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History of Banking in Scotland
Chapter XXVII - Comparison of Scottish Banking in 1865 and 1883

HAVING traced the progress of Scottish banking from its modest commencement in 1695, through trials, failures, and brilliant successes, to the time of its greatest trial, we may appropriately add to our sketch a review of the position of the surviving banks, as exhibited in their published balance sheets for 1883, and by a contrast of that position with the statistical condition of banking in Scotland eighteen years previously—the date at which the banks first generally adopted the practice of making a public disclosure of their financial state; for, until 1865, almost absolute secrecy shrouded their affairs. Except the amount of their capitals, and the rates of dividends they paid, but little was known regarding them which could serve as a guide to intending purchasers of bank stock. Customers had to exercise blind faith as to the solidity of the establishments they dealt with, and economists had to trust pretty much to imagination in estimating the position of banking and its relations to the progress of the nation.

Since 1865 we have had an unbroken series of yearly statistics, portraying, with nearly complete accuracy, the position of the several banking establishments. The elements vitiating the accuracy of the portraiture are not numerous, nor do they materially affect the general result. The denouement of the City of Glasgow Bank showed that its official reports were not worthy of implicit belief; but it is impossible to dispense with them. Another result of the same catastrophe was the ascertainment of the fact that the actual capital devoted to banking had not been so great as had been supposed, many of the banks having held large portions of their capitals in their own names. Stock so held, while nominally still in existence, and capable of being transferred without formal re-creation, was practically non-existent, as it in no way exercised any power, or was capable of meeting any responsibility. [This view of the question is controverted by some bankers, on the ground that, the capital having been actually created, taken up by subscribers, and not lost by the bank, it must still exist, although purchased by the bank. The case of the City of Glasgow Bank, however, supplies practical proof that this is a purely technical or book-keeping view of the matter.] These holdings having now been disposed of, there has really been a greater increase in proprietors' funds than the official statements would lead one to believe. Again, although a system of publicity is, in the main, very superior to that of secrecy, it has some dangers special to itself. There is an increased tendency to what may be called "racing," with the resulting danger of over-exertion, the banks vieing with each other, consciously or unconsciously, as to the creditableness of their annual statements.

As we have already seen, it was an old habit of Scotch bankers to pile up their profits from year to year, and make a grand stroke when the accumulation had reached a considerable point. While this practice, to the extent to which it was carried, is inconsistent with the interests of proprietors who may not hold long enough to participate in the distribution, there can be no doubt that it sometimes saved the banks from the effects of large losses which would otherwise have been difficult to deal with. A system of publicity tends to prevent such a course of action, and, in order to put on as good an appearance as for the time being they are entitled to, the banks are apt, from time to time, to lessen the extent of the hidden strength which, in times past, had secured their steady progress. Thus, the reserved fund shown in the balance sheet—drafts on which have always a serious effect in public estimation—tends to become the only source from which extraordinary losses can be met. And such losses no amount of prudence and foresight can avert—they can only provide for them. Competing openly in the eyes of the public, each bank, urged on by its shareholders, seeks to pay as high a dividend as its profits will allow. When reverses come, a sharp reduction follows, producing unreasonable disappointment on the part of investors, who seem to think they should be able both to eat their cake and have it. Of course, the main point is that provision should be made for extraordinary reverses of fortune, and, if this be done to a sufficient extent by public additions to reserve funds, the result may be the same in the long run; but the system of hidden reserves has a steadying effect on the progress of an establishment.

The progress during the eighteen years which elapsed between the points of comparison is marvellous, and much beyond the ratio of the increase in population. The population of Scotland in 1865 was probably about 3,074,000, and an official estimate for 1883 places it at 3,825,744. The increase would thus be 751,744, or nearly 24 per cent. But the deposits held by the banks rose 45 per cent during the same period; indeed they had reached that point much earlier—viz., in 1877—although they subsequently fell, as a result of the crisis of 1878. It is probable that the improvement thus shown is actually representative of a much greater advance of the nation in material prosperity, for the competition of investment companies of all kinds has, in an intensified degree, tended to lessen the natural inflow of deposits. But, without reference to such matters, it is a striking fact that while, in 1865, the twelve banks then existing held deposit money equal to 18 : 12s. per head of the population, the ten banks existing in 1883 held deposits equal to 21 : 14 : 1 per head of the population.

The aggregate liabilities of the banks have increased in a slightly lower proportion than the deposits. This is owing to the comparatively small increase in the circulation of notes, and to a small decrease in the amount of paid-up capital. The reduction of capital is due to the absorption of the Central Bank and the failure of the City of Glasgow Bank. If allowance be made, however, for the portions of capital held by the banks in their own hands, and subsequently issued to the public, as already referred to, it is probable that there has been no actual decrease in the total capitals. The amount of circulation given by the reports of the banks is not reliable as a basis of calculation, as the individual amounts are merely those of the particular days on which the balances were struck. The average yearly issues showed an increase of 34 per cent. Grouping the banks for comparison, as Edinburgh, Glasgow, and country, according to the location of their head offices, the distribution of the total liabilities was, in 1865—Edinburgh, 62 per cent; Glasgow, 30 per cent; country, 8 per cent. By 1883 the first group seems to have gained at the expense of both the others, for the proportions in 1883 were—Edinburgh, 70 per cent; Glasgow, 23 per cent; country, 7 per cent. The failure of the City of Glasgow Bank was, doubtless, the cause of this change, which was, indeed, natural, as it could not be expected that two Glasgow and three provincial banks would secure as much of the lapsed bank's business as the five large Edinburgh banks.

A striking feature of the increase in liabilities is supplied by the acceptances. (The drafts current, although conjoined in the tables with the acceptances, as they were not usually separated in the earlier reports, do not materially affect this comparison.) The increase in this department of banking was much more marked than that of any other, amounting to 85 per cent. It would seem, however, that this is due mainly to that exceptionally good department of acceptance business supplied by the colonial banks drawing on London, and not so much to mercantile acceptances. The acceptances of some banks actually decreased in amount.

While the public liabilities of the banks were thus extended, the banks (lid much towards supporting the proportion of proprietors' funds to them. Although, as we have seen, there was a decrease to the extent of 4 per cent in the amount of total capital, owing to the withdrawal of two banks, the amount added to reserved funds was no less than 91 per cent, or twice the proportion of increase in deposits. But the relative proportion of the proprietors' funds to public liabilities was not quite so great as in 1865, the proportions being 19 per cent in the earlier year against 16 per cent in 1883. But, if recent issues of stock be allowed for, it is probable that that apparent falling off is deceptive.

Turning now to the assets of the banks, some interesting features are manifested. The banking advances, which might naturally have been expected to increase in somewhat similar ratio with the deposits, have actually advanced at not very much more than half the rate. This would seem to indicate that the demand for banking accommodation had not progressed to the same extent as the increase in wealth of the nation. There may have been a determinate policy on the part of the banks to strengthen the banking reserves, but it is not probable that they desired so large an increase as had actually taken place—viz. 80 per cent. The outstanding expenditure on bank buildings also shows a large increase. As there were 218 more bank offices than existed in 1865, a considerable increase is natural. But the banks studied appearances as well ; for, while the average cost of the buildings was formerly about 1600, the later amount is 1943.

Considering the great extension of the banking business which had taken place, a large increase in net profits might have been expected. But, on the contrary, the improvement was very small. The ten existing banks declared, in 1883, profits only 3 per cent in excess of those declared by the twelve banks carrying on business in 1865. This comparison is, of course, quite fair, as the Central Bank and City Bank businesses are enjoyed by the surviving banks. It is thus evident that banking in Scotland was not, in 1883, nearly so profitable as it was eighteen years previously. To a large extent this is due, doubtless, to the smaller proportion of funds employed in banking advances, the reserve securities not yielding so high a return. But other causes probably contribute to the result. Perhaps allowance should be made for the fact that 1865 was a year of high pressure in commercial activity, the price of money ruling high during the greater portion of it, while 1883 was mainly one of low rates. But this will not entirely account for the disproportion of profits. The average rates of dividend and prices of stock are in accordance with the rate of increase in profits.

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