History of Banking in Scotland

THE crisis of 1772, which formed the subject of our last chapter, although sharp and disastrous in its immediate effects, passed off more quickly and easily than might have been expected. Several causes conduced to this. The old banks, and the three private banking houses of Forbes, Mansfield and Cuming, who were almost the sole surviving representatives of what had been a large community of financial establishments, had foreseen and provided for the approaching catastrophe; and, being themselves unentangled in the speculations and grotesque banking indulged in by Douglas, Heron & Co., and their clique, they not only themselves rose lightly on the wave of adversity, but were able to afford the necessary banking accommodation to bona fide traders and the public. It was remarked at the time that the forbearance of creditors largely aided the recovery from the crisis; but this was only an unphilosophic way of stating that business was in the main sound, and that money was fairly plentiful. Coin, it is true, was scarce, but the notes of the public banks were in full credit. The crisis was essentially a banking one; and although it was necessarily directly associated with trade, it would appear that that connection was, as far as Scotland was concerned, limited to a comparatively small section of the community. The resolution of the banks, in 1773, to accept the notes of the Ayr Bank in payments, when that establishment finally agreed to give up business, was a further assistance in the restoration of confidence. The harvest of 1773 was fairly good, the fisheries excellent, the cattle trade active, and money cheap.

Hardly had affairs resumed a satisfactory aspect, when the dark cloud of war cast its shadow over the land. Complications with the American Colonies arose, and rapidly drifted into open rupture. In January 1774, hostilities commenced, which did not end until 1782, when the independence of the United States, who had formally thrown off their allegiance to their tyrannical parent six years previously, was acknowledged by Great Britain. Meanwhile the latter country was at war with France, Spain, and Holland; had to sustain repeated reverses in India, at the hands of the victorious Hyder Ali; had to stamp out sedition and open rebellion in Ireland; and had to check discontent and riots within its own borders. It does not concern us here to discuss the policy of the British Government during those events; but the events themselves are potent factors in the history of banking. The national expenditure had assumed enormous proportions; and although increased taxes were laid on the much-suffering public, the warlike and aggressive rulers of a commercial people year by year dragged their subjects deeper into debt. The American war alone cost 129 millions sterling, besides the loss of 50,000 men. The financial result of the eight years of warfare, ending with the peace of January 1783, was that the national debt was increased from 136 to 238 millions sterling, even after exhausting efforts to balance expenditure and income.

Although Scotland had to bear her share of the burden of the national foreign policy, she, as usual, suffered less from its effects than her more wealthy and powerful neighbour. England being much further advanced in its social condition, relied greatly on its foreign trade, which was crippled by a state of war; while Scotland, in its comparatively backward state, had enough to occupy its attention in the development of its agricultural and other industries. The scarcity of specie, moreover, from which it was a chronic sufferer, but which was aggravated by the foreign expenditure for military and political purposes, was largely counterbalanced by the readiness with which paper money circulated. For sums of £1 and upward there was practically no want of money, but it must be admitted that for smaller payments there was great lack of a medium. It would seem, nevertheless, that about the year 1776, loanable capital was more abundant, and the value of land vastly greater than at any former period. As regards the banks—both corporate and private—the national difficulties were actually a source of great advantage, as they readily invested in British Government securities, and Bank of England stock, at greatly depreciated prices, from which they realised large profits when these securities rose in value on the return of peace. So much was this the case, that serious accusations were made against them from time to time for diverting the funds, which should have been employed in the nourishment of the national industries, to stock jobbing purposes. As Sir William Forbes explains the matter, however, they seem really to have been more shrewd and prudent in the management of their own affairs than neglectful of their public duties.

Almost immediately after the collapse of private banking in Edinburgh, in 1772, it arose as a Phoenix from its ashes, renewed in vitality, and purified from the evils which had attached to its former condition. The houses of Sir William Forbes, J. Hunter & Co., and Mansfield, Hunter & Co., who were destined for a long and honourable career, and who, together with the firm of William Cuming & Sons, and presumably that of Thomas Kinnear & Sons, [Sir William Forbes expressly says that, besides the public banks, only the three first-named banking firms continued solvent. We are unaware, however, of any other authority for supposing that the Kinnears suspended payment at that time. The house continued until 1834.] had easily survived the trials which ruined their imprudent brethren, were not long left undisturbed by rivals. In 1773, the firm of Donald Smith & Co. commenced business; and three years later Robert Allan and Alex. Allan (they were not, if we are rightly informed, relations) established the houses which were well known in the earlier part of the present century, as Robert Allan & Son, and Alexander Allan & Co. About this time the firms of Bertram, Gardner & Co., and Allan & Steuart, and one or two individual bankers, began their career. Wm. Scott was in business in 1778; John Wordie is included in a list of bankers in the same year; and, as he was Dean of Guild in the Edinburgh Town Council previous to 1769, it is probable that his business was of older standing. It continued for a few years, but his name drops out of the roll in 1781; and, on 25th September 1782, his creditors were advertised to lodge their claims, in anticipation of a division of the proceeds of lands sold. He is designated "merchant" in the notice.

In the provinces, a few new private banks were started. Mr. Hunter, who had been cashier in Ayr for Douglas, Heron & Co., founded (1773) the successful business of Hunters & Co., which exists still as the Ayr office of the Union Bank of Scotland. The Stirling Banking Company and the Commercial Banking Company of Aberdeen were formed soon afterwards (1777 and 1778). Sir Wm. Forbes, James Hunter & Co., took an important step in the development of their business at this time, by beginning, on 1st January 1782, to issue notes of their own house in the same manner as the public banks in Edinburgh. Previously they had used the paper of the Royal Bank, with whom they had a cash credit, and of which bank Mr. John Coutts was a director. During this period (1772-82) two banking failures occurred, but they were not of much moment. We allude to the temporary suspension (20th August 1772) of John Fyffe, Edinburgh, who was probably more an agent for country banks than a banker on his own account; and the collapse (1774) of the Merchant Banking Company of Glasgow, who had closed their doors during the difficulties of 1772, but who were resuscitated by the public spirit of the western metropolis. The creditors were paid in full. [Boase is the only authority for their stoppage in 1774, when, he says, they were compelled to wind up. Somers erroneously indicates that they did not survive 1772. We find, however, that in a shipping advertisement in the Mercury of 10th July 1784, reference is made "to James Robertson, Merchant Bank, Glasgow"; and they advertised on 30th August 1788 a forgery of their £1 notes, dated 2nd February 1782. If, therefore, they stopped again in 1774 they must have resumed. The estate, however, was sequestrated.]

In 1774 the Bank of Scotland made a third and successful attempt to establish a branch system in the provinces. The localities first selected were Dumfries and Kelso. Next year an office was opened in Ayr; and shortly thereafter, their operations were extended to Kilmarnock, Inverness, Aberdeen, and Stirling. That at this time their funds were accumulating in their hands seems to be indicated by an advertisement they issued on 3rd May 1775, offering to lend money at Whitsunday on heritable security. This loan, we are told, was soon completed. The improvement of the gold coinage also occupied the attention of the Bank at this time. That reform had been prescribed in 1773 (Act 13, Geo. III. cap. 71). That it was much needed is evident from the fact that, including both England and Scotland, it entailed a loss of upwards of one million sterling, £300,000 of which fell on the holders of light coin. Silver coins, in sums of £25 and upward, were ordered to be taken at 5s. 2d. per oz. At the same time the Mint price of gold was fixed at £3: 17 :10-. The Bank of Scotland seems to have bought light gold at £3:17s. per oz., which price they subsequently reduced to £3 : 16s. The Royal Bank was appointed to give out new coin for the light coin called in. [Boase, p. 92. From a notice in the Scots Magazine, 1773, p. 443, however, the Bank of Scotland appears to have begun giving the Mint price on 20th August 1773.]

By a second Act of Parliament, obtained in 1774, the Bank of Scotland was authorised to increase its capital from £100,000 to £200,000. It would appear that up to 1773 the amount of capital called up was 80 per cent; and in that year " it was resolved to make a call for the remaining two-tenths of their capital not yet paid up, by which the bank will be enabled to give an aid more effectually to the country, now that Messrs. Douglas, Heron & Co. have given up the banking business." According to a pamphlet which appeared in 1778, but for the accuracy of which we cannot vouch, the Bank of Scotland attempted in a discreditable manner to acquire, through the agency of a private banking firm, a secret influence in the management of the Royal Bank. Their mode of doing this was to enable their friends to purchase the stock of that bank in sufficient quantities. This plot, if it was actually ever laid, does not appear to have had any effect on the policy of the intended victim. But if one pamphleteer abused the Bank of Scotland, another who appeared about the same time was not less animated (although less effective) in his reflections on the Royal Bank. About the same time there was a rumour of a projected union between the two banks, which had perhaps some connection with the incident to which we have just referred; but it does not appear that open overtures were made on the subject. It is more than probable that any desire which may have existed on the part of the Bank of Scotland for the accomplishment of this object—the Royal Bank appears to have been entirely passive in this drama—never assumed a very definite shape. At this time an animated warfare was also being carried on between the Glasgow and Aberdeen bankers.

We get a glimpse of the internal relationships of the banks at this time from the records of the Dundee Bank. [Boase, p. 117.] Wm. Cuming & Sons, their agents in Edinburgh, had demanded a salary of £200 a year, with a commission of ¼ per cent, besides interest, on any advance beyond £3000. They refused £150 salary, and 1/8 per cent commission on advances. Bertram, Gardner & Co., however, undertook the agency on these terms; agreeing also to allow interest at 3 per cent, and to charge at 5 per cent, on the balance of the account, as it happened to be in favour of or against the Dundee Bank. Their position was not so good as that of the Cumings. They failed in 1793, at which time they still retained the agency; but, although they did not pay their creditors in full, it is probable that no loss occurred to the Dundee Bank, as the balances seem to have been running against the latter. As at this time the assets of the bank were little over £50,000, and the payments through the Edinburgh agents about £100,000 per annum, the terms look sufficiently liberal to occasion surprise that the Cumings should have been so stiff.

With the advent of peace in January 1783, there dawned on Britain a period of comparative prosperity, during which mechanical science made considerable progress. The utilisation of steam as a motive power; the improvements of Arkwright and others, on machinery for the manufacture of textile fabrics; and the improvement in the means of communication throughout the country, by the regular organisation of mail-coach routes, and by the formation of canals, at once evidenced a material advance in the intelligence of the nation (of which the resolution come to a few years later to abolish the slave trade was one of the earliest fruits), and provided the means for carrying out their enlarged views. Alluding to this satisfactory change, the directors of the Royal Bank, in the course of an unfortunate rupture which occurred between them and an important private banking house some thirty years later, make the following statement: "The fact is, that during the times to which Messrs. Ramsays, Bonars, & Co. allude, more especially from 1783 to 1792, the circumstances of the country underwent a more favourable change than they had ever done in so short a period at any former time. The improving agriculture and trade of the country at this time required a much greater circulation. Hence the banking business became more profitable, and the Royal Bank among others shared in the prosperity of the times." During the same period the average dividend of the Bank of Scotland, on an enlarged capital, was higher than for some time previously; and a great increase occurred in the amount of capital devoted to banking in Scotland. The latter movement appears to have been inaugurated by the Royal Bank, who, in March 1783, added to their original capital of £111,347:19 : 10 5/12 a sum of £38,652 : 0 : 1 7/12, thereby raising it to £150,000. In this year also they opened a branch in Glasgow.

In June following they obtained their fourth charter, which authorised a further increase to £300,000. This operation was carried out at Midsummer, 1784. Under the authority of a fifth charter, dated 5th June 1788, they again doubled their capital. The former increases, and £100,000 of the increase in 1788, were made out of profits, without any payment on the part of the proprietors. In this connection the following contemporary newspaper notice is interesting: "The public will be happy to be informed that the Royal Bank of Scotland has just obtained a new charter from the Crown, empowering the proprietors to double their capital. . . . It will now be no less than £600,000. When it is considered how liberal this bank has been for these many years past, in the manner of transacting business; what facilities they have given to the landed, mercantile and manufacturing interests of the kingdom ; and how much they have done, on the present emergency, for the support of public and private credit, every person must rejoice at their prosperity, as it will enable them to do still more for the advantage, not only of the proprietors, but of the nation at large." [Caledonian Mercury, 12th June 1788.] At Christmas 1793, the capital was further enlarged from £600,000 to £1,000,000, but without any transference from profits.

The Bank of Scotland was not long in following suit. As we have already seen, they had doubled their capital in 1774. In 1784 they obtained their third Act of Parliament, authorising an increase from £200,000 to £300,000. Only proprietors holding two shares or more were permitted to apply for the new capital. They were entitled to one new share for every two old shares held. This seems unfair to holders of single and odd shares; but, although the terms of the notice are obscure, it would seem that holders could obtain the value of their proportions by transferring their right to subscribe. Subscription was limited to three months from 27th July 1784. A call of 20 per cent was made, payable 15th December. In 1792 they got a fourth Act to permit an addition of £600,000, and in 1794 the capital was further raised to £1,000,000. Unlike the Royal Bank, however, the subscriptions were not fully called. How they amalgamated the original £100,000, which, as we saw, was fully called, with the subsequently created capital, does not appear; but it is probable that the 20 per cent called in 1773 was repaid to the stockholders.

But it was not only in Edinburgh that long steps in the development of banking were being taken. Although on a much smaller scale, the provinces also were making decided advances. Full details regarding the country banks are awanting; but the following particulars relating to the Dundee Banking Company are significant. In 1784 the paid-up capital was increased, out of profits, from £8560 to £10,700; in 1786 a call was made, raising it to £21,400; and in 1794 a further addition was made, which raised it to £31,700. About three-fourths of the last-mentioned sum was, however, partly repaid to the partners, and partly written off as lost, and it was not until 1839 that this decline was fully made up again. The profits, during the period with which we are dealing, do not seem to have kept pace with the increase of capital. It may be presumed that other provincial banks contributed a share in the increase of banking capital; but, at any rate, there was a striking tendency to the erection of new banks. The Paisley Banking Company was established in 1783; the Merchant Banking Company of Stirling in 1784; the Greenock Banking Company, and Andrew, George & Andrew Thomson, a small banking house in Glasgow, [This firm were the victims of a remarkable robbery narrated in Banking in Glasgow, p. 16. "On Friday night, 29th October 1791, a mahogany box containing £1600 in guinea and twenty shilling notes of Messrs. Thomsons' issue, and twelve bills, which had been put in a small sack, and sent on a carrier's cart from Cumnock to Glasgow, was stolen in going along the streets. A reward of £200 was advertised, and 'no questions asked.' On the 17th November following, the box was found in a dunghill in Saltmarket. It had not been opened. The reward was paid to the lucky finder."] in 1785; Campbell, Thomson & Co., Stirling, 6th January 1787; the Falkirk Banking Company in 1787; the Paisley Union Bank Company in 1788; the Dundee Commercial Banking Company, and the Leith Banking Company, in 1792.

At this time a somewhat curious advertisement [It appeared in the Caledonian Mercury of 27th November 1784.] was issued by the Stirling Banking Company which is interesting as throwing a sidelight on the circumstances of the period. It is as follows: "The Directors of the Stirling Banking Company think it incumbent on them to give this notice to the public, —That of late, some notes, dated at Stirling, and signed by Robert Belch and James Drysdale, have appeared, and probably may be artfully passed upon simple people, by some interested persons, for notes of the said Banking Company, which must be considered not only as an imposition on the public, but also an injury done to the said Company. No public intimation of those concerned in the business has been given, nor of any bond of security to the public being lodged; but it is reported that the company for which Robert Belch acts, consists of a Country Schoolmaster near Glasgow, and a Farmer at Calder, who, it is said, has absconded. The business is in the hands of some boys who are minors, and not answerable for their transactions. The Directors therefore give this notice to put people on their guard, and appoint their Cashier to get this advertisement inserted in the public papers, and to sign the same.

"DAVID ROBERTSON, Cashier.

"STIRLING, 25t& .November 1784."

Of course, none of these banks were corporate bodies; for at that time, and for many years thereafter, the only way of obtaining corporate privileges was by obtaining the special consideration of the Crown or of Parliament. They were all, therefore, private partnerships; but most of them were on the joint-stock principle, having a definite amount of transferable capital divided into shares. Some of them, however, were nothing more than banking firms, consisting of a very few individuals, although taking a local designation. The only banking corporations existing at that time were the Bank of Scotland, and the Royal Bank of Scotland. The British Linen Company, although also a corporation, and actively carrying on banking business, were not nominally authorised to act as bankers until 1849. It is worthy of notice, in connection with the chronic agitation regarding the rights and privileges of banks, that the essential difference between the old banks as public corporations, and the new banking companies as private partnerships, was, until comparatively recent times, invariably taken for granted. When, however, incorporation became attainable by simple registration under a general statute, the distinction was to a large extent lost. The subsequent growth of the younger banks, to dimensions similar to those of their older rivals, has now almost obliterated the distinction to all but those who have carefully studied the subject. This leads many to assert, that the old banks have had special privileges conferred on them. The truth is, that the old banks started under the only conditions that were possible at the time they were formed. Since then they have grown in proportion to the progress of the work they commenced and carried on to the benefit of the public; but they have not otherwise altered, nor have they had any further special privileges conferred on them. The change which has taken place is entirely on the part of the other banks, who have, from time to time, reaped the benefit of subsequent legislation, which has gradually extended to them all, or nearly all, the advantages which could only be bestowed formerly by the special interposition of the sovereign individually, or by concurrence with the legislature. It is not out of place here to refer specially to the question of limitation of liability of members of corporations, for contemporary records are full of references to the subject. These references, however, are never connected with any questioning of what is now a sometimes debated point. They never have any other phase than simply pointing out the difference existing, in this and other respects, between the "public banks" and the "new banking companies,"—for so they were usually respectively designated.

The profitableness of the banking business at this time is indicated by the high value of Royal Bank stock, £900 of which, with the benefit of the new subscription, sold in April 1784 at from £375 to £393 per cent. "This is by far the greatest price ever given for any bank stock in this country." [Mercury, 12th April 1784.]