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History of Banking in Scotland
Chapter IV - The Equivalent Company - The Royal Bank of Scotland

WE now come to the period when the history of banking in Scotland begins to assume a general character. Hitherto the progress of one establishment has been all we have had to chronicle; but, from the time when, in 1727, the monopoly of the Bank of Scotland ceased, the number of banking houses rapidly increased. The record of dividends paid by the Bank of Scotland, to which we have already referred, bears patent evidence to the effects of the change. The first blow to the exclusive reign of the Old Bank (as it came to be called) was the incorporation of the Royal Bank of Scotland. The competition thus brought into play must have been of a very serious kind. The Bank of Scotland had the prestige of thirty-two years of remarkable prosperity; but its rival had the power of superior resources, and was backed by the special favour of the Crown. This latter circumstance was no direct loss to the Old Bank, as it had never experienced benefits of that description; but the disfavour which its Jacobite proclivities had entailed on it, was calculated to handicap it severely in the contest which now commenced.

In 1727 the Bank of Scotland paid a dividend of 22½ per cent; in the succeeding year—during which the Royal Bank carried on business—it paid 13 1/3 per cent; in 1729 the rate was only 3¾ per cent; and during the succeeding fourteen years, ending with 1743, the average rate of dividend hardly exceeded 5 per cent. The contrast thus afforded with its previous experience speaks as graphically as any detailed account could (even were that to be had) of the seriously changed position of the Bank of Scotland, when it had to encounter the rivalry of other establishments. It did, indeed, in after years pay occasional exceptionally large dividends, and its increases of capital are understood to have been made largely from accumulated profits; but there is reason to believe that these arose mainly, if not entirely, from special gains on what would now be considered speculative transactions, but which in the olden days of banking were deemed an important and legitimate department of the banker's business. Its ordinary banking profits must have been very largely encroached upon by the operation of competition, and this effect was much aggravated by the violent and expensive efforts it made to maintain its right to monopolise banking business.

In order to describe the origin of the Royal Bank of Scotland, it is necessary to go back to the time of the union of the countries. By the fifteenth article of the Treaty of Union it was stipulated that, as the customs and excises to be levied in Scotland would be proportionately applicable to the debts of England, a sum of £398,085: 10s., together with a proportion of the prospective increase of Scotch revenue to be realised in after years, should be paid by England, and devoted to the following purposes, viz.-1st, To reimburse private persons for losses incurred in connection with the recoinage of the Scots currency; 2nd, to repay the capital of the African and Indian Company (which was then to be dissolved) with 5 per cent interest per annum; 3rd, to pay the public debts of Scotland (which seem to have consisted entirely of arrears of salaries, pay, etc., and not of borrowed money); 4th, the payment of £2000 per annum for seven years towards the encouragement of woollen manufactures; and 5th, the payment of a like sum in after years for the encouragement of the fisheries and other industries. A Board of Commissioners of the Equivalent, of whom the Board of Trustees for Manufactures appear to be the modern representatives, was appointed to superintend these arrangements. The lion's share went to the Darien Company, whose capital amounted to £232,884: 5 : 0 2/3. It does not appear in what way the money was raised; but, as it is improbable that the English Exchequer had free funds in hand to meet the charge, it may be presumed either that loans were obtained from private parties, or that a part of the sum due (perhaps the Darien Company's capital) was allowed to lie as debt owing. The latter supposition seems the more probable one.

It is stated that great delay occurred in the settlement of claims, the Government issuing debentures of £50 each to the creditors, but making no provision for their redemption or for payment of interest on them. However, an Act was passed in 1719, being the fifth year of the reign of George I., settling the Equivalent as matters then stood, by which the proprietors of the debts were incorporated into a company called the Equivalent Company, with a capital of £248,550 : 0 : 9½. This sum consisted of £230,308: 9 : 10 5/6, due to general creditors, and of £18,241 : 10 : 10 2/3, allowed to William Paterson as indemnification for his losses and services in connection with the Darien scheme. Whether or not Paterson lived to realise his good fortune is uncertain, as he died in the same year, but it would undoubtedly form part of his estate. The Equivalent Company was allowed an annuity of £10,000, until redemption of the principal, as interest, and £600 a year for salaries and expenses.

The company seems very early to have entertained the temptation to make further profits. The great prosperity of the Bank of Scotland dazzled them and others. Mr. Fleming states [Scottish Banking: A Historical Sketch, James Simpson Fleming, Edinburgh, 1877, P. 12.] "that in December, 1719, an overture of union was made to the Bank of Scotland by the Equivalent Proprietors; another in the following year by the Edinburgh Society; [For insuring houses against loss by fire. Its business was ruined by the establishment of the Friendly Society, a mutual office; and, soon afterwards, it was dissolved under the Bubble Act.] and a third in 1721 by the Royal Exchange Assurance Corporation of London. But the directors resisted all their wiles. They said in substance, we have a very profitable concern, we have as much money as we require to sustain our credit, and when more is wanted, our own proprietors will find it." Although the Equivalent Company failed in this attempt, they did not give up thought of gratifying their desire to share in the profits of banking. When they commenced to agitate for an extension of their powers, so as to enable them to do banking business on their own account, we cannot say; but, on 31st May 1727, a charter was granted to such of their number as chose to subscribe their stock into a new company, whereby they were incorporated as The Royal Bank of Scotland. Nine days after the date of the charter, and before it had passed the Great Seal of Scotland, the King, George I., died. The grant was thus in danger of lapsing; and the Old Bank made vigorous efforts to secure this result. Under sign manual of the new King, however, the seal was duly appended on 8th July. That, and seven charters granted in after years, and an Act of Parliament passed in 1873, form the constitution of the Bank.

The original charter of the Royal Bank of Scotland states that "Our Sovereign Lord, considering, That by an Act of Parliament made and passed in the fifth year of His Majesty's reign, entitled, An Act for settling certain yearly funds, payable out of the Revenues of Scotland, to satisfy public debts in Scotland, and other uses mentioned in the Treaty of Union; and to discharge the Equivalents claimed on behalf of Scotland, in terms of the same Treaty; and for obviating all future disputes, charges, and expences concerning these Equivalents," certain enactments had been made regarding the incorporation of the Equivalent Company, and "His Majesty did thereby for himself, his heirs, and successors, covenant, grant, and agree to and with the said Corporation or Body Politic, and their successors, that he, his heirs, and. successors, should, from time to time, and at all times thereafter, upon the humble suit and request of the said Corporation or Body Politic, and their successors, give and grant unto them all such further and other powers, privileges, and authorities, matters, and things, for rendering more effectual their said grant, [of revenues and privileges], according to the true intent and meaning of the said Act, and of the said grant, which he could or might lawfully grant, And considering that the said Corporation have, by their most humble application to His Majesty, requested, That he would be graciously pleased, by letters patent under the Great Seal of Scotland, to enable such of the Proprietors of the said Corporation as should subscribe their stock for that purpose, to have the power of Banking in Scotland only, with liberty to borrow and lend upon security there, . . . and that such power of Banking so established, would materially tend to the great benefit and advantage of that part of his kingdom; . . . . therefore His Majesty, in compliance with the said request, and by virtue of his prerogative royal, and of his especial grace, certain knowledge, and mere motion, and for the benefit of his subjects in that part of his United Kingdoms, ordains a Charter to be made and passed under the Seal appointed by the Treaty of Union, in place of the great seal thereof, nominating " thirteen persons named, to receive subscriptions of stock, on or before 29th September 1727, and constituting the subscribers "one Body Politic and Corporate of themselves, in deed and name, by the name of The Royal Bank of Scotland," and to have perpetual succession, etc.

Among the specified powers granted are the "lending of money as they shall see fit, at any interest not exceeding lawful interest, on real or personal security, and particularly on pledges of any kind whatsoever, of any goods, wares, merchandises, or other effects whatsoever, and that the said company may keep the money or cash of any person or persons, and may borrow, owe, or take up in Scotland, on their bills or notes payable on demand, any sum or sums of money whatsoever." The Company was prohibited from trading in buying or selling wares of any sort, allowance being made to deal in bills of exchange, bullion, etc., and to dispose of goods lodged in security for advances, unredeemed lands purchased, etc. Voluminous regulations follow, which it is unnecessary to specify. Power is given to the General Courts of Proprietors to make calls, not exceeding 50 per cent in all, over and above the subscribed stock, "as to the majority of the Members in their General Courts shall seem proper, and so as not above ten pounds upon every hundred pounds of stock be called at one time."

This point is specially interesting from the fact that it has, in a recent able treatise on Scottish Banking, [Our Scotch Banks, Wm. Mitchell, S.S.C., 3rd edition, 1879, page 81.] been construed to imply direct liability of the proprietors for a further suns than the now fully paid-up capital. The question is one which might afford good opportunity for legal fencing in a Court of Law; but there are two weighty objections to the theory which Mr. Mitchell has put forward. The first is that the enactment appears to have been a purely optional one, at the discretion of the bank itself, being inserted in the charter because, the capital consisting entirely of stock of the Equivalent Company, the bank would, without such power, have been destitute of ready money other than what might be supplied by customers. The second objection is, that as the provision was not renewed in any charter subsequent to the first—most of the charters being complete in themselves, and not mere additions, but absolute renewals of privileges on slightly different bases—it may be held to have been abrogated. But, even if it be held that it was not abrogated, it could only apply to that portion of the capital stock which was created by the charter in which the provision was inserted. As that original capital has, in all probability, changed hands, been sub-divided, and intermixed with later created portions of the capital, the attachment of liability would now be practically impossible. In any case, the total extent of the liability would only be about £55,000, subject to deduction of certain sums which had been called in exercise of the privilege.

We have treated thus fully—perhaps tiresomely so—of the charter of the Royal Bank, because of its unique character. There are three other chartered banks (excepting the Bank of Scotland, which, although popularly called "chartered," is strictly a Parliamentary Corporation), but none of their charters has the same historical value or antiquarian interest, although they may be more readable, on account of the smaller amount of verbosity and pedantic iteration they display. As a specimen of contemporaneous legal composition, it is somewhat of a curiosity, both from its redundant modes of expression and the simple clearness of its language. And above all, it is a most important element in the history of Scottish banking.

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