It is one of those strange accidents of history that the four major organisations in Scottish banking should have been founded in different ways. Since 1695 commercial banking in Scotland has produced more than 100 banks—of these only three remain—the Bank of Scotland, Royal Bank of Scotland plc and Clydesdale Bank PLC. Also since 1810 the savings bank movement has produced a similar number of banks and of these only four remain.

In 1695 an Act of the Scottish Parliament constituted the Bank of Scotland as a legal entity. This gave it power to sue and be sued in its own name, and it was also generally agreed that the Act conferred limited liability upon the shareholders. This meant that if at any future time the Bank had to be wound up then the shareholders could not be forced to pay any more than that part of the authorised capital for which they had subscribed.

The same benefits were obtained by the Royal Bank of Scotland when it was founded in 1727, but this time the constituting document was a Royal Charter rather than an Act of Parliament. When the British Linen Co. (later British Linen Bank) was set up in 1746 it too was constituted by a Royal Charter. The fact that all three concerns had limited liability made their shares very attractive to the investing public because most businesses in the 18th century were organised as partnerships. The law of partnership meant that any one who invested money in such an organisation became a member of it and was therefore liable for all of its debts, i.e., if the business's liabilities exceeded its assets when it was being wound up then the personal assets of the partners could be sold to pay the debts of the business.

Not all banks, however, were organised and constituted in such a way that the benefits of limited liability were conferred upon them. In fact most of the banks which were founded in the 18th century were partnerships. There were two different kinds of these banks. Firstly the private banks in Edinburgh of which there were about twenty, many of which failed in the crisis of 1772. These were mainly very small non-note issuing banks who borrowed money from the Bank of Scotland and Royal Bank which they then lent to their own customers at a slightly higher rate of interest. Very little is known about these concerns but it does not seem that they were of great significance to Scottish economic development. Possibly the sole exception to this generalisation was the house of Sir Wm Forbes, James Hunter and Co. which grew to some prominence as a deposit gatherer and then began to issue its own notes in order to further extend its business.

Of much more importance to economic progress were the provincial banking companies of which forty-five were formed in the period 1747-1825. These tended to be much larger than the private banks although smaller than the Bank of Scotland or Royal Bank. They were set up as partnerships, ranging in size from six to eighty partners, in all of the larger burghs and some of the smaller ones. By 1800 there were provincial banking companies in Glasgow, Dundee, Aberdeen, Stirling, Perth, Ayr, Paisley, Greenock, Falkirk and Leith and others followed in the 19th century. Many of these concerns were set up before the large Edinburgh banks had extended their operations to include a branch system so that when branches were set up they often had to face competition from one or more of the banking companies. Competition was therefore a major feature of the evolving Scottish banking system and the result was a service which was certainly more efficient and probably cheaper than its English counterpart.

In England the Bank of England had been set up in 1694 largely as a result of the efforts of the Scot William Paterson. It was not England's first bank as several London goldsmiths had evolved the banking functions of deposit, note issue and lending earlier in the 17th century. Nevertheless, the Bank of England soon came to dominate the English banking scene from its London base. An Act of 1708 which was passed to defend the Bank's monopoly of joint-stock banking in England and Wales enacted that no other bank in these countries could have more than six partners. By 1750 there were about twelve country banks in English provincial areas but all were restricted by the legislation of 1708. The result of this restriction was that England and Wales were deprived of a system of banking commensurate with a period of rapid economic growth.

Of course in 1750 the Scottish people were much poorer than their English counterparts and were very conscious of this fact. If they were to catch up with their southern neighbours it was absolutely essential that they develop a system of banking which would create credit and mobilise savings in as efficient a way as possible. As we shall see the Scottish banking system, within the British Isles, pioneered in an extensive way several major developments including joint-stock organisation, deposit taking with interest, note exchanges, branch banking and cash credits (the forerunner of overdrafts). Scotland was very fortunate in that the Government left the system free of restrictive legislation so that it could develop in line with the requirements of its customers. The path to the achievement of this highly effective banking system was not, however, always very smooth.

It is a perfectly natural phenomenon in human relations that well established individuals will be suspicious of new arrivals until they either prove that they are not a threat or can be controlled in some way—and so it is in business; especially when the rival organisations are constituted differently. In the mid-18th century the Bank of Scotland and Royal Bank of Scotland, after initial distrust, had settled into relatively peaceful co-existence. Their peace was shattered, however, when, from 1747, the provincial banking companies began to be formed. Initial attempts by the Edinburgh banks to control these new arrivals failed and a period of considerable hostility ensued before peace was restored in 1771 when the Edinburgh banks decided to set up a note exchange and forced the provincial banks (nine in number) to join. The effect of the exchange—the first of its kind—was to place proper limits on the amount of notes which a bank could keep in circulation. From then on banks could only keep in circulation those notes which their customers required for daily transactions. Other notes had to be retired, either over the counter or through the exchange.

The following year there occurred one of the worst commercial crises that Scotland has ever seen. Several of the small private banks in Edinburgh failed as did Douglas, Heron and Co. (the Ayr Bank), the largest of the provincial banking companies. The crisis might have been even more serious had it not been for another innovation, i.e., the preparedness of the Bank of Scotland, the Royal Bank and, to some extent, the British Linen Company to act as lenders of last resort by lending cash to some of the provincial banking companies, whose business was otherwise sound, but who had problems of providing adequate liquid assets to meet the demands of their customers. In other words the Edinburgh bankers were prepared to develop at least some of the functions nowadays normally associated with a Central Bank.

The willingness of the Edinburgh bankers to act in this way brought considerable stability and confidence to the Scottish banking system. Thereafter commercial crises were never experienced with such intensity as they were in other parts of the British Isles. The preparedness of the banks to help one another meant that the banks were better able to help their customers through difficult times. Nowhere was this more evident than in the crisis of 1825-6 when sixty country banks in England failed with considerable loss to the public who held notes or deposits with the failed banks. In Scotland only two of the smaller provincial banks failed but their difficulties were of long standing. Despite this there was no loss to the public and all debts were paid in full. This experience reinforced the writings of Thomas Joplin, a Newcastle merchant, who had published a pamphlet in 1822 decrying the English banking system and extolling the virtues of the Scottish banks. Joplin's arguments were highly polemical and therefore sometimes not terribly accurate but there was sufficient truth and perceptive comment in his writings for them to carry a certain amount of political weight. A Parliamentary enquiry was set up specifically to enquire into the issue of bank notes in Scotland and Ireland but, more generally, to enquire into the whole system of banking. The Government planned to abolish the right of Scottish banks to issue notes under £5—a right which they had always enjoyed. Such was the clamour from Scotland that Parliament appointed the committee of enquiry which found that Scottish banking was—

"a system admirably calculated to economise the use of Capital to excite and cherish a spirit of useful Enterprise, and even to promote the moral habits of the people, by the direct inducements which it holds out to the maintenance of a character for industry, integrity and prudence."

The result was that the Scottish banks were allowed to keep their note issues. But this enquiry also lent considerable weight to Joplin's argument and legislators in London became increasingly aware of the Scottish system of banking and its successes compared with the English system and its weaknesses.

In Ireland too, where the system had emerged like that of England, with a monopolistic Bank of Ireland in Dublin and a series of small country banks, there had developed pressure for change. Several pieces of legislation between 1824 and 1833 gradually removed the restrictive legislation in Ireland and England and enabled these countries to develop banking systems on the Scottish model. In this way began a general exodus of Scottish bankers into other parts of the British Isles and eventually to other parts of the world.

Pressure for change had built up in England and Ireland as a result of developments in the economy and this pressure was also manifest in Scotland. It was a period of considerable growth and large scale developments in building, iron steamships and railways placed increasing demands upon the banking system. The result of this pressure was that the provincial banking companies were replaced by a series of joint-stock banks. These new arrivals were very similar to the provincial banking companies but differed from them in the important respect that they were very much bigger. They had a larger capital base and whereas the provincial banks usually had only local branch networks many of the new joint-stock banks developed banking systems which were national in scope and which soon came to rival the Edinburgh banks. Several of these new joint-stock banks like the Commercial Bank of Scotland and National Bank of Scotland were Edinburgh-based while others were based in the other major cities, e.g., the Glasgow Union Bank (later Union Bank of Scotland) and Clydesdale Bank in Glasgow, and the North of Scotland Bank in Aberdeen. These joint-stock banks and the Edinburgh banks gradually took over the provincial banks until by 1864 when the Royal Bank took over the Dundee Banking Company only the joint-stock banks and the three Edinburgh public banks remained. By this time both the Commercial Bank and the National Bank had obtained Royal Charters but neither had managed to obtain the privilege of limited liability which remained the prerogative of the three oldest Scottish banks.

Such had been the success of the Scottish banking system that many writers attributed to the banks a large portion of the credit for the rapid development of the Scottish economy. From being a poor neighbour of England in 1750, Scotland had, a century later, a national income per capita which was probably at least the equal of England's. Numerous factors were of course responsible for this and the extent to which the Scots had evolved a banking system which pioneered in so many ways is a sure indicator of the importance of banking to the development of the economy.

One other aspect of this development was the Savings Bank movement which began in a very small way at Ruthwell in Dumfriesshire in 1810 when the Rev. Henry Duncan founded a parish savings bank. The idea was basically to gather the savings of the poorer classes of society and to deposit them en bloc in one or other of the commercial banks who, being keen to encourage the savings movement, offered a slightly higher rate of interest than was normal on deposits. The movement spread rapidly throughout the British Isles. Under Acts of 1817 and 1828 English Savings Banks were enabled to invest their funds in Government Securities. By an Act of 1835 this facility was extended to Scotland. Banks which registered under this Act (e.g., the Savings Bank of Glasgow) became Trustee Savings Banks, i.e., their management was vested in a board of trustees. Savings banks placed their funds between the commercial banks and the Government.

There was from then on a complementarity between the savings banks on the one hand and the commercial banks on the other. One result of this was that the latter seldom attracted deposits direct from those parts of society below the middle class income range. This situation prevailed for over 100 years.

All of these new developments in banking, however, were not achieved without some difficulty. In the 1830s and early 1840s there were a number of failures of joint-stock banks in England and, in addition to this, it was a period which experienced several commercial crises and some inflation. The Government blamed the banks for destabilising the economy by creating too much credit and for a number of years a great debate ran its course between the Government and its supporters (Currency school) on the one hand and the bankers (Banking school) on the other. The bankers believed that so long as each credit they extended was to meet the legitimate needs of trade then there could be no inflation. The debate itself was rather inconclusive but in 1844 the Government acted on its beliefs and passed the Bank Charter Act which was intended to limit the growth—particularly the note issues—of the banks. The Act separated the banking and note issuing functions of the Bank of England and tied the note issue to the supply of gold in the country; in effect to the balance of payments. As far as joint-stock banks (in England and Wales) were concerned no new bank could have a note issue and existing issues were to be limited to the average of their issues over a three-month period in 1844. If any banks merged or opened an office in London they were to lose their note issue. These last provisions were critical for eventually all banks came into one or other of these categories and so lost their note issues. In this way the Bank of England eventually gained a monopoly of all note issues in England and Wales.

Similar legislation was proposed for Scotland and Ireland but such was the outcry from these countries that they were treated differently. The note issues were limited to the average of the year preceding the passing of the Act in 1845 and any excess issue beyond these authorised limits had to be backed by gold. The Scottish and Irish banks were not however forced to lose their issue if they merged with another bank or opened a London office. The result of this has been that both Scottish and Irish banks have retained their rights to issue notes to the present day. (Irish banks, of course, now only issue in Northern Ireland.)

The legislation had the desired effect of limiting the ability of all banks in the British Isles to issue notes but it did not cure the problem of instability and inflation. Indeed the Act of 1844 had to be relaxed in the crises of 1847, 1857 and 1866. The difficulty was that the banks had begun to develop payments by cheque thus obviating the need for bank-notes, i.e., deposits and deposit creation were becoming more important as bank liabilities than notes. The legislation had not taken account of this development.

In the second half of the 19th century the banks concentrated increasingly on attracting deposits and it was generally a period of substantial growth in the economy and in banking. In the period between 1850 and 1873 Britain can be said to have been the "Workshop of the World" and although there were difficulties after 1873, as other countries began to industrialise behind substantial tariff barriers, it was nevertheless an era of development especially in Scotland which experienced the growth of much of the heavy industry, including shipbuilding, for which the country became so famous.

This growth in the scale of industry and trade posed challenges to the banking system. The major challenge was that individual customers now required more substantial advances from their bankers than had been normal in the past. Most banks appear to have met this challenge in a highly effective way although this is an area in which much research requires to be done so that we may learn more about the techniques of lending.

There was, however, one notable failure to meet this challenge and this was the City of Glasgow Bank. This concern had become too heavily committed to a few firms most of which were owned by the Directors of the Bank. In a desperate effort to extricate themselves from their difficulties the Directors had begun to falsify the accounts but this was all to no avail and the Bank failed in 1878.

The liability of the shareholders was unlimited and several calls were made upon them to pay the debts of the Bank. Only 254 of the 1,819 shareholders remained solvent when the affairs of the Bank were finally wound up. All the creditors were paid in full.

The failure of the City of Glasgow Bank was a severe jolt to the confidence and self esteem of the rest of the Scottish banking system but the bankers were quick to learn the lessons and took steps to prevent the possibility of such a disaster ever happening again. Within a very short space of time after the closure the other banks had moved to have their shareholders appoint auditors who would report annually on the state of the accounts. This was the origin of independent auditing and acted as a control by the shareholders on the intromissions of the Directors.

A more vexed question was that concerning the liability of the shareholders for the debts of their bank. Many believed that unlimited liability was a good thing and that to limit liability would be damaging to a bank's image. This view ignored the fact that the three oldest banks had always had limited liability. Such was the fear engendered by the failure of 1878, however, that most banks favoured the view that limitation of liability was in the best interests of their shareholders. All seven unlimited banks registered with limited liability and added "limited" to their names from 1882. The principle of limited liability had been available to bankers generally since 1862.

In England and Wales banks met the challenge of increased demands from customers with a merger movement. There were numerous amalgamations amongst banks in the late 19th century and one result of a merger of several banks was the emergence of Barclays Bank in the 1890s.

There was limited scope for further mergers in Scotland where the average bank was still larger than its English counterpart. At the dawn of the 20th century there were ten note-issuing banks north of the border and an as yet unquantified number of savings banks. The note issuers were:

This was not, however, a stable situation for in 1907-8 the Caledonian Bank was taken over by the Bank of Scotland. Also in 1907 the two Aberdeen banks amalgamated. Meanwhile in England the merger movement continued apace and some of the, by now very large, banks began to look outside England for acquisitions.

The first success in this sphere was the purchase in 1918 of the shares of the National Bank of Scotland by Lloyds Bank although the arrangement that the two banks were to maintain separate identities was to characterise this type of activity. By this time of course the average Scottish bank was much smaller than any of the English "Big Five". The Scots were therefore vulnerable to takeover bids and some actively encouraged them seeing advantages in economies of scale from an affiliation with an English clearing bank. In 1919 Barclays Bank acquired the share capital of the British Linen Bank and the Clydesdale was acquired by the Midland Bank which also purchased the North of Scotland Bank in 1923.

The Scots were not without their responses to this movement and in 1924 the Royal Bank acquired the small but prestigious Drummond's Bank which retains its very singular identity. This was followed in 1930 by the acquisition of Williams Deacons Bank, based in the north-west of England, and in 1939 by Glyn, Mills Bank which was based in London and the south-east of England. Drummond's was assimilated into the Royal Bank but the other two retained their identities forming, with the Royal, the "Three Banks Group". The Royal also took over the London West End branch of the Bank of England in 1930.

By 1939 there were eight Scottish banks—four independent and four "affiliated" with English banks. In the post-war years the pressure for rationalisation and economies of scale dictated the need of further mergers, as it had in other sectors of the economy. In 1950 the Midland Bank merged its two Scottish banks to form the Clydesdale and North of Scotland Bank (later abbreviated to Clydesdale Bank). Agreement on a merger was reached between the Bank of Scotland and Union Bank in 1952. In 1958 the Commercial Bank and National Banks merged, with Lloyds Bank (owners of the National) getting a 37 per cent stake in the new National Commercial Bank of Scotland which immediately became the largest Scottish bank.

In the late 1960s mergers again became fashionable. The National Commercial Bank absorbed the thirty-six English branches of the Irish-based National Bank in 1966. In 1969 it was announced that the Royal and the National Commercial were to merge. The English subsidiaries Williams, Deacons and Glyn, Mills were then merged to form Williams and Glyns Bank.

Also in 1969 the union was announced between the Bank of Scotland and the British Linen, with Barclays Bank (owners of the British Linen) taking a 35 per cent stake in the new Bank of Scotland. By then the Scottish banking system was reduced to three banks—Bank of Scotland, Royal Bank of Scotland and Clydesdale Bank.

The last twenty years have also been a period of rapid change in other areas of banking. In the mid-1960s the Trustee Savings Banks decided that they would expand their business beyond the traditional savings and investment accounts by offering current accounts with chequeing facilities and encouraging people to have salaries paid into these accounts as was already the practice in the commercial banks. This development was obviously designed to make the Trustee Savings Banks more competitive with the commercial banks for the business of personal account customers. It was a move which foreshadowed the developments of the 1970s.

The Committee to review National Savings reported in 1973. The recommendations of the Page Report expressed the view that the Trustee Savings Banks should be permitted to develop as a "third force" in British banking and since then the T.S.Bs have taken several steps to expand their services. A Central Trustee Savings Bank was set up in 1973 to co-ordinate and control activities and in 1976 application was made to join the London Bankers Clearing House. Most of the banks have merged with some of their neighbours so that there are now eighteen regional T.S.Bs in Britain. Since then the T.S.Bs have gradually shaken off their close contacts with Government and have been integrated into the commercial banking sector under the supervision of the Bank of England.

In 1982 the four Scottish T.S.Bs established a Steering Committee to manage the arrangements for a merger of the four banks with effect from May 1983—the new bank to be called T.S.B. Scotland.

Just as competition for the commercial banks has emerged from a source which was once complementary to their operation so it has also emerged from organisations entirely new to Scotland. Merchant banks specialising in portfolio management and corporate financial services had long been a feature of the London financial scene. Several London-based merchant banks opened Scottish offices in the late 1960s and early 1970s and there was also some Scottish initiative—notably Noble, Grossart in 1969. Some of these new arrivals were shaken out in the banking crisis of 1973-4 and retired to their London base but others remained to provide a range of services which were both competitive with and complementary to those provided by the commercial banks. Co-operation was particularly marked in the area of North Sea Oil finance.

Competition also came from the finance companies—some of whom had been in existence from the inter-war years but the network of offices expanded greatly in the 1960s and 1970s. It came too, although only in a limited way, from branches of overseas banks and the English clearing banks establishing offices in Scotland.

Beyond the banking sector was the non-bank financial sector including the building societies, insurance companies, investment trusts and national savings. All of these had been around for a long time but changes in policy dictated that all should be more competitive in the search for deposit and investment money. This meant more competition for the banks. The age of competition was fostered by the Bank of England when in 1971 it published "Competition and Credit Control".

The banks responded to this new surge of competition by buying up controlling interests in finance houses and hire purchase companies and by setting up their own merchant bank subsidiaries. It was not of course possible to buy up building societies but banks met the competition by themselves offering mortgages at increasingly competitive rates.

In short the period from about 1955 to the present was one which presented a whole new range of challenges to the banking system. An editorial in the Bankers Magazine in 1976 concluded that—

"this phase in our economic history offers a challenge as great, and in its way as exhilarating as that provided by the breakthrough in our industrial revolution."