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History of Banking in Scotland
Chapter III - The Bank of Scotland

IT was in the midst of the experiences described in the last chapter that the earliest of Scottish banks came into existence, and passed the first few years of its career. On the 17th July 1695, three weeks after the incorporation of the African and Indian Company, the Scots Parliament passed an "Act for erecting a Publick Bank," [The quotations are from a print dated 1695.] which, together with six other Acts subsequently obtained, forms the constitution of the Bank of Scotland. The preamble recites how " Our Soveraign Lord, considering how useful a Publick Bank may be in this Kingdom, according to the custom of other Kingdoms and States; and that the same can only be best set forth and managed by Persons in Company with a Joynt Stock, sufficiently indued with these Powers, and Authorities, and Liberties, necessary and usual in such Cases; Hath therefore Allowed, and, with the Advice and Consent of the Estates of Parliament, Allows a Joynt Stock, amounting to the Sum of Twelve Hundred Thousand Pounds [Scots] Money, to be raised by the Company hereby Established for the Carrying and Managing of a Publick Bank. And further Statutes and Ordains, with Advice foresaid, That "certain persons named should have power to receive subscriptions from the 1st November to the 1st January succeeding, and that the subscribers "are hereby Declared to be One Body Corporat and Politick, by the Name of the Governour and Company of the Bank of Scotland."

After sundry provisions regarding the election of office-bearers, and the general management of the bank, and other matters, it is enacted that during the space of twenty-one years "the Joynt Stock of the said Bank continuing in Money, shall be free from all Publick Burden to be imposed upon Money," and "it shall not be Leasom to any other Persons to enter into and set up an distinct Company of Bank within this Kingdom, besides these Persons allenarly in whose Favours this Act is granted." That the bank would issue notes was recognised, without specification of powers, by the provision "And sicklike, it is hereby Declared, that summar Execution by Horning, shall proceed upon Bills or Tickets drawn upon, or granted by, or to, and in Favours of this Bank."

They were debarred from any "other Commerce, Traffick, or Trade with the Joynt Stock ... or Profits arising therefrae, excepting the Trade of Lending and Borrowing Money upon Interest, and Negotiating Bills of Exchange allenarly and no other," and from lending to or otherwise financially assisting the Crown, except where "a Credit of Loan shall happen to be granted by Act of Parliament allenarly." The Act concludes with the provision " that all Forraigners, who shall joyn as Partners of this Bank, shall thereby be and become Naturalised Scots-men, to all Intents and Purposes whatsoever."

Among the names mentioned in the Act are several which also appear in the African and Indian Company's Act; but there is one notable exception.' Seven London merchants are included in the list, of whom the names of John Holland and Thomas Coutts are specially interesting. But William Paterson, the founder of the Bank of England, the foremost Scotsman of the time in the domain of finance, he who, according to a contemporary poet, could "persuade a nation bred to war to think of trade," is too busy leading his countrymen on a will-o'-the-wisp chase to interest himself in a matter which far more concerned his country's good than all his dreams of foreign wealth. He even appears to have viewed the banking project with disfavour, but for what reason is not apparent.

To whom the credit for the original idea of a bank in Scotland is due seems unascertainable; but it is understood that Mr. John Holland, whose name is inserted in the Act, a merchant in London, drew up its constitution at the request of several Scotchmen resident in London. At the outset, the governor and one-half of the directors were elected from among the proprietors resident in London, the deputy-governor and the other half of the board being chosen from among the Scottish proprietors. Mr. Holland was the first governor. Subsequently, from want of interest in the bank leading to a gradual decrease in the number of English proprietors, the practice of electing London directors was abandoned. Mr. Wenley says: "It would appear that Mr. Holland's Scotch bank had not found much favour with his English friends; but there can be no doubt that, under his care, it had been judiciously planted, and had fairly taken root." [Journal of Institute of Bankers, vol. iii. p. 121.]

Although, as we have seen, the Bank of Scotland got its credentials on 17th July 1695, it was not until the new year that the share-subscriptions were completed, and the bank actually commenced business. The capital was subscribed for in the proportions of two-thirds in Scotland and one-third in London. The payments on application for stock, amounting to 10,000 sterling, or 10 per cent of the subscribed capital, sufficed for the bank's requirements. They began at once to issue notes of 100, 50, 20, 10, and 5 sterling; and in 1704 they adopted a 12 Scots (value 1 sterling) denomination. It is somewhat extraordinary that, at the outset, the notes should not only have been in English currency, but of such high denominations. The number of people who could have had use for the larger of these amounts must have been very small; and even 5 would be an unattainable sum for most of the population. The explanation is, doubtless, as suggested in the letter referred to below, [It is stated in the Historical Account that, in January 1699, they adopted a 20s. issue. The author subsequently, however, enumerates only the first five denominations as current in 1700; and his statement is otherwise unconfirmed. That it is probably an error is apparent from an interesting official letter printed in Appendix A. The notes, we are told, were then "engraven in one and the same character, only the amounts being different."] that the bank was dominated by the views of people accustomed to the conditions of business in London. Hence also the hesitation of the bank, until 1704, to issue small notes, which were essential to the efficiency of the circulation.

At first the lending of their capital and the issue of notes constituted the whole of their business, but very soon they attempted to engage in exchange business, for we find that in this first year of their active existence (1696) they established branches at Glasgow, Aberdeen, Dundee, and Montrose. It is possible that the immediate cause of this movement was an attempt made by the African and Indian Company to engage in the business of banking, as a set-off to their failure in Darien, and the unremunerative nature of their other commercial ventures. This action was, of course, a direct infringement of the legal monopoly of the bank, justifiable only by a literal interpretation of the prohibitory clause of the bank's Act, which forbade the setting up of "a distinct company of bank." Not feeling themselves strong enough, however, to contest the point, the bank allowed their opponents to carry on their competition undisturbed; and very soon it was found that the latter were as unable to command success in banking as in their legitimate business, and they retired from the field. "They resolved," says our author, "not to quarrel with that (then) Mighty Company, nor plead the Bank's seclusive Privilege; but rather to ly by for a little, and only so to manage their Affairs, as not to suffer an Affront in their Infancy, by a Demand on the Bank greater than the Amount of their Cash: And this they did effectually, but with some Loss to the Company; for it obliged the Proprietors to advance two Tenths of their Stock, besides the Tenth paid in at subscribing, and put a stop to all Negotiations for a Time" (p. 4). In the year succeeding the establishment of the bank's branches, the directors, finding [Parliamentary Report, 1841.] that the expense of conducting them greatly exceeded the profit obtained, withdrew them, and the attempt was not renewed during the currency of their monopoly. To meet their extended operations they had increased the paid-up capital to 30,000; but when they again confined their business to Edinburgh, it was reduced (May 1698) to the former amount by repayment of 20,000 to the proprietors.

In February of the year 1700, they had the misfortune to be burned out of their office, which was situated in Parliament Close, but, while the event occasioned alarm and inconvenience at the time, they do not seem to have sustained much injury therefrom. It was not long, however, before their affairs assumed a grave aspect. The issue of notes had doubtless proved a great boon to the public, as well as a source of profit to the bank, but the use of them was not at this time so general as it afterwards became. As an addition to the currency they were acceptable; but coin was still the recognised medium. In 1704 a scarcity of coin, occasioned by a persistent drain of bullion (probably to meet the foreign payments of England in connection with the wars under Marlborough, who gained his great victory over the French at Blenheim in August of this year), began to be severely felt. A rumour "that the Privy Council was to cry up the value of species," as it was quaintly termed, brought matters to a crisis with the bank. In the words of an official print, dated 28th December 1704, and styled a "Memorial and Intimation from the Governour and Coy. of the Bank of Scotland," these circumstances "occasioned a very great, unexpected, and unaccustomed demand upon the bank, which at last had such effect, that on Munday the 18th of this instant December the money in the Bank was wholly exhausted, and thereby payments stopt." Thus, in language contrasting strangely with the euphonious circulars in which firms now announce their inability to meet the demands of creditors, did the directors of the Bank of Scotland intimate that they had suspended payment.

Confident, however, in the perfect solvency of the corporation, they proceeded to state that application had been made to the Marquis of Tweeddale, the Lord High Chancellor, craving an inspection of the books. Thereupon the Earl of Loudoun, Lord Belhaven, the Lord President of the Court of Session, and others, met at the bank, and after examination they "find that the Bank hath sufficient Provisions to satisfie and pay all their outstanding Bills and Debts; and that with a considerable Overplus, exceeding (by a fourth part at least) the whole foresaid Bills and Debts." A general meeting of the adventurers was called, who sanctioned the allowing of "annual rent" on the notes "from the stop," to procure their continued currency, and made a call of 10 per cent on the nominal capital, amounting to 10,000. This sum was repaid two years later. With these arrangements the difficulty was overcome, and the bank learnt its first lesson in the absolute necessity of maintaining an efficient bullion reserve. It had probably been loth to supplement its falling stock, owing to the great expense attending such an operation. This will be readily understood, when it is remembered that the cost of bringing gold from London amounted then to 8 per cent or 9 per cent on the remittance. The year 1704 is further noticeable, from the first step in the establishment of the small-note currency, which subsequently proved such an important factor, having been taken, by the bank then commencing the issue of notes of the value of 1 sterling. Their circulation was, however, very limited until after the union of the countries.

Three years after the incident we have just narrated (1st May 1707), the legislative union of England and Scotland was accomplished, after protracted and acrimonious negotiation. That event is now regarded as a mutual blessing to both nations; but it was not generally so considered at the time. Haughty and contemptuous, the English looked on it as a means of staving off the troublesome incursions of the northern wolves. The Scotch, on the other hand, detested the proposition, and but for intrigue and bribery among the members of Parliament, the Act of Union would not have passed. The people were not, however, long in finding out the material benefits accruing to them from federal union with their wealthy neighbours, and from that time Scotland rapidly advanced in civilisation and commerce. The national coinage being then in a very unsatisfactory condition, the Bank of Scotland was entrusted with the duty of superintending its improvement. "The Directors undertook to receive in all the Species that were to be recoined, . . . and to issue Bank-notes or current Money for the same, in the Option of the Ingiver of the old Species, and the Privy Council allowed a Half per Cent, to the Bank for defraying Charges." The bank were promised a reward after finishing the work; but, although they preferred their claim, they do not seem to have secured its recognition. [Historical Account of the Bank of Scotland, 1728.] The total metallic currency of Scotland at that time has been estimated at 800,000, or, according to one authority, 900,000. Of this, 411,117 : 10 : 9 was brought in, in exchange for new coin. It is interesting to note that only 239,636: 13 : 9 was native coin, the rest consisting of 132,080: 17s. of foreign and about 40,000 English coin. This operation took place in 1707.

While this reform was in progress, the bank got a great fright; "For in March 1708 the French Fleet appeared at the mouth of the Firth of Forth, in the (then) intended Invasion. At which time the Bank had a very great Sum lying in the Mint in Ingots, and a considerable Sum in the Bank, brought in to be recoined, besides a large Sum in current Species; all which could not well have been carried off and concealed." [Ibid.] In 1707 the bank first assumed the role of a bank of deposit, but did not then allow interest on the money paid in. During the Jacobite troubles of 1715 the bank, being suspected of favouring the Pretender's cause, fell into disfavour with the Crown. To this is ascribed the favourable reception, some years afterwards, of the request by the Equivalent Company to have banking powers conferred on them, and the special recognition and support accorded to them for long afterwards as the great rival of the Bank of Scotland.

It does not concern us to trace the course of the rebellion, which, indeed, does not seem materially to have affected the country in general. But it is interesting to observe its effects on the bank. That establishment, despite the insignificance of its financial position from a modern point of view, appears to have been a considerable power in the land. It would appear that its influence was (doubtless secretly) enlisted more in the cause of popular patriotism (according to the light of those days) than in the interest of public order and loyalty, as these were regarded by the dominant party. For this disaffection to King George the bank was severely punished twelve years later; and even at the time it suffered from the results of the rebels' action. The Town Council of Edinburgh made successful endeavours to provide for the security of the city; but the approach of a detachment of the Pretender's party produced so much alarm among the citizens, that a severe run on the bank took place. It is recorded that "the enterprise began on the part of the rebels with an unsuccessful attempt to seize the Castle by surprise and the run on the Bank of Scotland was so great, that they stopped payment on the 19th September [having apparently sustained it for eleven days], and ordered their notes to bear interest from that date." Elsewhere, however, we are informed that "the Directors privately encouraged the Demand, lest the Money should fall into the Hands of Enemies. But the Directors took Care to retain the whole Cash belonging to the Government; and after all the rest of the Money in the Bank was issued, they delivered the publick Money; which was lodged in the Castle of Edinburgh, being about 30,000 Sterl." Tranquillity was restored by the arrival of troops from Holland in December following. The interest-bearing notes were withdrawn from circulation during May, June, and July 1716, "and the Directors proceeded again in Business and Negotiations." [Historical Account.]

In that year, as the result in all probability of the interruption of its business, it does not appear to have paid any dividend. As this was quite an unusual circumstance, even in those early days of the bank's history (as far as we are aware it occurred only once before and never after), and as, when dividends were resumed, they were at lower rates than those immediately preceding the cessation, it would seem that the bank had suffered considerably from the untoward train of events. The proprietors could, nevertheless, afford to dispense with a year's dividend, seeing their profits had been of a very substantial character. From an apparently authentic record we find that, for the twenty-nine years ending with 1727 (the date of the incorporation of the Royal Bank), the allocated profits averaged 17 per cent on the capital. After the first stoppage (1704) the rate fell to 6 per cent, but it was rapidly raised again until it reached 30 per cent, at which it stood for three years prior to the second suspension (1715-16). In the succeeding eleven years the rate varied from 10 per cent to 22 per cent, and the bank enjoyed an undisturbed and lucrative monopoly. Its exclusive privileges had lapsed in 1716, but no competitor had arisen to contest its sway in the domain of finance. Indeed, there are indications that in those days an opinion prevailed pretty generally that, while one bank was necessary, a plurality of banks was unadvisable and even dangerous. The great South Sea Bubble and the other speculative manias which in 1719-20 grievously afflicted the English nation, appear to have had little effect on Scotland.

The prosperity of the Bank of Scotland did not pass unobserved. Although up to 1726 no actual competition, other than the ineffectual attempt made by the Darien Company, seems to have been threatened, endeavours were made by other corporations to share their gains. One of the most curious of these was a scheme submitted by a Mr. James Armour, writer in Edinburgh, acting on behalf of the Royal Exchange Assurance Corporation of London. In advancing his scheme, Mr. Armour lays great stress on the benefit to be derived by the country from its acceptance; but it is evident from his tone that he had some strong personal interest in the success of his proposals. Seemingly the bank directors had turned a deaf ear to his charming, for he issued a print of 25 pages, with the object of forcing the scheme upon their attention, and enlisting the support of the proprietors. This pamphlet is entitled, "Proposals for making the Bank of Scotland more Useful and Profitable, and for raising the Value of the Land-Interest of North Britain; Edinburgh, 1722." It is dedicated to the Earl of Leven, Governor of the Bank, "to whom," says the author, "I'm perswaded, what is offered with a View to serve your COUNTRY and the BANK-COMPANY, will not be unacceptable." He then addresses the reader in the following words:"Being commissioned by some very Honourable Gentlemen, as a COMMITTEE of the DIRECTORS of the ROYAL EXCHANGE ASSURANCE COMPANY at LONDON, to offer the following PROPOSALS to the GOVERNOR and COMPANY of the BANK of SCOTLAND, which, in my humble Opinion, are for the Interest, not only of the BANK-COMPANY, but also of the whole NATION, I think myself obliged to submit THEM to the consideration of every one who will take the Trouble to examine 'EM, and has Resolution enough to judge for himself. 'Tis in vain to write for him, who, for Want of this Resolution, submits himself and his Concerns to another's Conduct, without enquiring into the Reasons of Things, such a one may save himself the Trouble of examining these Proposals, and leave it for a Task to his DIRECTOR." He then devotes sixteen pages (in which a peculiar taste in printing is gratified to the full by the liberal use of large and small capitals, italics, and old English characters) to the statement and advocacy of his proposals. He opens with a reference to "The bad Effects of the Scarcity of Money, and a sunk Credit" then existing; and continues, "'Twill be needless for

The deposit of 20,000 was to lie for a period of nineteen years, with option to the Assurance Company to demand repayment on twelve months' notice, but with no option to the bank to repay of their own accord. As the bank had been paying dividends of 20 per cent on the first instalment of 10,000 of their capital, and of 5 per cent on the second instalment of the same amount, the sum of free profits specified was to preserve that position. Further profits, including those to be derived from the use of the Assurance Company's money, were to be divided equally between the bank and the company. The exchange business was to be kept separate, one per cent commission to be charged, drafts to be payable at sight, each party to pay their own expenses, and the profit to be divided equally.

Our author seems to have had doubts as to the acceptance of his scheme, for, towards the end of his pamphlet, he expresses himself thus gloomily and sarcastically: "I know that very often the most useful Proposals" [he has long before this exhausted his stock of special types] "have been treated with the greatest Contempt; but a Man that has any Share of good Sense, must perceive how absurd this conduct is. If the World had been always averse to new Discoveries, we had been still as Barbarous as the most ignorant of our Ancestors" [a most profound depth surely], "and sure, one can't read the Proposals now offer'd with any Degree of Attention, but he must be ready to think, they will be Accepted with Pleasure, unless" [here comes the sting] "this is sufficient to Reject them that they are made feasible, and for the publicic Good."

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