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History of Banking in Scotland
Chapter XXIX - Conclusion

THE present sketch of banking in Scotland may be fitly concluded with a short consideration of some of the leading features of the system which has made Scottish banking conspicuous among the banking systems of the world. Perhaps the chief of these is its suitability to the circumstances of the country and the genius of the nation. This may almost seem a truism, in as far as the system was of almost entirely natural growth. But this is in itself a circumstance quite unusual in other countries. Elsewhere the State has been the motive power in calling banking into existence, has moulded its character, and has regulated its action all along. In Scotland the State took little interest in the matter beyond sanctioning the formation of a few of the earliest establishments. The consequence was a naturally-evolved system, moulded by the requirements of the people.

The nation was extremely poor, with a debased and insufficient currency. Even the small amount of capital at first put into the business was a great boon to the people, but it was the note-issues, founded on the credit of the banks, that actually gave the impulse to trade. The small amount of actual capital available would, by itself, have given only temporary assistance; but, by means of the note-issues, the banks were enabled to extend their advances in proportion to the wants of the people. This, it may be thought, would lead to excess of issues; but it does not appear that such a condition was ever experienced in Scotland. It is doubtful, indeed, if it be actually possible, where notes are not legal tender and are payable on demand. The banks had no desire and little temptation to grant advances which they did not believe to be good, as there was a great field of legitimate requirements before them. The notes so issued would at first not come back to the banks, except as worn, for there was a great vacuum of currency to be filled. Thus the profitableness and safety of early banking in Scotland are fully accounted for. The note-issues fulfilled the functions of capital, the absence of which was crippling the nation, and did so in a cheap and convenient form.

As the nation advanced in wealth, the note-issues began to lose somewhat of their indispensable character. A wealthy country can afford to indulge in a metallic currency. But, even when they might have discarded the notes, the Scottish people continued to use them as much as ever. And it was well that they did so; for, as the original function of the notes was losing somewhat of its force, a new necessity for the issues was arising. The banks were extending their branches more and more into the rural districts—an operation which could only be performed through the aid of the note-issues; for it it is only in comparatively wealthy centres that a bank office can be successfully conducted on a metallic basis. From a public point of view this is at present the great argument in favour of the retention by the banks of their right of issue ; and it is a very powerful one. The cost to Scotland of the abolition of these issues would be a more expensive currency, lessened banking facilities, and probably, heavier banking charges. If the note-issues had proved defective, this would not, perhaps, be too heavy a price to pay for security; but it seems too much to pay for the destruction of an institution which has been a vital instrument in producing the prosperity of the nation, which has never been productive of harm, which has always been thoroughly efficient, and which at the present time is a convenience to millions of people.

The cash credit system is another important feature of Scottish banking; but it is secondary to the note-issues. Cash credit bonds extended the range of good advances; but advances of any kind would have been impossible, except to a small extent, without the note-issues. But, as a part of the system, the cash credit was not only ingenious, but was a potent factor in the commercial progress of the nation. It secured the debt on which the notes were issued, and it enabled clever and industrious men, who had no capital of their own, to supply the requirements of the public, and to lay the foundations of individual and national wealth.

The deposit business was of slower growth than the departments we have referred to, for the simple reason that poor people have no money to deposit. But the Scotch have always been a saving people, and, when once they began to have a little more cash than was necessary for current requirements, they naturally availed themselves of the opportunity afforded by the banks of making it profitable to themselves and useful to others. As the banks have always given liberal facilities in this department, the spirit of saving was much encouraged, to the general benefit.

The widespread character of Scottish banking has been a great source of stability to it. In other countries the general practice is that banks confine themselves to particular localities, or even to particular departments of commerce. Under such a system risks are not sufficiently spread, and a bank stands or falls according to the fortunes of a small clientelle. In Scotland, also, this system was general for long, and it is only in comparatively recent times that it has entirely disappeared. But with the gradual consolidation, which is so marked a feature of its history, Scottish banking sought more and more a national basis. This it has now attained to, for there are no banks confining their operations within very limited areas. The provincial banks may be deemed a partial exception, but even they are fairly widespread. The banks have thus a strength and solidity such as is not general in other countries. In the United States, for instance, so-called national banks are to be found in every town, but their nationality consists in nothing more than the securing of their note-issues by a deposit of Government bonds. Every month a long list of new banks appears, and along with it a similar list of failures. These banks seem to be mere associations of small capitalists establishing themselves as single offices—a system of essential instability. Even in England the number of small local banks is great, although much lessened by the numerous amalgamations which have taken place during recent years.

But, if Scottish banking has now secured what, as regards its principles, may be considered an ideal condition, it has not done so without suffering in many severe struggles. The Legislature wisely left it to itself—or rather the indifference of the Government allowed it to fight for its own existence; but, if it suffered nothing from the attentions of the State, it had, on the other hand, to devise its own principles and form its own practice—operations of great difficulty and danger. It had to meet crises without proper knowledge of how they should be met, beyond that supplied by mother wit. In consequence, there were many stumbles and many falls. But a sound bank, in the early days, was hardly any the worse for stopping payment. At one time, as we have seen, all the banks stopped payment, the only result being a temporary excitement on the part of the commonalty, arising from the inconvenience of not getting change for Ł1 notes. During another crisis, almost all the Edinburgh private banks were swept away; but those who remained gained in credit and in experience. These were the blows that moulded the system, and it is surprising that the total loss sustained by creditors from the failure of banks in Scotland is quite insignificant.

But, it may be said, the Scottish banks have, within the period of what may fairly be considered the matured system, supplied two instances of gross failure, the later of which is probably the most disgraceful which any thoroughly consolidated country has experienced. It must be admitted that this is so, and that the three great banking disasters of Scotland—the Ayr Bank, the Western Bank, and the City of Glasgow Bank — show an appalling increase in ratio of calamity. And it is not sufficient answer to say that these events were the result of departure from the general system. They certainly were so—nay, it was the ignoring of the principles and practice which experience had established as the general rule that produced the ruin of these banks. But they cannot be excluded from the general estimate of Scottish banking. Indeed, it may be said that in no other country than Scotland could such a case as that of the City of Glasgow Bank have happened. The excellence of the banking system had commended itself to the Scottish public in a manner not elsewhere experienced in regard to private companies, and it was this blind trust that rendered the disaster possible. The only answer to the accusation is, that men fail in their strongest point. The lessons to be derived from these experiences are, however, of more moment than accounting for them. These have been preached, rightly and wrongly, to such an extent, and acted on so wholesomely, that it only requires vigilant interest on the part of proprietors, depositors, and the public, to avert such events in the future. And in regard to such vigilance, nothing is of more importance than insisting on the continued observance of the principles and practice which have proved so successful, and resisting new departures such as, under the specious assertion of a necessity for extended facilities, have three times brought grievous disaster on the nation.

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