s issue of the notes it is necessary to have an equal amount of gold to back them. So millions of gold are sent down to Scotland from the Bank of England, and having lain a short time in the vaults of the Scottish banks, are trundled back again to London. The terrible catastrophe of the City of Glasgow Bank in 1878 produced a complete change in the constitution of all the joint-stock banks in the United Kingdom. Their shareholders compelled them to adopt the principle of limited liability. But we shall defer the consideration of this question to a later chapter.
The following table exhibits the position of all the Scottish banks on the 19th October, 1895: