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History of Banking in Scotland
Chapter V - Competition - Private Banking - John Coutts & Co.

IT was not without a severe struggle that the Bank of Scotland submitted to the encroachment on its hitherto undisturbed monopoly by the Royal Bank. Most strenuous efforts were made to prevent the grant of a charter, influence being made with persons of position in London, and, according to one authority, even bribery being resorted to. It is much to be regretted that the early history of Scottish banking should not have found efficient contemporaneous chroniclers. As it is, we have the merest glimpses into the progress of the banks even up to comparatively recent times. Were it not for Sir William Forbes' most interesting and valuable memoir, which the well-known firm of W. & R. Chambers brought to light twenty years ago, we would have only a skeleton to study; and as it is, that record is mainly confined to the development of one bank—and that a private establishment—and only reaches back to within a few years of the period we are dealing with. There are two small works, however, of which a few copies are still extant, one of which is in the library of the Writers to the Signet, and from which Mr. Fleming gives some interesting extracts and details of this period. They were both published in 1728. The first is An Historical Account of the Establishment, Progress, and State of the Bank of Scotland, and of the several attempts that have been made against it, and the several interruptions and inconveniences which the Company has encountered. The second is a Letter containing Remarks on the Historical Account of the Old Bank. These are, so far as we know, the only publications by contemporary writers which treat specifically of this all-important crisis in our banking history, and they deserve to be better known than they are at present.

All the efforts of the Old Bank to frustrate the advent of its rival were of no avail. On the 31st May 1727, an incorporating charter was granted to the petitioning Equivalent Proprietors, and within the prescribed time stock to the amount of £ 111,347:19: 10 5/12 sterling was transferred as the capital of the new bank. As we saw in our last chapter, the charter gave power to the proprietors to assess the fully-paid stock to an extent not exceeding 50 per cent. Without this power the company would have been placed in an awkward predicament, as, although they had a paid-up capital greatly in excess of that of the Bank of Scotland, it was unavailable for banking purposes, being entirely in the form of Government debt. In order to enable them to proceed to business, they made calls in December, 1727, and February, 1728, amounting together to 20 per cent on the capital. At the former of these dates they appear to have opened their office, their first notes being dated 8th December 1727. A remittance of £20,000 in connection with the provisions of the Treaty of Union anent the encouragement of manufactures, to which we have already referred, seems to have been the occasion of special strife between the banks. As descriptive of the struggle, we cannot do better than quote Mr. Fleming's words ;-

"Then came the tug of war. The Old Bank and the New are now face to face, each with its hot partisans eager for the fray. I fear not a few hard blows were struck in those early months of 1728. And yet, what monopolist ever patiently submitted to the surrender of his privilege, or saw either reason or public advantage in its sacrifice? And do we ever see, even in our enlightened days, the new institution welcomed into cordial brotherhood with the old, until it has not merely deserved but commanded respect? So it was with our two banks. The Old was jealous and resentful; the New was aggressive and defiant. Peace was hopeless until they had tried each other's strength. The struggle was short and sharp. The New Bank established its footing, and the Old had for a time to succumb under the pressure of its rival's demands. The warfare culminated in the use by the New Bank of the legal engines of horning, inhibition, and arrestment, in the course of which Andrew Cochran, the Lord Provost of Glasgow, of whom we shall hear more, appeared on the stage. The Court of Session evidently thought that legal diligence was being run rather hard, and stretched a point. The Royal Bank, writhing under a supposed denial of justice, was more forcible than polite; for we find that the Lords, `taking notice that the terms of a petition were indecent and disrespectful to the Court, would not allow it to be entered on the record.' Then followed an appeal to the House of Lords, who, on 9th May 1729, reversed all the decisions of the Court of Session, and awarded to the Royal Bank and Cochran the costs, which then formed the only question between the litigants, the sums sued for having been previously paid."

It was long before harmonious relations were established between the rivals, almost the first thing to cause them to coalesce being the prospect of a third competitor entering the field nineteen years later. But gradually a more creditable style of rivalry took the place of the deadly quarrel described. It was through the medium of their note issues that the banks harassed each other; and as the Old Bank's issue was greater than that of the Royal Bank, the latter was enabled to operate with more effect than the former. Arnot, in his History of Edinburgh (1816, p. 411), says: "Agreeably to the envious policy so frequent among commercial companies and states, when the Royal Bank was created, that company purchased up all the notes of the Bank of Scotland that they could lay hands on, and made such a run upon this bank as reduced them to considerable difficulties. To avoid such distresses for the future, the Bank of Scotland, on the 9th of November 1730, began to issue £5 notes payable on demand, or £5 :2 : 6 six months after their being presented for payment, in the option of the bank. On the 12th December 1732, they began to issue £1 notes with a similar clause." [See also Logan, pp. 77-78.]

Thus was initiated the pernicious practice of inserting an optional clause in bank notes; but, as we have already shown, the system of deferring payment and allowing interest to accrue had been commenced long before. This proceeding must have been effectual for the purpose in view; but, the example being generally followed in after years by other banking companies, it led to great abuses, which seriously reflect on the character of Scottish banking, until the year 1765, when a legislative prohibition was enacted against such optional clauses, as well as against notes for a smaller sum than £1. The custom greatly facilitated those excessive note issues by persons of insufficient means which, in the middle of last century, weakened public confidence in banks, and endangered the continuance of the right of issue. A writer in 1787, after describing the erection of the two oldest banks, says: "Other banking companies quickly followed, both in Edinburgh and other towns in Scotland, until at last they became a public nuisance, by issuing notes for the most trifling sums, at the same time that they were almost entirely destitute of capital for carrying on the business of banking, or any other." [History of Edinburgh, Alexander Kincaid, Edinburgh, 1787, p. 82.] One can sympathise with the harassed directors of the Bank of Scotland seeking to avert suspension of payments, but it must be regretted that they and their successors should have so grievously misapprehended the essential principles of note issuing. Even in our own times, when the development of financial economy has to a large extent lessened the utility of note issues, these are of great public service, notwithstanding the fox-and-the-grapes style of argument of non-issuing bankers. But it is essential to their character as efficient substitutes for money, that they should be convertible into specie on demand. Whatever tends to counteract that condition is unsound in principle.

We may here appropriately notice the origin of the now well-known and distinctive feature of Scottish banking called cash credits. The name of the author of the system is unknown, but the Royal Bank has the merit of inaugurating it. The directors' minute is dated, we are informed, 12th March 1728, and on 31st May following, the first cash-credit was granted to William Hog, Jun., merchant in Edinburgh, who afterwards became a private banker on his own account. The principle of the cash credit was simply as follows. A trader or other person, not possessed himself of sufficient capital for the conduct of his business, but who could command the good opinion of two or three other persons of known position and repute, applied to a bank to have a current account opened in his name on which he could draw, on balance, to a fixed amount—say £500 or £1000—aver and above what he might pay in to his credit. Thus the account might at any time show that he was due to the bank (say) £500 or £1000, or any less sum; or, on the other Band, it might show any amount due to him by the bank. To secure the probable and fluctuating debt, the applicant and the other persons (he being called the drawer and they the co-obligants), signed a formal bond by which they, jointly and severally, guaranteed to repay to the bank, when called on, the amount of the debt and accrued interest. The bond also covered all other transactions of the principal debtor with the bank, such as liability on bills discounted; but of course not exceeding in all, as regarded the sureties, the maximum sum agreed on, together with accrued interest. Interest ran only on the balance shown by the account at the close of business each day, not on the principal sum mentioned in the bond.

The universal adoption of the system in after years was accompanied by material benefits to the nation. In a poor but energetic country, such as Scotland was in those days, there are always many industrious and intelligent people who, from want of capital, are unable to exercise their powers beyond the limits of everyday requirements. If they are enabled, by the operation of credit, to increase their business, their profits are proportionally increased, and they are supplied with the means of repaying their creditors, and eventually accumulating private wealth. At the same time, the wealth of the nation is increased by the greater productiveness of the national industry. Thus it was that Scotland advanced through the instrumentality of its banking system, and in that system the practice of lending money without tangible security, in reliance on the respectability of the applicant, guaranteed by two or three responsible persons, has been, perhaps, the most potent element. The superior affluence of the general public nowadays renders the cash-credit system of less importance in comparison with other departments of banking than formerly; but even yet, especially in small centres of population, its beneficial effects are largely operative.

Following the good example shown by the Royal Bank, the Bank of Scotland soon began to show the advantages of competition, by courting the favour of the public by increased banking facilities. In 1729 they adopted the cash-credit system, and in the same year they commenced to allow interest at five per cent per annum on deposits "on the Treasurer's bond." These were presumably the precursors of the more modern "deposit receipts." In 1730, as we have seen, they took a decidedly retrograde movement; but in 1731 they, with praiseworthy boldness, attempted, in repetition of the essay of 1696, to establish a branch system. The places selected were Glasgow, Aberdeen, and Dundee, being the same as formerly, except that Montrose was not again honoured with notice. The times, however, were not yet ripe. Two years later the branches were discontinued. In 1731 another change was made in the deposit arrangements, by the introduction of the system of fixed periods, interest being allowed at four per cent for twelve months' notice, and at three per cent per annum for six months' notice.

At this point it is proper to allude to the origin of the system of private banking, which forms a prominent feature in Scottish financial history during the latter half of last century and the first quarter of the present century. It is probable that the first private banking firm in Scotland was the house of John Coutts & Co., Edinburgh. Sir William Forbes [Memoirs of a Banking-House, Edinburgh, 1859. See also Coutts & Co., Bankers, Edinburgh. and London, Ralph Richardson, London, 1900.] tells us that the founder was Patrick Coutts, a native of Montrose, who was in business as a merchant in Edinburgh in 1696, and who died in 1704. It is evident, however, from subsequent statements in Sir William's narrative, that John Coutts, the eldest son of Patrick Coutts, must be regarded as the actual founder of the house. John Coutts was born 28th July 1699, and was therefore only five years old when his father died. The latter's business is presumed to have " been in a great degree discontinued by himself before his death, and wound up by the tutors he left to his children." Of the early years of John Coutts' life but few particulars have been preserved. In 1723 he was engaged in mercantile business in Edinburgh, but whether of a continuous or intermittent nature is not recorded. It is evident, however, that previous to 1730 he must have been a man of considerable importance, as in that year "he entered the Town Council of Edinburgh [a much more exclusive body then than now] as first merchant councillor." During two partnerships previous to 1744, the firm was John Coutts & Co., and subsequently it became Coutts & Trotter. Again, in 1749, it was changed to Coutts, Son & Trotter, when, we are informed, the capital was £4000, a much more considerable sum in those days than it would be deemed now. John Coutts died at Mola, near Naples, on 23rd March 1750; and when, a few years later, Mr. Trotter retired from the business, the firm became Coutts Brothers & Co.

There is no reason to suppose that during their earlier years the firm were carrying on banking business proper; but, in addition to their ordinary business of " dealing in corn, buying and selling goods on commission," they were also engaged—as was usual with mercantile firms of credit in those days when the domains of commerce and finance were not distinguished so definitely as now — in "the negotiation of bills of exchange on London, Holland, France, Italy, Spain, and Portugal." Sir William Forbes continues: "The negotiation of bills of exchange formed at that period a considerable part of the business of Edinburgh ; for there were then no country banks, and consequently the bills for the exports and imports of Perth, Dundee, Montrose, Aberdeen, and other trading towns in Scotland, with Holland, France, and other countries, were negotiated in Edinburgh." The firm's exchange business gradually developed into banking, and instead of being an adjunct of the mercantile department, that became subordinate to it. Corn and other speculations continued, however, to be indulged in until 1761, when Sir William Forbes — then the senior partner - abolished the practice. The original designation of John Coutts & Co. was renewed in 1763. After the death of John Coutts (at Bath on 4th August 17 61) his sons opened a mercantile house in London, which developed into the banking firm of Coutts & Co. The house of Herries, Farquhar & Co. was also founded by members of the family. To the senior partner of the latter firm belongs the credit of the invention of circular notes (a species of letter of credit generally considered of recent origin), for which he successfully established a regular system of correspondence with the principal cities of the continent of Europe. The outbreak of war seems to have interrupted the further prosecution of a scheme which, in later times, has been resumed on an extensive scale. Its present success, however, is more conspicuous than its profitableness.

Although, like other private bankers of their day, John Coutts & Co. for long engaged in operations dangerously inconsistent with legitimate banking, the business appears always to have been managed with considerable prudence, so that times of trouble were met with sufficient resources, and experience gained was always carefully profited by. In consequence of a quarrel with Messrs. Coutts & Co., of London, it was deemed advisable to drop the designation of John Coutts & Co. On 1st January 1773, therefore, it was changed to Sir William Forbes, James Hunter & Co., and by that name the house continued to be carried on during, and for some years subsequent to the termination of, its independent career. Under the direction of Sir William Forbes the firm rose steadily to a high position of credit and influence. Among Scotch private banking firms Sir William Forbes, James Hunter & Co. occupied undoubtedly the highest place. The others were in too many cases habitually addicted to those speculative transactions, the renunciation of which secured the permanence of Sir William's business. The firm is gone, having been merged in the Union Bank of Scotland in 1843, after five years of practical amalgamation with the Glasgow Union Bank, but the business still exists; and in virtue of this connection, the Union Bank can claim to rank as the third oldest bank in Scotland, while its business succession probably reaches back to the pre-banking era.

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