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History of Banking in Scotland
Chapter I - Origin and Development of Scottish Banking

THE state of Scotland at the close of the seventeenth century—the period at which Scottish banking commenced—was not favourable to commercial enterprise. Foreign and domestic wars and tumults had, from time immemorial, drained the country of its hardiest manhood and of its scanty treasure. Commerce, except in that minimum proportion which is indispensable to the distribution of the necessaries of life, had never had opportunity to establish itself. The nation was sunk in poverty. Even the few large landowners could only be called wealthy in comparison with the plain living commonalty, who could with difficulty supply their wants. Even the officers of the Crown were in the enjoyment of but petty incomes, which the evil fortunes of the nation frequently interrupted the payment of. The currency was debased in quality and scarce in quantity. It would appear that payment in kind was usual in the settlement of rents, and it is probable that barter in some forms was not uncommon in the more remote country districts. The history of Scotland as an independent country is one of almost constant misfortune ; for even the brilliant victories gained by the Scots over their great enemies, the English, were but the barriers which averted ruin. They did not, like the triumphs of the French or of the Spaniards, add new territory to the State, or increase the wealth of the kingdom. They merely enabled the unconsolidated community to continue its rude existence in independence at the cost of chronic penury, intensified by internecine feuds and periodic coups d'etat. Eventually the nation reaped a rich reward for the sufferings it had endured in the struggle to preserve its freedom, for it gained access to boundless fields for the exercise of its restless energy, achieved large profits for its untiring activity, and became united into one of the most law-abiding and industrious countries in the world. At the time when our history begins, however, the clouds of night were still overshadowing the country; and the sun of prosperity, destined to shine with undimmed splendour, had not yet risen on the national horizon.

The Union of the Crowns of England and Scotland in the year 1603, by the accession of James VI. of Scotland to the throne of England, put an end to the hereditary warfare waged for centuries between the kingdoms; but though the wounds were bound up they were not healed, and international jealousy and dislike still prevented the full advantage of community of interests. As being the weaker power, Scotland suffered most in this new phase of its struggle with its domineering associate, who ever and anon checked its enterprise whenever it seemed to trench on English prerogatives. It did, however, snatch an uneasy rest during the forty years which elapsed before the great civil war between the Commons and the Crown broke out in 1642. In that six years' struggle, as in all the succeeding troubles, the efforts of Scotland were generally spent on the losing side. The Scots, indeed, escaped the brunt of the conflict, but they suffered terribly in the end by the iron hand of Cromwell, whose power they had well-nigh crushed at Dunbar, but for the infatuation of their clerical dictators prevailing over the military skill of their sagacious general, Leslie. Through the Commonwealth and the restored Monarchy, the country's grievances continued; and it was not until the peaceful revolution of 1688 placed the constitution on a firm basis, that there was even the possibility of prosperity for Scotland; and not until the effects of the legislative union of the countries in 1707 had had time to develop themselves, that the nation's spirit was at rest.

With the revolution settlement of domestic affairs began a new and brighter era in the commercial and financial history of Britain, which the warlike foreign policy of successive administrations was not potent enough to neutralise. England drifted from one quarrel into another, and accumulated a national debt which at last reached an amount unequalled in the world's experience, until, in our days, German ambition sought to crush French aggression under the weight of financial difficulties. While the national exchequer was empty, and irregular methods were adopted to replenish it,—nay, even as the immediate consequence of a system of State lotteries and forced loans,—the foundation of the great fabric of British finance was laid. That it was laid in such unfavourable circumstances, established on the erroneous principle of monopoly, and fostered by exclusive privileges, granted as the price of pecuniary aid to the Crown, has been the source of woes unnumbered to the banking system of England. But as far as Scotland was affected by it, the influence of the change of dynasty was only good. The Highland interest being strongly enlisted in favour of the Stuarts, did, it is true, assert itself by force of arms; but this was no new experience, and it was soon overcome. The nation, as represented by the more consolidated portion of the community, was enabled to follow the lead in the organisation of a financial system, and, by reason of its independent constitution, to found it in a free and untrammelled condition.

It has been a fortunate circumstance for Scotland that, in borrowing the idea of establishing joint-stock companies for the advancement of industrial enterprise, the Parliament of Scotland avoided the temptations yielded to by the Parliament of England, and did not seek to fill the national coffers at the expense of the future interests of the nation. Banking in England has been crippled and enfeebled by the pernicious monopolies granted to, and the onerous responsibilities imposed upon, its first joint-stock bank; while in Scotland the banking system has been developed and matured under natural and unfettered conditions. Thus, south of the Tweed, banking legislation, in a series of makeshift patches, has produced a multiplicity of conflicting interests which have to be subjected periodically to readjustment, in order to preserve even partial satisfaction among the unequally weighted competitors. In the history of banking in Scotland, on the other hand, there is comparatively little trace of unequal legislative treatment — all the banks competing in most essential points under similar conditions. What unfairness actually exists is due entirely to the introduction of English ideas, and is limited, for the most part, to the department of note-issuing, as regulated by the Act of 1845.

We are not at present discussing the merits of Sir Robert Peel's measures, but we desire to point out that they introduced, for the first time, the principles of restriction and exclusion in Scottish banking legislation. The Scots Parliament of 1695 did, indeed, recognise the principle of monopoly, when establishing the Bank of Scotland; but it was understood (and the result justified the supposition) that the exclusive privileges granted to that corporation were designed merely to give it a fair chance as an entirely new experiment, and were not to be renewed at the end of the term of twenty-one years for which they were granted. That this special encouragement should have been granted was unquestionably wise. It would have been unfortunate, if, at that early stage, the development of banking had been checked, through competition in a field where the probability of success, on the part of even one establishment, was absolutely uncertain. Had a similar course been pursued in England—had the exclusive privileges of the Bank of England been withdrawn as soon as its probation was over, the roll of English bankers would have been a much less melancholy catalogue than it has proved to be, and the currency question need never have occasioned the trouble and vexation which have characterised it up to the present time.

But, unfortunately, the poverty and ambition of successive Governments made them the creatures of their powerful creditors, and tempted them into erroneous principles of legislation, which have produced the most artificial financial system existing in the world. Through struggles and crises, amendments have been made which enable the units of the system to hang together—the inevitable jarring which occurs every few years being temporarily overcome by some special arrangement, generally involving the creation of one or more new species of banks. Thus it happens that, at the present time, there are about a dozen distinct classes of banks in England, each subjected to peculiar legislative provisions. At the same time, owing to the operation of the enactments limiting the number of partners in private banks, and discouraging amalgamations, there has always been an unfortunately large number of small establishments whose fortunes depend on the prosperity of particular localities, and the resources of small coteries, instead of having the broader basis of the general experience of the nation, and the wealth of large proprietaries. This condition has, however, been greatly modified during recent years by the numerous amalgamations which now constitute such great corporations as Lloyds Bank (Limited), Barclay and Company (Limited), and the London City and Midland Bank (Limited).

The Scottish banks, too, show some diversities in the legislative conditions under which they exist, for which they are indebted to English statesmanship. But the national spirit of Scotland has to a large extent prevailed over attempts to reduce the uniform and matured system, evolved by wholesome experience, unfettered by Governmental interference, to the hampered condition of the English banking system. The inequalities existing—viz, the privilege of undesignated limitation of liability of stockholders in some of the banks, and the disproportion in the amounts of authorised issues of notes among the several establishments—are not such as to interfere with free competition between the members of Sir Robert Peel's charmed circle. They are, indeed, recognised as grievances, but the banks are content to let them lie over. To contrast with the multiplicity of classes of banks in England, there are three in Scotland—namely, chartered banks, presumed to be limited in virtue of the character of their incorporation; chartered banks, formerly unlimited, now limited by registration under the Companies Act 1879; and banking companies incorporated and limited under the Companies Acts 1862-80. As the two latter classes are practically the same, there are really only two classes of banks in Scotland. Under the provisions of the Companies Acts 1862 to 1879, all essential constitutional distinctions disappear as far as the Legislature is concerned, and there remains only the partly sentimental injustice of enforcing on all but the three oldest banks the addition of the invidious and inelegant word "limited" where, in point of fact, the distinction is altogether inappropriate.

The first-mentioned class of banks embraces the Bank of Scotland, the Royal Bank of Scotland, and the British Linen Company. The second class includes the Commercial Bank of Scotland (Limited), and the National Bank of Scotland (Limited). The third class consists of the Town and County Bank (Limited), the Union Bank of Scotland (Limited), the North of Scotland Bank (Limited), the Clydesdale Bank (Limited), and the Caledonian Banking Company (Limited). Together these form the roll of the Scottish banks in the order of their formation. The Bank of Scotland is established under special Acts of Parliament; the other two old chartered banks, and the two senior "limited" banks, are incorporated by Royal Charter; and the five youngest banks are enrolled under the Companies Acts of 1862-80. All of them exercise the power of issuing Hates, and carry on business in all the departments usually included by British economists under the term banking.

These operations may be classified broadly into borrowing, lending, and investment. The companies obtain money from their own members to form the capital and other private funds of the corporation, and from the public under notes payable to bearer on demand, deposit receipts, current accounts, letters of credit (now generally called drafts), for the remittance of money between various localities in the United Kingdom and abroad, and circular notes for the use of travellers abroad. The money thus obtained is lent on the security of bills at a currency (usually three to six months after date), cash accounts, overdrafts, heritable and personal bonds and other securities, to mercantile firms and other customers. It is understood that advances by bankers should be on tangible and readily convertible security. In this connection it should, perhaps, be noted that advances are now largely made on what are termed fixed loans —that is loans, usually of round sums and for fixed periods, such as the bi-monthly stock exchange accounts, or one, two, or three months — on the assignation of approved marketable securities, with a margin of 20 or 30 per cent to be maintained between the amount of the loan and the value of the securities at the current market quotations. In all cases the banks retain, however, their right to call up advances when they consider it advisable to do so. The acceptance of bills on account of customers has become an important part of banking business. A large proportion of the funds is held in reserve as cash, investments in first-class Government and other stocks, short loans to financial houses, and bills of exchange of the most approved description.

To the efficient carrying on of their business, and establishing themselves on broad bases, the Scottish banks have spread their branches over Scotland so thoroughly that there is no district, with an appreciable nucleus of population, unprovided for. All the large banks have, moreover, opened offices in London, and the Clydesdale Bank has, in addition, a few branches in the north of England. Thus, although there are only ten distinct banking establishments having their headquarters in Scotland, there are nearly 1100 bank offices. The amount of capital administered by the banks is more than £138,000,000, of which about £17,500,000 consist of the private funds of proprietors, £107,000,000 of deposits, and £8,000,000 of bank notes, the balance of £5,500,000 being represented by acceptances and drafts. There are 24,000 partners, and probably 500,000 depositors, of whom more than three-fourths appear to be deposit-receipt holders. While, as among themselves, the banks carry on a very active competition, their dealings with the public are regulated by tariffs drawn up in concert, and adjusted from time to time by mutual consent. Thus, as regards rates of interest, discount, and commission, there is practical uniformity throughout the country—the discretionary powers in these matters being of small extent. As far as terms are concerned, therefore, customers have no inducement to favour one establishment more than another. Of the ten existing banks, five have their head offices in Edinburgh, two in Glasgow, two in Aberdeen, and one in Inverness. The Edinburgh banks were all established before any of the others, and transact 69¾ per cent of the entire banking business in Scotland. The Glasgow banks conduct 22¾ per cent, and the provincial banks 7½ per cent of the business.

This, then, is roughly the position of banking in Scotland at the present time. It is indeed a mighty edifice, built up (as the sequel will show) from a very small beginning by shrewdness, economy, and industry during the last two hundred and six years. The history of banking in Scotland is most intimately associated with the national progress from poverty to wealth; and the characteristics of the system of banking which have been developed are in many points unique, and marked by the peculiar circumstances which have moulded the Scottish character. The result of the experiment so modestly attempted in 1695 has, despite many and grievous failures, and at least one deeper stain than the financial community of any other nation has cause to blush for, been a great success. In treating of English banking, if we have represented it historically in an inferior light, we do not mean to gloss over or extenuate the weaknesses displayed, especially during last century, by Scottish bankers, nor to deny the glory due to their southern brethren for the magnificent financial fabric they have reared under conditions which, if commercially superior, have been legislatively inferior. And in regard to scientific exposition and research, Scottish bankers cannot bear comparison with the financiers of England. English banking, following the commercial prosperity of the country, has become the most widely extended in its range, and the most voluminous in the amount of its transactions, of the banking systems of the world. But Scottish banking has this -peculiar glory, that it has been in large measure the means of producing and securing the prosperity of the country, which has in turn expanded it to the proportions we have described.

In making such a comparison, it must, however, be borne in mind that the political and commercial positions of England and Scotland have always been widely different ; and that, of course, as a matter of cosmopolitan importance, the state of English banking is of much greater moment than that of Scottish banking. At the same time, the history and operations of the Scottish banks have not only great interest for the people of Scotland, but vitally affect the welfare of the empire and of the world. In the words of an able writer on Scottish banking, "The banking question, whether discussed in London or Paris, always reverts to the history of the Scotch banks as a fragment indispensable to the controversy." [The Scotch Banks and System of Issue, Robert Somers, Edinburgh, 1873, p. 71.] Their operations have been so admirably adapted to the requirements of the country, and have so effectively led its agriculture, manufactures, commerce, and every branch of industry to a high state of prosperity, without special devotion — as is usual in other countries—to particular departments of business, that they are universally looked to as efficient exponents of practical banking.

The existing banks are all public joint-stock corporations. For about sixty years there has been no private banking firm in Scotland, among the last being the famous house of Sir William Forbes, J. Hunter & Co., who amalgamated in 1838 with the Glasgow Union Bank, afterwards the Union Bank of Scotland, although their firm-name continued to be used for a few years in connection with the Edinburgh business of the bank. The less conspicuous house of Alexander Allan & Co. appeared in the Edinburgh directories as bankers for about twenty years later; but it would seem that for some time previous they had practically ceased the active conduct of banking business. With this exception, the last private banking firm extant in Scotland was Dunlop, Houston, Gemmell, & Co., who carried on business as the Greenock Banking Co. until 1843, when they amalgamated with the Western Bank of Scotland. Shortly before these events, a shock had been given to the system of private banking by the failure of several firms, and the withdrawal from business, on account of losses, of the important firm of Ramsays, Bonars, & Co.

Private banking has, however, been a very important element in the history of Scottish banking, at least one-half of the establishments formed in the country having been on that principle, while several others, although nominally joint-stock, may for most purposes be included in the category. Considerable, and in some cases large, fortunes were made by private bankers, but their ultimate success does not seem to have been great, as only about half-a-dozen reached the stage of amalgamation, the others being either sequestrated or wound up. In all, there appear to have been at least ninety-five distinct banking establishments formed in Scotland up to the year 1845. Since then no new bank has been formed. [The Scottish Banking Company (Limited) was formed at Dundee about twenty years ago, but as its affairs were not made public, it cannot with certainty be included among the banks in Scotland. It was wound up a few years later, after an inglorious career.] Of that list, thirty-six failed and were wound up, ten passed out of existence from unexplained reasons —in all probability for the most part insolvency—six retired voluntarily, thirty-three amalgamated with other banks, and ten remain in business. [The North British Bank, an exchange company, and not a bank, was sometimes included in the published lists of the banks in Scotland. See post. chap. xx.]

It will thus be seen that the narration on which we are about to enter is by no means unchequered by sad vicissitudes. Indeed, the operations of the Scottish banks have been attended by a large amount of mismanagement and recklessness, and have produced a full proportion of bankruptcies, entailing ruin on partners, and sometimes loss to creditors. It is but justice, however, to add, that the cases where creditors have suffered severely are comparatively few in number, and are confined entirely to the smaller class of offices. The total amount of the deficits is in but trifling ratio to the aggregate liabilities of the banks.

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