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History of Banking in Scotland
Chapter XXVIII - A Critical Period


BETWEEN the close of 1878 and the crisis of 1890, the public history of the nation records many important incidents, but few of outstanding magnitude. With quite a crop of small wars, and continuous Boer and Irish troubles, the country crept along ever without the moral courage to pluck safety from the nettle danger. Nations seem, like individuals, to have alternating periods of nerve experiences. At any rate, an imperialistic-ascendency condition ended with the Berlin settlement of 1878, securing "peace with honour"; and thereafter set in an opportunist spirit which had its manifestations in the Majuba capitulation treaty, tinkered Boer conventions, the sacrifice of General Gordon, dangerous vacillation in Irish policy eventuating in the almost fatal Home Rule weakness; until, tired of perpetually yielding to everybody only to be bothered for something more, the nation closed its teeth.

The twelve years which have elapsed since the crisis of 1890 have been full of the makings of history. The great battle for the maintenance of the Union —the most momentous, probably, of the past century —has been fought and won; laissez faire policy in South Africa, the first overt act of which had been the recall of Sir Bartle Frere on 1st July 1880, was followed by both parties in a weak-kneed manner, until, nineteen years thereafter, the Boers, taught that pressure only was necessary to obtain concessions from the British, launched their insolent ultimatum, and started to sweep the rooineks into the sea. Then the nation paid in blood and treasure for the false peace it had indulged in. The economic error had been dreadful, but, probably, under psychological conditions it was inevitable. At the same time, the results of the costly remedy which the nation calmly, and great mindedly, unhesitatingly resorted to probably formed an experience necessary for the wellbeing of the body politic, and were eminently beneficial to the higher life and aspirations of the race. And the units of the Empire were welded together as only such titanic force could effect.

Notwithstanding widespread agricultural depression, and Irish and anarchist plots, the domestic state of the nation was fairly good, if not so prosperous as it had sometimes been. There was much complaint of bad trade until comparatively recent years, but the bulk of the people seem to have thriven on the low prices ruling for commodities. Strikes, however, were a pronounced feature, both from their number and their magnitude; but, although they entailed losses and privations out of proportion to the results obtained by either party, they tended to teach labour that it was not invincible, and to adjust the relationships to capital. As the century drew towards its close there was a continuous improvement in the state of the nation, until 1896 could be styled "a wonderful year of prosperity." That, however, was the zenith, since when wars and heavy taxation have weighed on the weary citizens, with the close of the Victorian era.

Arts and sciences progressed if they did not achieve brilliant results; and industry produced the Severn Tunnel, the second Tay Bridge, the stupendous Forth Bridge, and the Manchester Ship Canal,—all works of the first rank in engineering. In fiscal matters, Mr. Goschen's consols conversion scheme, whereby a large saving of interest payable on the national debt was secured, was perhaps the only outstanding favourable incident; while the large issues of war stock and consols in connection with the Boer War are conspicuous on the other hand. But revenue collection experience, and the statistics of foreign trade (apart from prices), show fairly healthy features; and, all things considered, the condition of the people was better than similarly disturbing influences produced in former times, evidencing an increase of inherent strength.

The crisis of 1890 is associated mainly with the failure, and liquidation under exceptional circumstances, of the firm of Baring Brothers & Co., by the Bank of England, supported by the leading banks and bankers of the kingdom. It is an instance of a suppressed crisis, the results manifesting themselves in a long continuance of unfavourable conditions in business. The Scottish banks were largely interested in this liquidation, and supported the action of the Bank of England: the seven banks in Edinburgh and Glasgow subscribed £300,000 each to the guarantee fund. Again, the crisis which might have been expected about the year 1901 appears to have been a disguised one. The exceptional circumstances of the war in South Africa may have acted as a counter-irritant, dispersing the ordinary course of events. There have, however, been large liquidations which may well represent the wreckage of a joint-stock crisis. But it may be that the crisis is not passed, and that we have still to encounter the blast of the tempest.

The history of banking in Scotland during the last eighteen years may be epitomised by a paraphrase —Happy is that banking system that hath no annals. While it cannot be absolutely affirmed that all the companies have in all respects improved their positions, there is but slight exception to the rule. In the main there has been extraordinary healthy growth during the period, with an absence of unfavourable circumstances of a serious character. And there is an absence of sensational circumstances which, while giving interest and colour to a narrative, indicate trouble and disease among the dramatis personcæ.

The period treated of in last chapter, and that now falling to be dealt with, are of nearly similar duration, viz., about eighteen to nineteen years. In both there is shown a great and healthy growth; but the latter period does not show increases so great, either in bulk or by percentage, as the former period. The only departments in which the cash increase is greater are those of the banking reserves and capital paid up; and it is only in the case of the note circulation that the percentage increase now is greater than formerly. Perhaps the same rates of expansion were hardly to be expected, considering the great increase of financial business competing more or less with the banks. On the other hand, when we turn from the balance-sheets to the profit and loss statements, it is gratifying to find that the remunerativeness of the business has considerably improved.

Having in a previous chapter treated of the progress of banking in Scotland from 1865 to 1883, we propose now to examine the changes which have occurred during the almost similar period which has elapsed since the latter date to the present time. [See Appendix B. The present review is not in as full detail as the previous one, as the writer has elaborated this matter recently in his Scottish Banking during the Period of Published Accounts,] So far as amounts go, the changes in the two periods bear some striking resemblances. Thus the total assets have increased by 30 millions, as against rather more than 31¼ millions formerly. The reserved funds, 2½ against 2¾ millions. Deposits, 24¼ compared with 25¾ millions. In other words, the sum of increases in these important items appears to have averaged much the same per annum during the two periods. But, of course, the percentage increases have been much less than formerly. On the other hand, other items show a widely different experience. Thus there has been no such effort during the last eighteen as in the former eighteen years towards strengthening the capital accounts. The solitary instance of extension of capital is supplied by the British Linen Company, which have issued £250,000 of new stock. Again, the amount of acceptances and drafts has hardly moved, the half million increase shown being possibly accidental. The note circulation has, however, expanded to a marvellous extent, being now two millions, or 36 per cent, greater than in 1883, against an increase of less than 1 million, or 18 per cent, in the former period. This great advance has, of course, been solely an effort to meet the public convenience, and has been a pecuniary loss to the banks owing to the increased expense of maintaining the issues without any counterbalancing profit. Advocates of the abolition of note-issues may console themselves with a calculation of the saving to the State of the wear and tear of metallic currency which would have accrued on this great increase of the circulating medium.

Among the asset groups, the experience of the two periods has been widely different. There has been a trifling increase of 5 1 millions, or 8 per cent, in the banking advances, as compared with 13- millions, or 25 per cent, formerly. The amount of expenditure outstanding under the heading of bank buildings shows a very moderate increase--less than half of the increase of the preceding period. To some extent this result may be due to more generous appropriation of profits to writing down the cost of buildings. As there has been so small an outlet for the increasing resources of the banks, the banking reserves have risen 24 millions, or 63 per cent, contrasted with 17 millions, or 80 per cent. They now show the extraordinarily high proportion of 45 per cent to the total liabilities, and are equal to more than one half of the liabilities to the public.

There has been a continuous expansion in the matter of branches; but the rate of increase has only been about two-thirds of what it was in the former period. The total number of offices is nearly 1100, of which thirteen are in England. This gives a proportion of one bank office to every 4155 of the population of Scotland, a very liberal supply of banking facilities. All the banks have participated in this activity in branch extension; but the most progressive have been the Commercial, Clydesdale, British Linen, and Union. While this policy has been accompanied by increased profits, it may be doubted if it has contributed in any marked degree to that result. The National Bank, which shows the second largest increase of profits, are hardly over average in the matter of branch extension. It is more probable that the improvement in profits is mainly due to the large increase of public liabilities, the abolition of payment of interest on current accounts, and other lessening of burdens on revenue.

The question of special banks for the working classes was considerably discussed in this period. The idea was borrowed from the continent, where people's banks have been in operation for long, and especially with reference to those of the Schuize-Delitzsch type, which were supposed to be of special efficiency. As a result the People's Bank, Limited, was established in Edinburgh in January 1889. According to a statement made at the time "the object of the bank is to furnish banking facilities to those classes whose money transactions are at present generally considered too small to require such services, and who, from this cause, too often fall into usurious hands. It is registered under the Industrial and Provident Societies Act, 1876. It will conduct, in the main, the business of an ordinary Scottish bank, though, of course, it does not possess the power to issue its own notes. . . . The accounts of depositors may either be current or deposit accounts. On the former 1 per cent of interest will be allowed, calculated on the minimum monthly balances, and on the latter 2½ per cent. . . . Loans will be granted, but each borrower must be a shareholder to the extent of at least one share. Advances will be made on such securities as stocks, ground-rents, feus, leases, life policies, building and co-operative society shares, house property and land; and credits upon cash-accounts current will be granted when the security is considered good, and approved bills will be discounted." The bank appears to have carried on a modest but successful business. The latest report shows a holding of deposits to the amount of £33,498 and an accumulated reserve fund of £1000; with advances to the amount of £26,206. It pays a dividend of 5 per cent per annum.

Shortly afterwards a similar institution was organised in Glasgow which has grown more rapidly than its earlier compeer. It has seven branches, £68,748 of deposits, and a reserve fund of £2500, How far it has adhered, however, to its original field of operations, seems uncertain. It changed its name to the Mercantile Bank of Scotland, Limited; and its latest balance-sheet shows that the bulk of its funds are invested; less than 22½ per cent being advances to customers. The position indicates that the company is carefully conducted. It pays a dividend of 4 per cent.

It is still too early to decide whether the system of people's banks is likely to be permanent. Probably the result will depend largely on the amount of care bestowed on the business, which, it may be presumed, will involve considerable risks accompanied by narrow margins of profit. There will be a tendency to enlarge the field of operations.

There are still a few events which it will be proper to refer to ere closing our narrative. Owing to the continuance of low profit rates, the banks made important alterations in their deposit interest arrangements. On 1st July 1885, the initial step was taken by the discontinuance of the daily balance rate, all interest allowed on current accounts being thereafter calculated on the minimum monthly balances,—that rate being at the same time reduced from 1½ to 1 per cent. The old minimum of 2 per cent on deposit receipts was also given up, and the rate reduced to 1½ per cent. As an offset, some concessions were made in regard to discount terms. These arrangements held until 1st October 1892, when the continued pressure of low rates necessitated a further change. The old established system of allowing interest on current account creditor balances was entirely abolished, and the deposit receipt minimum rate was reduced to 1 per cent. On the other hand, the overdraft rate was reduced by ½ per cent.

In November 1888 a forgery of a new issue of £1 notes by the Bank of Scotland was discovered. It seemed to be the work of a skilled engraver aided by an expert lithographer. Even the watermark was ingeniously imitated by a special process. About a dozen notes were put in circulation. This bank suffered more seriously, on 16th February 1891, by the robbery from a London branch clerk of his remittance bag, containing £11,580 in bank notes, while he was at the counter of one of the other city banks. The British Linen Company made, in 1892, an issue of new stock to the extent of £250,000 at 300 per cent. This has enabled them to secure the place of honour in regard to amount of proprietors' funds. Although matters of but little importance, it may be right to record that, in 1883, an honest but mistaken venture called the Money Order Bank, designed to conduct a so-called improvement on the Post Office remittance system, was started in Edinburgh; and, in 1894, an English concern calling itself the London and Scottish Banking and Discount Company, Limited, opened an office in Edinburgh. In both cases the inevitable ending was not long deferred, and the close of the latter's career was ignominious.


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