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History of Banking in Scotland
Chapter XVIII - The Close of Free Banking

WITH the accession of Queen Victoria to the throne of Great Britain, on 20th June 1837, commenced a new era in the history of the country. From that date onward there has been a triumphant progress of more remarkable development of industry, science, and social improvement, than history records of any former age. The beginnings of this social revolution have been indicated in previous chapters as concurrent with the century ; but it was reserved for the Victorian era to achieve its development. The application of steam to navigation and manufactures had accomplished a mighty work, but the connecting link was wanting so long as inland transit was conducted under the slow and laborious methods of highways and canals. When steam railways became an established system, men's eyes were opened; and from thenceforth they thought and acted with an independence and activity they had never formerly displayed. Improvements in every department of business and social relationship succeeded each other with uninterrupted rapidity.

The general condition of the country, however, at the time with which we are at present dealing, was not yet one of emancipation. Men's eyes were indeed opening to the realisation of brilliant possibilities, but they failed not also to see intolerable evils around them. The achievement of constitutional liberty in 1832 had, as yet, done little beyond making the nation conscious of its power to accomplish its own emancipation. But when that consciousness had been attained, the good work sped apace. Deterrent influences were, however, at work. Wars in China and India—costly and, at times, very disastrous; Chartist riots and Irish troubles; industrial and agricultural distress and disturbances, and a high rate of bankruptcies, followed, for a few years, the effects of the crisis of 1837. But the national appreciation of railways was not to be checked in its manifestation. A mania for investment in railway undertakings set in, resulting in a much more rapid expansion of the system than the circumstances of the country warranted. Trade was thus stimulated, both directly and indirectly, to an unusual extent.

The position of banking in Scotland at the close of 1837 was as follows:—There were five chartered banks, with aggregate capitals amounting to £4,600,000, on which dividends averaging six per cent were paid. Five other joint-stock banks had capitals amounting to £1,550,000, on which the dividends averaged slightly less than six per cent. These ten banks had 213 branches, of which the chartered banks held 158. There were, besides, other seven joint-stock banks, and seven private banks, with 37 branches. This gives a total of twenty-four banks, with 274 offices. The average circulation of these banks does not appear to have much exceeded three millions sterling, the small notes forming about two-thirds of the total amount. The amount of the deposits was estimated at twenty-five millions; but little weight can be attached to a calculation which, in the absence of official information, must have been largely founded on imagination. The average price of the stocks of the chartered banks was 178 per cent, and such of the shares of the other banks as were quoted stood at high premiums.

In 1838 the affairs of the Western Bank of Scotland again came into prominence. The experience of the recent crisis, combined with the results of injudicious banking in America, and the public attention which was increasingly bestowed on banking, led the Edinburgh banks to consult with the other banks in Scotland as to the advisableness of permanently maintaining large reserves of coin and Government securities, in order to secure the proper conduct of banking in Scotland. It may be presumed that there was a consensus of opinion on this point; but it was a wise and even necessary step that negotiations on the subject should be held, considering that one powerful establishment had hitherto ignored the principle. This was the Western Bank of Scotland. They had a paid-up capital of £600,000, on which a dividend of five per cent was paid, and they had seventeen branches throughout the country. Four years previously they had been remonstrated with on the same matter, on an application by them for assistance. They had then given a reluctant adhesion to the practice, and had obtained large advances to enable them at once to carry it out. But, the immediate necessity past, they appear to have relapsed into their bad habit. When the Edinburgh banks again remonstrated in 1838, they defended themselves on the grounds that investments of a fluctuating character should be avoided, and that the fostering of the trade of the country was their first duty. The banks then intimated that after 21st July they would decline to take Western Bank notes, unless their wishes were complied with. After further negotiations the Western Bank again undertook to conform to the practice of investing in Government stocks, and the Edinburgh banks withdrew their resolution. Later in the same year the Western Bank applied to the Crown for a charter of incorporation ; but, on representations by the Edinburgh banks, based on the tenor of the correspondence referred to, the application was refused.

During the year 1838, six new joint-stock banks were established in Scotland. Of these, the most important, as viewed from the present time, was the Clydesdale Banking Company in Glasgow, with a paid-up capital of £375,000, in £20 shares with £10 paid. Three years later its paid-up capital was £500,000, and the shares sold at £12: 17s. At first its only branch office was in Edinburgh. The only other bank started in this year, which has survived to the present time, is the Caledonian Banking Company in Inverness. It began with a capital of £125,000, one quarter of which was paid up. It would appear that its projection met with serious opposition in some quarters, but that, nevertheless, its shares were popular with the public. In 1841 the paid-up capital was £75,000, and the £2: 10s. shares sold at £3. The Eastern Bank of Scotland was a hurriedly-organised concern, destined for a special purpose. That purpose was to take over the business of the Dundee Commercial Bank, whose affairs had got into a hopeless condition, before the state of the latter bank should ,become public. This object was successfully accomplished, and the Eastern Bank of Scotland commenced business in July 1838, with a paid-up capital of £112,510. The chief office was in Dundee, but there was also a nominal head office in Edinburgh.

A still more important establishment was the Edinburgh and Leith Bank. It is stated to have been designed for the benefit of the "industrious middle class," and it at once sprang into popularity. A contemporary writer says of it—"A great deal of speculation took place in the stock of the Edinburgh and Leith Bank. The shares went to 5s. premium as soon as they were in the market, and 2000 or 3000 shares have been known to change hands in the course of a single day. It is now (1841) one of the most popular banks in Edinburgh, and sells at a high premium." [Manual of the Scottish Stocks and British Funds, p. 22, by John Reid. Second edition. Edinburgh, 1841,] Its capital was £500,000 in £5 shares fully paid. It had six branches. In 1844 it was re-organised as the Edinburgh and Glasgow Bank, at which time the Glasgow Joint-Stock Bank joined it, with a paid-up capital of £1,000,000. No bank had better chances of a long and prosperous career than this one. Starting with popularity, it rapidly obtained a large deposit business. Its authorised circulation under the Act of 1845 was £136,657, which was much in excess of that of any other bank of its own age. But antagonistic management between the western and eastern offices, and incompetent direction under the two boards, which the Edinburgh directors were too feeble and ignorant of financial business to control, occasioned the losing of the golden opportunity. Heavy losses were incurred; the bank's credit was affected during the crisis of 1857, and next year its valuable business, together with the large authorised issue, passed into the hands of the Clydesdale Bank by amalgamation, in which the shareholders gained nothing except relief from a responsibility which never emerged.

The Paisley Commercial Bank was also formed in 1838. Its capital was £200,000 in £20 shares, one half being paid up. After a short career it was merged in the Western Bank. Another venture of this year was the Southern Bank of Scotland, with its bead office in Dumfries. Its projection was coldly received, but it would seem that its shares went to a premium very soon. It had a capital of £500,000 in £20 shares, with £5 paid. In 1841 its shares, with a five per cent dividend, were at 2s. 6d. premium; but on 31st October next year it was fain to find rest from incompetent management in the bosom of the Edinburgh and Leith Bank. It had seven branches.

Next year (1839) the prospectus of a new bank in Glasgow was issued, in which it was observed—"It is not a little astonishing that, notwithstanding the rapid strides which commercial enterprise has taken in Glasgow (and a correct idea of its extent may be formed by a glance at the shipping arriving at the harbour, the revenue from which, during the last thirty years, has increased from £1000 to nearly £40,000 during that period), only three new banks have been formed in Glasgow, all of which have been eminently successful." This new financial venture, designed to make amends for want of enterprise in former years in accommodating the expanding trade of the great western community, and intended as an addition to the roll of brilliant banking successes, was the now world-known City of Glasgow Bank. It had a capital of £750,000 in £10 shares, of which £656,250 was paid up by the middle of 1841, the price then being £9: 10s. for £8 : 15s. paid per share. The lamentable manner in which this bank failed to realise its intentions, as expressed by its promoters, is now only too well known. It suspended payment for thirty-three days during the crisis of 1857, having succeeded, during the eighteen years of its existence, in laying the foundation of a style of bank management peculiar to itself. Having tided over its difficulties, it resumed the practical study of those economic theories, the full development of which won for it, twenty-one years later, greater notoriety than had ever previously fallen to the lot of any business establishment.

The Glasgow Joint-Stock Bank and the Greenock Union Bank were formed in 1840. It is stated that the projection of the former bank "met with great encouragement, and the applications for shares were very numerous." In 1841 it had a paid-up capital of £562,500, and its shares stood at a fair premium. As already stated, it joined the Edinburgh and Leitli Bank, in 1844, as the Edinburgh and Glasgow Bank. The Greenock Union Bank had a paid-up capital of £125,000. Its shares sold at a discount soon after it commenced business. It joined the Clydesdale Bank in 1844, after a good deal of coquetting with both them and the Western Bank. The Glasgow Banking Company (the second of similar name) was formed, or at least promoted, towards the close of 1843, but it does not seem to have commenced business until the next year. At all events, it is said not to have issued notes prior to 6th May 1844, and consequently to have been unable to secure the right of note-issuing in terms of the prohibition of the Act of 1844 applied to banks which were not issuing at that date. It may be that the average issue was so small as to be considered practically worthless, no value being placed at that time on the right to issue against coin in reserve. When the Act of 1844 was passed, it amalgamated with the Western Bank. [Banking in Glasgow during the Olden Time, p. 32. Glasgow,1862. See also Boase, second edition, p. 425. Logan, second edition, p. 24, states the National Bank Glasgow branch scheme as having been carried out, which is an erroneous anticipation. R. Allan's Share Circular of 30th.Noveniber 1843 gives details of the scheme.] That it was considered of importance is evident from the facts that its shares at once went to a considerable premium, that it was said to have secured 800 shareholders, and to have met with warm support in Glasgow. Moreover, so strong an institution as the National Bank appears to have contemplated its acquisition as their Glasgow office (although they already had a branch there) on favourable terms. The arrangement with the Western Bank was concluded in July 1844, the new bank getting shares of the former on terms which are stated to have yielded them about 7s. 6d. premium on their own shares. Thus practically ended the formation of new banks in Scotland. It must be admitted, however, that, for a population of about 21 millions, the finish was rather brilliant.

But while so many new banks were entering the list, some veteran firms were retiring. The business of Sir William Forbes & Company ceased to be a private bank in 1838, when an amalgamation was effected with the Glasgow Union Bank. In consideration, however, of the extent of business and high reputation of the firm, the old designation continued to be used until the Glasgow Union Bank transformed itself into the Union Bank of Scotland in 1843. The Paisley Union Bank Company also joined the Glasgow Union Bank in 1838. On 2nd May 1843 the Glasgow Union Bank assumed the national designation of the Union Bank of Scotland, at the same time reducing its nominal capital of 2½ millions to 1 million, one half of which was paid up. Soon thereafter (August) it absorbed the old-established house of Hunters & Co., the Ayr Bank. It made a still more important arrangement a few months later, whereby a junction with the Glasgow and Ship Bank took place as of 1st December. In connection with this event, the paid-up capital was raised to £1,000,000. [The terms of purchase are stated to have been, that for each £10,000 share of the latter bank (valued at £18,000), 200 shares of the former (market quotation, £90) were given, together with a bonus of about £1000 a share in lieu of dividend.] In November the Western Bank absorbed the Greenock Banking Company, paying the partners a large premium, an event which is usually considered as the extinction of private banking in Scotland. About this time also the Greenock Union Bank arranged to join with the Clydesdale Bank, an event which appears to have taken place at the close of the year. [The equation in this case was one Clydesdale £20 share (£10 paid) at £12 :10s. for every two Greenock Union, £5 paid, at par; the new holder to pay the difference of £2 :10s. in cash.] It is said there was considerable competition between the banks in both Edinburgh and Glasgow to get the business. In 1844, in addition to the Edinburgh and Glasgow union just referred to, the Paisley Commercial Bank and the Dundee Union Bank joined the Western Bank (31st March), and the Arbroath Banking Company joined the Commercial Bank.

At this time, moreover, the City of Glasgow Bank acquired the Edinburgh establishment of the Eastern Bank, which included a local board of directors. There is also a statement that they took up "the Commercial of Aberdeen;" but, although they did open a branch there in 1844, the reference is not easily understood, as the Commercial Banking Company of Aberdeen was absorbed by the National Bank in 1833. The acquisition of the new Glasgow Bank by the Western (already referred to) closed this great series of amalgamations. But it was not only by the honourable means of amalgamation that the roll of banks was being reduced. Insolvency, also, was thinning the ranks. In 1842 there were three failures, but none of them was of great magnitude. These were the Leith Banking Company (25th April), the Renfrewshire Banking Company (1st April), and Hay & Ogilvie (the Shetland Bank), all of whom were sequestrated with considerable loss to their creditors. The liabilities of the Leith Bank were £123,582, on which dividends of 13s. 4½d. per .£ in all were paid. The circulation was small—about £10,000. There were six branches in Scotland, and, from 1835-37, one in Carlisle, which was registered as an English bank. The Renfrewshire Bank had debts to the amount of £226,545, and paid about 9s. per £; but holders of receipts or notes dated prior to 1840 were paid in full by Mr. Dunlop of Keppoch, a former partner. They had five branches. The Shetland Bank's debts were about £140,000, and the dividend 6s. per £. A somewhat exceptional action was taken by the Eastern Bank in 1844 (November 1), in repaying one-third of their capital to the shareholders, thus reducing it to £400,000, while at the same time they retained £2 a share to clear off bad debts. The movement seems to have favourably affected the market price of their shares. As curiosity became excited, towards 1843, as to the intentions of the Government in regard to banking and currency, private banks rapidly disappeared by amalgamation with their joint-stock rivals, until, in 1844, all had disappeared with the doubtful exception of Alexander Allan & Co. in Edinburgh.

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