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History of Banking in Scotland
Chapter XIII - Conflict of Joint-Stock and Private Banking - The Commercial Bank of Scotland

ON the first day of the first year of the last century, the United Kingdom of Great Britain and Ireland commenced its career as a consolidated constitutional empire. But, notwithstanding this great step towards peace and civilisation, there succeeded a period of fifteen years, during which the nation was engaged in exhaustive warfare with most of the nations of Europe, with the United States of America, with the native princes of India, and with the colonies and dependencies of European nations in various parts of the world. France, Russia, Denmark, Sweden, Spain, Turkey, and the United States, were all grappled with severally or in combinations. But this does not indicate the total difficulties of the country. Trade, as was natural in such circumstances, was depressed and almost paralysed; Ireland was openly disaffected; great distress existed among the working-classes; and, in England and Scotland, the corn-laws were made the occasion of serious and widespread disturbances and riots. Taxation was oppressive, and yet so insufficient to meet expenditure, that the national debt was increased to the extent of about £200,000,000. The French War, lasting practically from 1793 to 1815, is estimated to have cost Great Britain £1,427,219,964. These events culminated in 1815, when the power of Napoleon was finally shattered, and the commercial equilibrium was reestablished after the throes of a crisis which, if not of the first magnitude, was widespread in its incidence.

The period was not, however, destitute of important features of a favourable character. If industry was depressed, the means for its improvement and extension were considerably developed. Mechanical science continued to advance; so much so, indeed, that the supercession of manual labour by machinery occasioned, in the unfavourable state of the country, a bitter opposition by the working-classes, who imagined that their means of livelihood were being taken from them, and led to serious outbreaks of popular fury. In 1812, moreover, steam navigation was inaugurated by the success of Bell's Comet on the Clyde. Thus, in a period of deepest gloom, one of the most potent factors in the development of commerce and the advancement of civilisation, was placed at the service of mankind.

The crisis which closed the period which may be considered to have commenced about the middle of 1797 appears to have been a gradual one, extending from 1810 for about five years. It fell with great severity on the English country bankers —141 provincial banking houses being reported as having succumbed. This was doubtless due in great measure to the unfortunate state of banking legislation, which fostered a plurality of small firms, and prohibited the formation of large joint-stock banks. Scotland did not suffer to the same extent as England, owing to its comparatively backward condition giving scope for its industries within its own borders.

As regards banking, this period was one of much activity. At least sixteen new banks were started; and the Bank of Scotland and the Royal Bank both obtained power to increase their capitals to one million and a half. Of the new banks, which date from 1802, the most important is the Fife Banking Company, who commenced with a capital of £30,000, and after a career of a quarter of a century, collapsed in 1829, through mismanagement and dishonesty, entailing total loss, and liability for £5500 per share, on the partners. Another bankrupt born in this year was the Renfrew. shire Banking Company. They managed, however, to pull on for forty years, when they made a disgraceful failure. The Cupar Banking Company was also formed in 1802, and is said to have retired from business nine years later; but the dissolution of copartnership did not take place until 1820. The Falkirk Union Banking Company was another unfortunate venture. Established in 1803, with a capital of £12,000, held by fourteen partners, it existed for thirteen years, and was sequestrated on 18th October 1816. The liabilities were about £60,000. Malachi Malagrowther cites it as one of the few instances of bank failures in Scotland, and states that it "paid up its engagements without much loss to its creditors." Another authority, however, states the deficiency at 10s. 6d. per £. John Wardrop & Co. began business in Edinburgh in or shortly before this year, and dropped out of sight some twenty years later. At this time the affairs of the Dundee Commercial Bank having got into gross disorder, the business was reorganised as the Dundee New Bank, on 14th January 1802, with a capital of £58,000, in shares of £2000 each, of which one-tenth was paid up. It does not seem to have been a satisfactory concern during its earlier years. Its business was purchased by the Dundee Banking Company in 1838. We should also mention David Paterson of Costerton, who at this time commenced a ten years' banking career which ended in sequestration; and the Kilmarnock Banking Company, which was established 10th June 1802.

This rapid extension of banking naturally occasioned anxiety to the Edinburgh banks, who, in order to check it, intimated that they would not receive the notes of any new country banks that might be established. Either as the result of this opposition, or more probably from the circumstances of the country, the growth of new banks was somewhat restricted for several years subsequently. With the exception of a wretched attempt at Dumfries, where James Grace, with the assistance of his son and another partner, started the Dumfries Commercial Bank in 1804, only to succumb four years later with a deficiency of 10s. per £, and of the firm of Belsh & Co. who commenced business in Stirling, in 1804, but failed two years later, only two banking houses, and those not of great importance, were established up till 1809. These were Inglis, Borthwick, Gilchrist & Co., in Edinburgh; and the Galloway Banking Co. of Douglas, Napier & Co. The former firm began business in 1805, and continued for ten years, when, on the death of Archibald Borthwick, 13th July 1815, it became James Inglis & Co., who failed in 1834, with liabilities amounting to £23,000. The Galloway Banking Company, established in the following year at Castle-Douglas, was a more important firm; but it had a career of only fifteen years, when it withdrew from business. The banking mania now broke out afresh. In 1809 the Dundee Union Banking Company and the Glasgow Banking Company were started. The former, which subsequently amalgamated with the Western Bank, appears to have been somewhat energetic in the establishment of branches—for, not content with eight offices in the immediate neighbourhood of Dundee, it is recorded that the experiment of a branch in London was made, though without success. It had a nominal capital of £100,000, of which £60,000 was paid up. It was absorbed by the Western Bank on 31st March 1844. The Glasgow Bank was an offshoot of the Dundee New Bank, and started with a fully paid capital of £100,000. It afterwards joined the Ship Bank as the Glasgow and Ship Bank, and the conjoined business was, in 1838, merged in that large collection of banking companies, the Union Bank of Scotland.

The Glasgow Commercial Bank was established in 1810, but it does not seem ever to have risen into much notice, and it ceased to do business in 1820. A more noteworthy production of the same year was the East Lothian Banking Company, whose head office was at Dunbar. It had a capital of £80,000. Malachi Malagrowther speaks of it as a company "whose affairs had been very ill-conducted by a villanous manager." This model banker was William Borthwick, the cashier, whose career forms quite a romance of crime. The bank stopped payment in 1822, with liabilities amounting to £129,191 : 16 : 7, which were subsequently met in full.

The Perth Union Banking Company was also established in 1810. It amalgamated with the National Bank of Scotland in 1836. In 1812, the Caithness Banking Company was formed at Wick. It got into difficulties in 1825, and the business was taken up by the Commercial Bank. Another provincial bank was the Montrose Banking Company, established in May 1814, with a capital of £15,000. It was merged in the Dundee Union Bank in 1829. The private firm of Thomsons & Co. was established in Edinburgh in 1811, but it is probable that they may more properly be classed as financial agents than as bankers.

By far the most important banking establishment which came into existence at this time was the Commercial Banking Company of Scotland. It was formed in November 1810, and was on the joint-stock principle, although not incorporated until some years later. [For some interesting details regarding the origin of this bank see Some Edinburgh Shops Josiah Livingstone, Edin. 1894, p. 64 et seq.] It has been remarked that it was the first bank not established by public authority which assumed the national designation implied in the addition to its name proper--a practice which has been followed to a large extent since. It was not long, however, in justifying its adoption of the designation, for it speedily spread itself over the land with much spirit and success. Its comparatively large capital—£3,000,000 nominal, divided into 6000 shares of £500 each, of which £2,250,000, with £450,000 paid up, was issued at first—enabled it to do this with ease. From the outset, it appears to have been designed on a large-minded plan, and to have met a decided want. The old chartered banks were not then, as now, banks of the general public. Their business was for the most part among capitalists—small, doubtless, as well as large, but who, as financiers, were distinct from the body of the people. They occupied, to a considerable extent, a position similar, though of course on a much smaller scale, to that at present held by the Bank of England. They did, doubtless, as occasion offered, deal directly with the general public; but the practice then was, for private individuals to transact their business with private bankers. The private Edinburgh firms were each in close—sometimes, as we shall presently see, too close —connection with one or other of the old banks. This arrangement had sprung up at a very early period, and had been always continued. It saved the banks both from danger and from trouble; for the middlemen managed all the details of small deposits and discounts, and assisted in extending the circulation; and it paid the private bankers (who were very like the modern bill discounters), for they exacted heavier terms from their clients than they were charged by the banks.

The connection between the Bank of Scotland and the Royal Bank on the one hand, and their respective sets of banking customers on the other hand, became more and more intimate, until partners of private banking firms not only got seats on the bank boards, but actually to a large extent controlled the proceedings of the latter. Business men then began to find it irksome to have to pass their business through the strait gate of the private bank, where toll had to be paid, as the only practical way of obtaining the benefit of the public banks' accommodation; for they believed, rightly or wrongly, that the private banker would refuse at the board meeting to approve of paper which he would readily discount in his own office. It was one great feature of the Commercial Bank to counteract this state of matters; and accordingly it was made a rule of their constitution that no private banker could hold the office of director. This was practically the death-blow to private banking in Edinburgh; for, although many firms continued to exist for years afterwards, the system was ever on the wane. The new establishment was very popular, but it was also very discreet ; for while it studied the best interests of the public, it imitated the wisest provisions of the old banks' practice. In short, the founders of the Commercial Bank evinced an amount of true wisdom, which, while it produced great advantage to themselves, was at the same time largely beneficial to the general community. It must not be supposed, however, that the new bank at once sprang into the position of a compeer of the old banks. It commenced on a scale much inferior to their resources, and although it had public favour, it was destitute of the prestige and influence, and accumulated wealth, which placed the old banks in those days on a distinctly elevated platform.

Another circumstance which aided the progress of the Commercial Bank was the practice of speculating in the Government funds—which in the depressed state of the country fell to a very low price—indulged in by the old banks. This was a very safe kind of speculation for persons who could afford to lie out of their money for an indefinite time; as, with a declaration of peace, Government securities were sure to rise in value. But the banks were accused of yielding to the temptation to such an extent as to seriously neglect their duties towards trade. The Commercial Bank got credit for devoting due attention to this matter. There is good reason for believing that the competition of this bank had a good influence in bringing the old banks into more direct contact with the public, and in breaking down their rather selfish ideas of aggrandisement. They had relegated into the hands of private bankers, to an undue extent, those duties to the community which they were erected for the purpose of performing, and were devoting their attention mainly to their own pecuniary interests. From this golden trance they were aroused by the advent of the Commercial Bank. It may have been partly owing to this circumstance that the rate of interest on deposit receipts was raised from 3 per cent to 4 per cent at this time.

The estimation in which the Commercial Bank was held during its earlier years is amusingly shown by a paragraph in a tract [Three Letters on the Speculative Schemes of the Present Times, and the Projected Banks." Anthony Romney. Edinburgh, 1825.] dealing with the joint-stock excitement which culminated in 1825, in which the writer says: "In our own city [Edinburgh], every one admits that all the old chartered banks and private banking companies are just as liberal as any reasonable man could wish, and even the Commercial stripling, which, like all young folks, should at least not be rash, has never yet been accused of a close or niggardly spirit. On the contrary, Firebrass himself told me that he had never heard a single complaint uttered against that bank, excepting one,---and that was for keeping a huge mastiff somewhere about their premises, which, with its vehement nocturnal howlings, broke in upon the balmy slumbers of all the hypochondriacal nymphs and nervous soot-brokers in the neighbourhood."

Lord Cockburn is even more complimentary to the new bank, but not so complaisant to the chartered banks: "The rise of the Commercial Bank marks the growth of the public mind. . . . No men were more devoid of public spirit, and even of the proper spirit of their trade, than our old Edinburgh bankers. Respectable men they were, but without talent, general knowledge, or any liberal objects, they were the conspicuous sycophants of existing power. . . . They all combined banking with politics. . . . A demand for a bank founded on more liberal principles was the natural result of this state of things. Hence the origin of the Commercial, professing to be the bank of the citizens." [Memorials of His Own Times, Edinburgh, 1856, pp. 252-3.]

The relationship which existed between the chartered banks and the private bankers in Edinburgh is graphically illustrated by an incident which occurred early in the year 1816. This was a rupture between the Royal Bank and the private house of Messrs. Ramsays, Bonars & Co., who had for many years been their principal auxiliaries (although previously clients of the Bank of Scotland), two of the partners of the firm being at the time directors of the bank. It appears from the printed documents which were issued during the course of the dispute, that the majority of the directors accused the firm of unadvisedly availing themselves of their long and intimate connection with the bank to obtain, without proper authority, large advances. There never was any question as to the sufficiency of the security, but the irregular manner in which the loans had been obtained, and a supposition that the firm were endeavouring to increase their already considerable influence in the direction of the bank's affairs, were made the basis of an appeal to the proprietors by the board. In their defence the firm state that " the account current of our house with the Royal Bank rests on much stronger grounds than the form of applying for a credit, and obtaining it at any recent date from a board of directors. It rests on the best understanding and usage of near half a century, grounded on the close connection of having been of the greatest mutual advantage to each other for the last thirty-four years. . . . Mr. Ramsay, the senior partner of our house, ... devoted his whole attention to the concerns of the Royal Bank, and placed it in a train of management that has produced greater prosperity than, we believe, ever attended any chartered company in the same period [1781-1807]—not excepting even the Bank of England—in proportion to their respective capitals."

An important point in connection with this matter is, that the money so obtained was understood to be employed in purchasing Government stocks at a low price, with the object of realising them at an enhanced figure. Thus the money was not used for banking purposes. The directors do not seem to have disapproved of this practice in itself, but to have considered that it would have been more advantageous for the bank if the money had been so invested directly for behoof of the bank. In fact, they considered that the firm were diverting to themselves a profit which the bank would have obtained, had they been aware that Messrs. Ramsays, Bonars & Co. were operating on their account to so large an extent. For they were fully aware of the profitableness of this style of investment, and habitually availed themselves of it. It would seem that the firm had acquired, and held for years, a controlling influence in the direction which was prejudicial to the independent and safe management of the bank. One writer on the subject refers to it as "the thraldom under which the bank has long languished," and points out that the then market price of the stock - 185 per cent—was much below the figure twenty-eight years before. [In August 1788, a sum of £3592 : 6 : 8 of Royal Bank stock was purchased in London by a banker at £209 : 6 : 8 per cent, and three years later the price was 240 per cent.] This latter circumstance he attributes to the exercise of the firm's influence in availing themselves of the use of the bank's funds to an excessive extent; and he asserted that the previous prosperity of the bank, referred to by Messrs. Ramsays, Bonars & Co., was principally due to the improved circumstances of the country.

It is evident that such a relationship between banks and their customers is fraught with much danger; but there can be no doubt that the above-narrated incident was the outcome of a long-established and not intentionally evil system peculiar to banking in Edinburgh. Its exposure at this time, and the competition of new joint-stock banks, effected a cure. This result, however, was attended with the rapid decay of private banking. Indeed, it was only in Edinburgh that private - banking, pure and simple, was still in active operation. Of course, all the banking companies, other than the incorporated banks, were merely partnerships; but, from the least to the greatest, they were more and more assuming the appearance and functions of public banks, except in the metropolis.

In closing our review of this period (1800-15), it may be advisable to refer briefly to some minor details. Although, as we have already seen, the Bank of Scotland early essayed the formation of branches, and at the close of last century had several in operation, it was not until 1804 that it opened in Glasgow. This is the more extraordinary, as their great rivals, the Royal Bank, who otherwise abstained entirely from branch extension, had opened in Glasgow twenty years before. It has, however, been supposed that a tacit agreement had existed between the two banks, that the former should have the provinces (excluding Glasgow), and the latter Glasgow as their respective spheres of influence. To the Bank of Scotland we are indebted for inaugurating the present system of deposit receipts in 1810. This movement was doubtless made in contemplation of the competition of the new joint-stock bank. About this time there were sixty bank offices in Scotland. Interest was usually allowed at from 3 per cent to 4 per cent, and charged at 5 per cent. The par of exchange between Edinburgh and London was forty days. In 1813 the British Linen Company obtained—despite great opposition on the part of the older banks—a supplementary charter authorising an increase of their capital from £200,000 to £500,000; but, although they were to all intents bankers, the legal right to be so considered was still withheld from them. [It would appear that the practice of granting licenses to issue notes was commenced at this time. By a Stamp Act passed in 1808 (48 Geo. III c. 149), every issuing bank was required to take out a license, costing £20, for its head office and all branches previously established ; while every branch subsequently opened necessitated another license. By a later Act (55 Geo. III. c. 184,—year 1815), the cost of such licenses was raised to £30; but banks in Scotland were not required to take out more than four licenses whatever the number of their branches.]

We may fitly conclude this chapter by referring to the inauguration of savings banks, which occurred at this time. The earliest movement in this direction appears to have been that of the Rev. Joseph Smith at Wendover in England in 1799, and it was followed by the Charitable Bank at Tottenham, both of which were of primitive character. It is understood that the first regularly organised savings bank in this country was established by the Rev. Henry Duncan in his parish of Ruthwell, Dumfriesshire, on 20th May 1810. It was called "The Parish Bank Friendly Society of Ruthwell." The idea was rapidly taken up in other parts of the country; the first attempt on an extended basis being made in Edinburgh in 1814; but details regarding it are wanting. On 19th June of the succeeding year, a similar establishment, which was styled the Provident Bank, was formed in Glasgow. The practice of the Scottish banks allowing interest on deposits materially facilitated the savings banks movement. There has been much legislation in regard to these banks. The English Act of 1828 was made applicable to Scotland in 1835, when the banks were placed under the supervision of the National Debt Commissioners. They were reconstructed as National Security Savings Banks at that time. It is stated that the Church of St. John's Parish, Edinburgh, was largely built by a grant from the directors of the Edinburgh Savings Bank of unclaimed deposits, etc., when its operations ceased through supercession by the new organisation. More recent legislation, by extending the amounts of deposits receivable, has largely altered the character of savings banks; the customers of which now include a large proportion of the middle classes as well as the working classes. This point is usually overlooked in discussions on labour economics. Thus was laid the foundation of a system for improving the condition of the poorer classes, which has since successfully developed to such an extent as to supply no small portion of the national resources.

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