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History of Banking in Scotland
Chapter VIII - Note-Issuing Mania and the Act of 1765


THE year 1765 is notable, in Scottish banking, on account of the first Act specially regulating the business having been then passed. Previous to that date, there were no restrictions on the proceedings of the various establishments, other than those embodied in their individual constitutions, or imposed by the common law of the land; and it was only in the case of the three oldest banks that the constitutions were prescribed by competent authority; the others being entirely free to lay down, or abstain from laying down, such rules as to the partners seemed fit. In point of fact, however, the old establishments set the example, and moulded the general principles, which were adopted throughout the country, for the conduct of banking business. That they should have survived, while the majority of their imitators have passed away, is to be attributed to the fact that the younger establishments, in the eagerness of their rivalry, forgot the principles they nominally adhered to, while they had not sufficient strength and credit to carry them through trials which were met by their powerful competitors with comparative ease.

The practical immunity from legislative interference which characterises banking in Scotland until the year 1844 has been an unmistakable blessing to the country, and has saved the banks from those vexatious and unnecessary distinctions and restrictions which have hampered and distorted English banking. In Scotland, banking was permitted to develop as the country advanced in wealth and in intelligence. Nay, it was even enabled to lead the nation on the path of prosperity, and to evolve, from practical experience, a natural and healthy system of banking, which would have been impossible under close State control similar to that followed in other countries. Despite the manifest errors and stains conspicuous in the history of Scottish banking, the system matured by Scottish bankers is justly acknowledged to be a model one. Freedom, however, has its limits; and, at the time we are now dealing with, it had become absolutely necessary to impose some check on the indiscriminate issue of notes, which had been pushed to an extent which produced the pardonable, but not strictly accurate, contemporary exclamation of a writer in the Edinburgh Advertiser:—"Since the beginning of the world there never was a nation so much abused by banking as Scotland is at present, and probably never will again till the end of time."

The grievance was not that there was an overissue of notes (although that was freely stated), for with the system of periodical exchanges, which even then was pretty systematically carried out, that was impossible except to a small extent. The main evil lay in the pernicious practice devised, as we have already seen, by the Bank of Scotland during its early troubles with the Royal Bank (1730), of inserting in the bank notes a clause making them repayable at a term after presentation (usually six months) in the option of the issuers. Although it was stipulated that, in such circumstances, interest should accrue on the principal sum at 5 per cent per annum, the option was entirely inconsistent with the nature of bank notes, whose legitimate character is that they should be convertible into specie on demand. The action was, besides, of the nature of a forced loan, in regard to which the lender had no say. Moreover, by this means, persons of little or no substantiality were enabled to raise money by an unadvisably easy method, which was availed of to a very large extent as far as the number of issuers was concerned.

This phase of the note circulation was greatly aggravated, by the practice of issuing notes for very trifling sums, varying from one shilling Scots upwards. The regular bankers do not seem ever to have adopted a smaller issue than five shillings; but a multiplicity of business firms, and small partnerships organised for the purpose, thrust their worthless paper on the public. This appears to have been accomplished, mainly, by employers of labour paying wages in this personally convenient form. It would probably be impossible to enumerate all the instances of this species of note issues, but the following examples may be both interesting and amusing. James Smiton, seemingly a coffeehouse keeper in Edinburgh, obliges himself "to pay the bearer, on demand, in money or drink, two shillings and sixpence sterling," on the backs of which notes, it is stated, "are sometimes marked receipts for one or more mugs of porter, or bottles of strong ale, &c., in part [payment]. "P. Williamson, Edinburgh, under the designation of the Ready-Money Bank, promises "to pay to Sir John Falstaff, or bearer on demand, in books, coffee, or ready-money, according to the option of the Director (!), One shilling sterling, value received." The Mason Barrowman Company of Edinburgh issued a lengthily-worded and formidable-looking document for the value of one shilling Scots (one penny sterling).

Perth, however, was the great seat of this industry. There, notes were issued by the "Wright Journiman Company" for one shilling Scots; by the "Tannery Company" (Stewart, Richardson & Co.); by the Craigie Company" (John Ramsay & Co.); John Stewart & Co.; Blacklaws, AVedderspoon & Co.; and MacKeith, Rintoull & Co. [Boase, p. 56.] But, while the epidemic was most virulent in the old town of St. Johnston, it was general throughout the country. Even in Stornoway, in the Lews, there was an issue by the local proprietor. In this case, however, it is probable that no smaller denomination than £1 was used, and that the issue was justified by the want of currency [This issue may not have commenced until a Iater period.] George Kellor & Co., wine and spirit merchants in Glasgow, Martinson & Co. at Falkirk, James Scrimgeour & Son at Borrowstounness, and Alex. Fleming & Company at Kirkliston, issued similar notes. These, together with the Perth notes, were made retirable in Edinburgh, when public opinion became clamant against this species of imposition. The position of this matter was rather piquantly hit off by a print, purporting to he a note dated Glasgow, 16th January 1765, promising to pay one penny sterling, or, in the option of the directors, in three ballads, six days after demand. The border was ornamented with figures of wasps, and the note bore the motto, "We swarm."

Although this state of matters was highly objectionable, and justified the futile endeavours of county magnates to refuse such notes in payment of rents, taxes, etc., the existence of these notes was occasioned by a severely felt public want of a medium for small payments. The metallic currency of Scotland was, and had been for an indefinite period, in a chronic state of insufficiency. Some theorists may hold that the paper drove out the coin; but, although this is a sound theory in general, it will not hold in the present case, for the want of coin was felt before any notes existed, and the denominations of the notes were only lowered below £1 as the necessity for small change became pronounced. Moreover, it is clear that there was a distinct suction of coin to England, to assist in meeting war expenditure abroad; and during the intervals of peace, English investments in Scotland were withdrawn for employment at home, where a state of war prevented so profitable a use of capital as the poverty of Scotland at all times admitted of. From innumerable statements, it is evident that the silver coinage in Scotland (gold had been almost entirely replaced by notes) was altogether inadequate to meet the requirements of the people. Even the large banks experienced great difficulty in maintaining their reserves. This scarcity of coin was the cause both of the optional clause and of the issue of small notes. Indeed, some contemporary writers held that the optional clause was a necessary counteraction to the tricks of English bullion jobbers, who drew fictitious bills on London, at 30 days' currency, which they sold in Edinburgh at a premium for notes payable on demand. These in turn being converted into gold, the proceeds were sent to London to meet the bills which would fall due a few days after the arrival of the remittance.

In response to the agitated condition of the public mind in regard to the note circulation, the Bank of Scotland and the Royal Bank induced the then Lord Advocate, Thomas Miller, Esq., of Barskimming, afterwards Lord President of the Court of Session and a Baronet, to bring in a bill dealing with the subject. [The Scots Magazine, October 1769, states that the credit for this Act is chiefly duo to the Earl of Eglinton, whose murder they then record.] The result of this representation was the Act of George III. cap. 49, entitled, "An Act to prevent the inconveniences arising from the present method of issuing notes and bills by the banks, banking companies, and bankers, in that part of Great Britain called Scotland." The provisions of this Act were: (1) That from and after 15th May 1766, it should not be lawful to issue "any note, ticket, token, or other writing for money, of the nature of a bank-note, circulated, or to be circulated as specie, but such as shall be payable on demand in lawful money of Great Britain, and without reserving any power or option of delaying payment thereof for any time or term whatever." Also, that such as were in circulation at that date, should thenceforward be deemed payable on demand. (2) That summary execution might proceed on all bank notes not paid on demand —one protest being allowed to include any number of notes. (3) That from and after the 1st day of June 1765, no bank note should be issued for any sum of money less than 20s. sterling; and that those which had been issued up to that date might be allowed to circulate for one year thereafter. The penalty attached to infringement of the provisions of this Act was a fine of £500 with costs of suit, payable to informers. The delays prescribed for the full enforcement of the provisions of the Act were doubtless intended to allow time for the accumulation of reserves of coin, and for an increase in the metallic circulation; but it does not seem that the Government took any steps towards practically assisting this movement. Indeed, it is probable that unless the banks had themselves moved in the matter, the abuses of the circulation would have gone on unheeded by the rulers of the land, whose heads were always more engrossed, in those days, with foreign dynastic intrigues, and the raising of loans and taxes at home, than with the social questions which distressed their subjects.

A minor effect of this Act was an alteration of the hours during which the banks were open for business. Formerly they were open forenoon and afternoon, with an interval for refreshment: (we read of the worthy citizens going for their "meridian" when the "gill-bells" rang at half-past eleven from St. Giles, just as in the afternoon they took their " four hours' penny," i.e. a penny glass of ale). This arrangement was changed to a continuous period from nine to three o'clock; these being the hours during which notes not paid on demand might be protested. It need not be supposed that total abstinence during these hours supervened; doubtless a luncheon hour (whatever it might be termed) would be arranged on some system of relays.

We are now approaching the great Scottish banking crisis of 1772, which will fall to be treated of in our next chapter; but meanwhile we may note some of the principal incidents which occurred from 1763 till that date, other than those already dealt with. In our last chapter we alluded to the establishment of the Dundee Banking Company of George Dempster & Co., which commenced business on 1st August 1763, with a paid-up capital of £1260. Although during the century of its existence, terminating with its amalgamation with the Royal Bank of Scotland in February 1864, it gradually developed into an institution of no small moment, having a paid-up capital of £100,000, deposits to the amount of £685,000, and a note circulation of £41,000, it was in its early years classed with the note societies of which we have been treating. It was, however, from the first in all respects a bank; and although about the year 1837 it was actually in a state of insolvency, from which it was only rescued by systematic good management, it played a most important part in developing the industries of Dundee and Forfarshire; and as the first bank formed in Dundee, and one of the earliest and most successful of the provincial banks, it possesses a peculiar interest. Its progress has been fully chronicled in a series of valuable statistics and notes (a quarry of information) by its last manager, Mr. C. W. Boase, who, while managing partner of the Dundee New Bank, was called on to readjust its embarrassed finances, which, as we have seen, he amply succeeded in doing.

The private firm of John Macadam & Co., in Ayr (or Air, as it was then spelled), was also established in 1763. The business was purchased eight years later by Douglas, Heron & Co. The year 1766 witnessed the formation of the Perth United Company. It was dissolved on 6th May 1787, its notes being retired and the banking business carried on by a new company under the firm-name of the Perth Banking Company, which existed until 1st August 1857, when it joined the Union Bank of Scotland. The firm of Alex. Johnston, Hugh Lawson & Co. in Dumfries, which was another of Douglas, Heron & Co.'s bad bargains, also commenced in this year (29th October). In the succeeding year (1767), the long-headed Aberdonians made up for their abortive scheme of 1749 by establishing the Banking Company in Aberdeen, which proved a most wonderful success. It was organised as a regular joint-stock company. The contract of co-partnery, which took effect as from 1st January 1767, ascribes the formation of the company to the great scarcity of all kinds of specie in the north of Scotland, and the dangers of "the extensive and industrious circulation of a variety of bank-notes issued and signed by people unknown in this part of the country," as well as for the promotion of local industries. It defines the business to be engaged in as "issuing notes of hand, lending money on cash-accounts, bills, or permanent securities, purchasing bills of exchange, and discounting inland bills or notes." The capital subscribed was £72,000, in shares of £500 each, of which £200 was to be paid up. This seems to have been immediately completed to £75,000, with £30,000 paid up. An absolute prohibition against engaging in any other business was carefully prescribed; and the other regulations were similarly judicious. The company appears to have been managed with consummate ability during the greater part of its career. Over a series of years its dividends averaged 8 per cent per annum, besides occasional large bonuses added to paid-up stock. In 1836 the paid-up capital was £200,000, of which £170,000 was accumulated from profits, in addition to a reserve of £50,000. The shares, bearing £150 paid, sold in 1821 at £1400, and in 1836 they were worth £3000. This singularly prosperous concern was merged in the Union Bank in 1849. [Theory and Practice of Joint-Stock Banking, Peter Watt, Edinburgh, 1836.] About this time—the spring of 1769—the smaller traders in Glasgow started a new bank, called The Merchant Banking Company of Glasgow.

The only important banking incident which falls to be recorded at this time is the failure, in August 1769, of William Hogg & Son, who had been established in Edinburgh for about twenty years. They had temporarily suspended payment previously, when the senior partner was alive. After his death the business was continued by his son Thomas. The failure was connected with advances to a lead-mine speculator. Although the business was not extensive, the liquidation seems to have been a prolonged one, as notices of meetings appear as late as 1793. The depositors were not paid in full. The surviving partner died in Edinburgh on 12th April 1784. This bankruptcy had little effect on the general position. In the same year the miserable three years' fiasco of Douglas, Heron & Co. commenced its ruinous career.


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