History of Banking in Scotland

THE year 1844 marks a distinct revolution in the constitution of banking in the United Kingdom. Owing to the pernicious effects of special legislation in favour of the Bank of England, the natural development of banking in England had been greatly hampered. The Bank of England would neither themselves supply the necessities of the provinces (indeed, they could not have done so to more than a small extent), nor would they allow any other powerful establishment to minister to them. The consequence was that English provincial banking was perforce conducted by small private partnerships, whose responsibility was, as far as the public was concerned, a matter entirely of faith or conjecture. Until 1826 not more than six persons were permitted to associate themselves for the purpose of carrying on the business of banking. Thus for a period of one hundred and thirty-two years from the formation of the Bank of England, every encouragement was given to weak bankers; strong banks (with one exception) were absolutely prohibited; and the one powerful establishment, for whose special benefit the public interests were ignored, was not required, nor did it spontaneously endeavour, to supply the vacuum.

From this state of matters it very naturally followed that every financial crisis produced a long list of bank failures, and that, periodically, an outcry was made about the insecurity of bank notes. That the results were not worse than they actually proved, must be attributed to the general respectability of the persons with whom the public entrusted their financial affairs, and not to any beneficial element in banking legislation. That was tinkered from time to time, each operation encroaching slightly on the monopoly of the Bank of England; but the monopoly itself, the real element of weakness, was ever regarded as too sacred an institution to be absolutely removed. No Government would face such a daring operation, nor is it probable that any actually recognised it as the proper remedy. In 1826, as we have already seen, the nearest approach to this course was taken ; but the operation was only half accomplished.

Sir Robert Peel's powerful and practical mind recognised the necessity of putting banking legislation on a proper footing. He saw the weaknesses of the existing system, and wisely determined to remove them. His diagnosis of the case was, however, in one essential particular, very deficient, and his treatment was hampered by preconceived ideas. He certainly did good—he succeeded in establishing the convertibility of bank notes, or, at least, in minimising the danger of their proving inconvertible. But he accomplished this by creating a most cumbrous and artificial system to supersede a simple but pernicious one, in place of sweeping away all monopolies and permitting a healthy and natural development. He failed to study exhaustively the history of the case. He saw correctly enough the existing condition; he saw that banks were weak, and that notes were sometimes not convertible either on demand or at any subsequent period. He therefore came to the conclusion that the system of private issues was bad, and should be discouraged. He appears entirely to have overlooked the vast public benefits derivable from such issues; the danger attaching to them was too close to his mind's eye to allow him an unbiassed judgment.

All that he really contended for—that is, the convertibility of the note—might have been effectually secured without paralysing the provincial issues. He might have absolutely abolished issues without security, provided the right of issue had been preserved, and the public interests would not have been injured; but by drawing a hard and fast line, beyond which issues could not go, he prevented bankers from ministering to the wants of the public in as great a measure as they might have done. He seized the idea that note-issuing and banking were essentially distinct; that the former was the prerogative of the State, and that the latter should be conducted without connection with the former. He refused to recognise the danger of entrusting Governments with the power of paper issues, and he failed to appreciate the great public benefit of the association of issuing with general banking. He therefore devised a measure which should so far conciliate existing interests, but tend to the abolition of private issues, and leave the trade of banking absolutely free. As we will see, lie succeeded in establishing a new monopoly, and in restricting the freedom of banking.

On 7th May 1844, he introduced a bill, which, on 19th July following, became the Act 7 and 8 Viet., c. 3 2, "to regulate the issue of bank notes, and for giving the Governor and Company of the Bank of England certain privileges for a limited period." We cannot do better than quote the words of a contemporary writer in describing the Act:--"The Bank's charter was renewed by the Act 7 and 8 Viet., cap. 32, 19th July 1844. Its chief points were as follows:-1. After 31st August 1844, the issue of notes to be by the Bank, acting by a committee of directors, under the name of `The Issue Department of the Bank of England.' 2. Securities of £14,000,000 to be set apart for this, and gold to be held for amount of notes beyond this. 3. If any bank of issue ceases issuing notes, the Crown in Council may authorise the Bank's Issue Department to hold securities for two-thirds the amount of that bank's issues, and increase the £14,000,000 of notes against securities to that extent. [This has since been done to the extent of £4,450,000.] 4. Weekly accounts of the bank's position to be published in the Gazette. 5. Bank to pay £60,000 more than the £120,000 settled in 1833 for their privileges, and all profits on notes beyond £14,000,000 to accrue to the public. 6. No new banks of issue to be permitted after 6th May 1844. 7. Any bank ceasing to issue notes not to be allowed to resume issues. 8. All banks of issue to be allowed to issue an amount equal to their average circulation for twelve weeks preceding 2 7th April 1844. 9. Bank of England to be allowed to compound with private banks of issue to withdraw their notes, and get a commission not exceeding one per cent, till 1st August 1856. 10. Privileges of the Bank to continue till twelve months' notice after August 1855." [Boase, second edition, p. 428.]

Of these provisions, the only one directly affecting banking in Scotland is the 6th. By it the formation of new banks of issue, which had hitherto been freely exercised, was prohibited. There were nineteen banks of issue in Scotland on 6th May 1844. Their total average circulation was ascertained to be £3,087,209, which amount consequently became their authorised issue of bank notes. Since then, by the failure of two banks and the absorption of seven banks, the number of banks of issue has been reduced to ten, and the authorised issues to £2,676,350. The present average circulation of all the banks is about £8,000,000.

Further legislation was deferred until next year, when the cases of Ireland and Scotland were dealt with specially. The Irish Act, 8 and 9 Vict., c. 37, 21st July 1845, rectified one great evil which had resulted from the establishment of the Bank of Ireland on principles of special privilege, as in the case of the Bank of England. Hitherto no partnership or company consisting of more than six persons, other than the Bank of Ireland, had been permitted to conduct banking business in Dublin, or within fifty miles of it. This prohibition was abolished by the 1st section of the Act, from and after 6th December ensuing. Provision was made for the repayment of sums advanced by the Bank of Ireland for the public service, and for the dissolution of the bank if determined on. Bank of England notes were not to be a legal tender in Ireland; banks might surrender their right of issue in favour of the Bank of Ireland; and notes for less than 20s. were prohibited. With the exception of a special provision referring to an agreement between the Bank of Ireland and the Tipperary Joint-Stock Bank (which had been established by John Sadlier in 1839, and failed in 185 6, with great loss to creditors through the fraud and forgery of its founder), under which the latter only issued notes of the former, the other enactments of the Irish Act are similar to those of the Scotch Act, to which we must now refer.

On the 21st July 1845 there received the Royal assent "an Act to regulate the Issue of Bank Notes in Scotland," 8 and 9 Viet., c. 3 8. This is the Act under which the note circulation of Scotland has since been conducted. As no special privileges existed among the Scottish banks (the matter of incorporation was entirely within the power of the Crown), legislation was comparatively simple. Sir Robert Peel was convinced that he could not extirpate either the small or the large notes, as the people strongly believed (in what he doubtless considered their ignorance) that their bank-note system had been an efficient agent in advancing the prosperity of the country. That the public of Scotland were correct in their view of this matter, will, it may be hoped, be evident from the former chapters of this history. At the same time it may be conceded in favour of Sir Robert Peel's theories, that the usefulness of the notes was not in 1845 what it had been in former times. The paper currency, formerly indispensable to the commerce of a country which was too poor to indulge in the precious metals, was no longer absolutely necessary under the happier circumstances to which the country had attained; but the people liked the notes, and continued to regard their existence as of as much necessity as formerly.

It does not appear from contemporary writings that the true value of bank-note issues in modern times was actually appreciated. The defenders of the status quo always drew their arguments from past experience, which, as we have seen, was every year losing, to some extent, its applicability. The great use of bank notes in relation to banking at the present time, from a public point of view, is their function of enabling banks to extend banking facilities into all parts of a country—thinly-populated and poor districts as well as dense centres and wealthy provinces. The saving in wear and tear of coin is another important benefit. Not only is there much less loss in this way, but such as there is practically falls on bankers.

Sir Robert Peel, however, was determined to restrict to some extent the rights of issue in Scotland, although he was forced to confer freer powers of action than he had accorded to English bankers. The 1st section of the Act re-enacts the prohibition of new issuing banks contained in the English Act, and made arrangements for ascertaining the average circulation of each existing bank, so that the amount of their authorised issues might be fixed. Sections 2, 3, and 4 provided that uniting banks might retain the full powers of issue enjoyed by them separately. Section 5 prohibits notes for fractional parts of £1. This was no new provision, as it had existed since 1765. Section 6 permits banks to issue to the extent of their authorised issues, plus the average amount of gold and silver coin held at their head offices during every successive period of four weeks. Section 7 provides for the rendering to the Commissioners of Stamps and Taxes of weekly accounts relating to note-issues. Section 8 defines bank notes in circulation as those which had left bank offices and had not been returned thereto. Section 9 enjoins Commissioners of Stamps and Taxes to publish monthly returns of the state of the bank issues. Section 10 regulates the mode of ascertaining the average amount of notes in circulation. Section 11 enacts that silver coin shall only count as against the note-issues to the extent of one-fourth of the gold so held. Section 12 empowers the commissioners to inspect bankers' books for the purpose of ascertaining the accuracy of returns. This power has never been exercised. Section 13 orders all bankers (except the three limited banks) to render a yearly return of the names of all partners. Section 14 prescribes that the penalty on excess of issues, beyond the authorised circulation and the metallic reserve, shall be forfeiture of the excess. Section 15 provides that Bank of England notes shall not be legal tender in Scotland. This was merely a specific enactment of the existing law. Section 16 makes notes under 20s. not negotiable. Section 17 prescribes the form of notes for amounts from 20s. to £5. Sections 18 and 19 prescribe penalties for the non-observance of provisions of the Act. Section 20 exempts cheques from inclusion under the provisions of this Act. Section 21 refers to the mode of recovering penalties; and Section 22 (the last) interprets the words used in the Act.

Although this Act does not square in all respects with economic principles, there can be little doubt that its main provisions have proved salutary to the public interest. The needless formation of new banks at once ceased, much to the public benefit. Nov that the note-issues exceed the authorised circulation, a bullion reserve on the part of every bank is secured. No doubt a well-regulated bank would hold such a reserve without being forced to do so; but then all banks are not well regulated. The provisions in favour of amalgamating banks have tended to the elimination of small and weak banks. A system of large and wide-spread banks was encouraged. All these benefits, however, are more incidental to the operation of the Act than actually designed by it. The convertibility of the notes, and the prevention of over-issues, were the great objects of Sir Robert Peel's measure. But it (lid not secure, although it perhaps strengthened, the convertibility of the notes; and over-issues were already impossible under the long-established system of exchanges subsisting among the banks.

Some positive disadvantages, moreover, attach to the Act. A monopoly of banking, although not directly established, has been a practical outcome of its provisions, for it is believed to be impossible to successfully conduct a non-issuing bank in competition with the banks of issue. The relative proportions of the authorised issues also, although accurate at the time they were fixed, are now out of keeping with the actual circulations of the various banks. But, whether the Act has fully answered the real intentions of its framer or not, it has not interfered with the public interest in retaining a wide-spread system of banking, and it has tended to the solidification of the banking institutions of the country. Had England been blessed with as good an Act, it would have been spared many grievous banking questions, which have disturbed the equanimity of economists and statesmen.