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HAVING traced the
progress of Scottish banking from its modest commencement in 1695,
through trials, failures, and brilliant successes, to the time of its
greatest trial, we may appropriately add to our sketch a review of the
position of the surviving banks, as exhibited in their published balance
sheets for 1883, and by a contrast of that position with the statistical
condition of banking in Scotland eighteen years previously—the date at
which the banks first generally adopted the practice of making a public
disclosure of their financial state; for, until 1865, almost absolute
secrecy shrouded their affairs. Except the amount of their capitals, and
the rates of dividends they paid, but little was known regarding them
which could serve as a guide to intending purchasers of bank stock.
Customers had to exercise blind faith as to the solidity of the
establishments they dealt with, and economists had to trust pretty much
to imagination in estimating the position of banking and its relations
to the progress of the nation.
Since 1865 we have had an
unbroken series of yearly statistics, portraying, with nearly complete
accuracy, the position of the several banking establishments. The
elements vitiating the accuracy of the portraiture are not numerous, nor
do they materially affect the general result. The denouement of the City
of Glasgow Bank showed that its official reports were not worthy of
implicit belief; but it is impossible to dispense with them. Another
result of the same catastrophe was the ascertainment of the fact that
the actual capital devoted to banking had not been so great as had been
supposed, many of the banks having held large portions of their capitals
in their own names. Stock so held, while nominally still in existence,
and capable of being transferred without formal re-creation, was
practically non-existent, as it in no way exercised any power, or was
capable of meeting any responsibility. [This view of the question is
controverted by some bankers, on the ground that, the capital having
been actually created, taken up by subscribers, and not lost by the
bank, it must still exist, although purchased by the bank. The case of
the City of Glasgow Bank, however, supplies practical proof that this is
a purely technical or book-keeping view of the matter.] These holdings
having now been disposed of, there has really been a greater increase in
proprietors' funds than the official statements would lead one to
believe. Again, although a system of publicity is, in the main, very
superior to that of secrecy, it has some dangers special to itself.
There is an increased tendency to what may be called "racing," with the
resulting danger of over-exertion, the banks vieing with each other,
consciously or unconsciously, as to the creditableness of their annual
statements.
As we have already seen,
it was an old habit of Scotch bankers to pile up their profits from year
to year, and make a grand stroke when the accumulation had reached a
considerable point. While this practice, to the extent to which it was
carried, is inconsistent with the interests of proprietors who may not
hold long enough to participate in the distribution, there can be no
doubt that it sometimes saved the banks from the effects of large losses
which would otherwise have been difficult to deal with. A system of
publicity tends to prevent such a course of action, and, in order to put
on as good an appearance as for the time being they are entitled to, the
banks are apt, from time to time, to lessen the extent of the hidden
strength which, in times past, had secured their steady progress. Thus,
the reserved fund shown in the balance sheet—drafts on which have always
a serious effect in public estimation—tends to become the only source
from which extraordinary losses can be met. And such losses no amount of
prudence and foresight can avert—they can only provide for them.
Competing openly in the eyes of the public, each bank, urged on by its
shareholders, seeks to pay as high a dividend as its profits will allow.
When reverses come, a sharp reduction follows, producing unreasonable
disappointment on the part of investors, who seem to think they should
be able both to eat their cake and have it. Of course, the main point is
that provision should be made for extraordinary reverses of fortune,
and, if this be done to a sufficient extent by public additions to
reserve funds, the result may be the same in the long run; but the
system of hidden reserves has a steadying effect on the progress of an
establishment.
The progress during the
eighteen years which elapsed between the points of comparison is
marvellous, and much beyond the ratio of the increase in population. The
population of Scotland in 1865 was probably about 3,074,000, and an
official estimate for 1883 places it at 3,825,744. The increase would
thus be 751,744, or nearly 24½ per cent. But the deposits held by the
banks rose 45 per cent during the same period; indeed they had reached
that point much earlier—viz., in 1877—although they subsequently fell,
as a result of the crisis of 1878. It is probable that the improvement
thus shown is actually representative of a much greater advance of the
nation in material prosperity, for the competition of investment
companies of all kinds has, in an intensified degree, tended to lessen
the natural inflow of deposits. But, without reference to such matters,
it is a striking fact that while, in 1865, the twelve banks then
existing held deposit money equal to £18 : 12s. per head of the
population, the ten banks existing in 1883 held deposits equal to £21 :
14 : 1 per head of the population.
The aggregate liabilities
of the banks have increased in a slightly lower proportion than the
deposits. This is owing to the comparatively small increase in the
circulation of notes, and to a small decrease in the amount of paid-up
capital. The reduction of capital is due to the absorption of the
Central Bank and the failure of the City of Glasgow Bank. If allowance
be made, however, for the portions of capital held by the banks in their
own hands, and subsequently issued to the public, as already referred
to, it is probable that there has been no actual decrease in the total
capitals. The amount of circulation given by the reports of the banks is
not reliable as a basis of calculation, as the individual amounts are
merely those of the particular days on which the balances were struck.
The average yearly issues showed an increase of 34 per cent. Grouping
the banks for comparison, as Edinburgh, Glasgow, and country, according
to the location of their head offices, the distribution of the total
liabilities was, in 1865—Edinburgh, 62 per cent; Glasgow, 30 per cent;
country, 8 per cent. By 1883 the first group seems to have gained at the
expense of both the others, for the proportions in 1883 were—Edinburgh,
70 per cent; Glasgow, 23 per cent; country, 7 per cent. The failure of
the City of Glasgow Bank was, doubtless, the cause of this change, which
was, indeed, natural, as it could not be expected that two Glasgow and
three provincial banks would secure as much of the lapsed bank's
business as the five large Edinburgh banks.
A striking feature of the
increase in liabilities is supplied by the acceptances. (The drafts
current, although conjoined in the tables with the acceptances, as they
were not usually separated in the earlier reports, do not materially
affect this comparison.) The increase in this department of banking was
much more marked than that of any other, amounting to 85 per cent. It
would seem, however, that this is due mainly to that exceptionally good
department of acceptance business supplied by the colonial banks drawing
on London, and not so much to mercantile acceptances. The acceptances of
some banks actually decreased in amount.
While the public
liabilities of the banks were thus extended, the banks (lid much towards
supporting the proportion of proprietors' funds to them. Although, as we
have seen, there was a decrease to the extent of 4 per cent in the
amount of total capital, owing to the withdrawal of two banks, the
amount added to reserved funds was no less than 91 per cent, or twice
the proportion of increase in deposits. But the relative proportion of
the proprietors' funds to public liabilities was not quite so great as
in 1865, the proportions being 19 per cent in the earlier year against
16 per cent in 1883. But, if recent issues of stock be allowed for, it
is probable that that apparent falling off is deceptive.
Turning now to the assets
of the banks, some interesting features are manifested. The banking
advances, which might naturally have been expected to increase in
somewhat similar ratio with the deposits, have actually advanced at not
very much more than half the rate. This would seem to indicate that the
demand for banking accommodation had not progressed to the same extent
as the increase in wealth of the nation. There may have been a
determinate policy on the part of the banks to strengthen the banking
reserves, but it is not probable that they desired so large an increase
as had actually taken place—viz. 80 per cent. The outstanding
expenditure on bank buildings also shows a large increase. As there were
218 more bank offices than existed in 1865, a considerable increase is
natural. But the banks studied appearances as well ; for, while the
average cost of the buildings was formerly about £1600, the later amount
is £1943.
Considering the great
extension of the banking business which had taken place, a large
increase in net profits might have been expected. But, on the contrary,
the improvement was very small. The ten existing banks declared, in
1883, profits only 3 per cent in excess of those declared by the twelve
banks carrying on business in 1865. This comparison is, of course, quite
fair, as the Central Bank and City Bank businesses are enjoyed by the
surviving banks. It is thus evident that banking in Scotland was not, in
1883, nearly so profitable as it was eighteen years previously. To a
large extent this is due, doubtless, to the smaller proportion of funds
employed in banking advances, the reserve securities not yielding so
high a return. But other causes probably contribute to the result.
Perhaps allowance should be made for the fact that 1865 was a year of
high pressure in commercial activity, the price of money ruling high
during the greater portion of it, while 1883 was mainly one of low
rates. But this will not entirely account for the disproportion of
profits. The average rates of dividend and prices of stock are in
accordance with the rate of increase in profits. |
