Banking in Scotland
Chapter VII - Control of the Banking
Britain in general but Scotland in particular was
remarkably fortunate in the extent to which Governments left the banking
system free to develop its structures and functions in line with the
growth requirements of the economy. Throughout much of the history of
Scottish banking the only effective monetary control on the banks was
the Bank Rate. When the Bank of England put up its rate this was
interpreted as a signal to the money market to put up their rates and so
control the demand for credit. Open market operations in the sale of
Government securities were also devised in such a way as to influence
the banks' reserve ratios. Sales of these securities had the effect of
reducing banks' reserves with the result that credit contraction would
Since the nationalisation of the Bank of England in
1946, however, the range and extent of Government's intervention in the
money market has increased markedly. In the 1950s bank rate and open
market operations were used extensively as a part of monetary policy. It
also became practice from time to time for the Bank of England to issue
directives to the banks indicating that they should either expand or
contract credit to certain sectors of the economy.
In 1960 Special Deposits were introduced whereby
banks were required to deposit a certain percentage of their deposits
with the Bank of England. The placing of these deposits then obliged the
banks to control their lending in order to bring their reserve ratios
back to the required levels. The 1960s was a difficult time for the
economy and all forms of credit control were used regularly but this
merely gave a stimulus to other financial institutions which the Bank of
England found more difficult to control than the banks. The latter were
losing business to the secondary banks and finance houses.
So when Competition and Credit Control was introduced
in 1971, minimum reserve requirements were stipulated for virtually all
financial institutions and all were encouraged to compete for business.
This led to some ill-considered business by some of the secondary banks
and in 1974 the financial collapse led to the Bank of England together
with the Scottish banks and London Clearing Banks setting up a
"lifeboat" scheme to prevent these concerns from collapsing.
As part of the 1971 package the efforts by the Bank
of England to enforce quantitative controls, i.e., lending
ceilings, on the banks were abandoned but the authorities retained the
right to provide banks with qualitative guidance when certain priority
categories were defined during credit restraint. For example, in 1972
they were advised by the Bank of England to restrict lending to property
companies and for financial transactions and to concentrate their
advances more on manufacturing industry especially those with export
potential. This request was repeated and re-enforced throughout the
Other types of Government controls on the ability of
banks to lend have remained in force although seldom in their original
form. Notably the special deposits scheme underwent several variations
in the 1970s ending with a "corset" scheme in 1978. Under this if
deposits increased by 4 per cent over six months then further special
deposits were required. In this way the Government hoped to choke off
the growth of the money supply (deposits) and so restrict the banks'
ability to lend.
Experimentation was also made with the role of Bank
Rate as a leader of market interest rates and as a controller of lending
but this new method in which the Bank Rate's name was changed to Minimum
Lending Rate was not a success and the scheme was abandoned in 1978 in
favour of the old system although the name Minimum Lending Rate
remained. This too was abandoned in 1981 when interest rates ceased to
be an instrument of monetary policy.
Many of the changes introduced in the 1970s were
intended to increase the degree of competitiveness in the British
banking system and to increase the efficiency of Government control. In
retrospect it must be argued that much more success was achieved with
the former objective than the latter, although the degree of this
success is to be seen in the range of services offered rather than in
the structure of interest rates and charges.
The extent of Government surveillance and control of
the banking system in the 1980s is in very marked contrast to the free
enterprise days of the Industrial Revolution.
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