Sect. VII.—: Banks (Scotch).

The amount of notes afloat varies from time to time, with the varying condition of the country, the state of credit, and so forth. It may, however, in ordinary years, be estimated as follows, viz.—

Of this sum, from five to six millions is usually in the till of the banking department of the bank.

The Act of 1708, preventing more than six individuals from entering into a partnership for carrying on the business of banking, did not extend to Scotland. In consequence of this exemption, several banking companies, with numerous bodies of partners, have existed, for a lengthened period, in that part of the empire.

The Bank of Scotland was projected by Mr. John Holland, merchant, of London, and was established by Act of the Scotch Parliament (Will. III. Parl. 1, § 5) in 1695, by the name of the Governor and Company of the Bank of Scotland. Its original capital was £1,200,000 Scotch, or £100,000 sterling, distributed in shares of £1000 Scotch, or £83: 6: 8 sterling, each. The Act exempted the capital of the bank from all public burdens, and gave it the exclusive privilege of banking in Scotland for 21 years. The objects for which the bank was instituted, and its mode of management, were intended to be, and have been, in most respects, similar to those of the Bank of England. The responsibility of the shareholders is limited to the amount of their shares.

The capital of the bank was increased to £200,000 in 1744, and was enlarged by subsequent Acts of Parliament, the last of which (44 Geo. III. c. 23) was passed in 1804, to £1,500,000, its present amount. Of this sum £1,000,000 has been paid up. The last-mentioned Act directed that all sums relating to the affairs of the bank should henceforth be rated in sterling money; that the former mode of dividing bank stock by shares should be discontinued; and that, for the future, it should be transferable in sums or parcels of any amount. On the union of the two kingdoms in 1707, the Bank of Scotland undertook the recoinage, and effected the exchange of the currency in Scotland. It was also the organ of government in the issue of the new silver coinage in 1817.

The Bank of Scotland is the only Scotch bank constituted by Act of Parliament. It began to establish branches in 1696, and issued notes for one pound so early as 1704. The bank also began, at a very early period, to receive deposits on interest, and to grant credit on cash-accounts, a minute of the directors with respect to the mode of keeping the latter being dated so far back as 1729. It is, therefore, entitled to the credit of having introduced and set on foot the distinctive principles of the Scotch banking system, which, whatever may be its defects, is perhaps superior to most other systems hitherto established. Generally speaking, the Bank of Scotland has been cautiously and skilfully conducted; and there can be no doubt that it has been productive, both directly and as an example to other banking establishments, of much public utility and advantage.

It may be worth mentioning, that the Act of Will. III. establishing the Bank of Scotland, declared that all foreigners who became partners in the bank should, by doing so, become, to all intents and purposes, naturalised Scotchmen. After being for a long time forgotten, this clause was taken advantage of in 1818, when several aliens acquired property in the bank in order to secure the benefit of naturalisation. But after being suspended, the privilege was finally cancelled in 1822.

We subjoin an official abstract of the constitution and objects of the Bank of Scotland, printed for the use of the proprietors;—the terms and mode of transacting business are, of course, sometimes altered, according to circumstances.

I. The Bank of Scotland is a public national establishment; erected and regulated by the legislature alone: and expressly as a public bank in this kingdom; for the benefit of the nation, and for the advancement of agriculture, commerce, and manufactures; and for other objects of public policy.—(Will. Parl. 1, § 5; 14 Geo. III. c. 32; 24 Geo. III. c. 8; 32 Geo. III. c. 25; 34 Geo. III. c. 19; 44 Geo. III. c. 23.)

II. The statutory capital is at present £1,500,000 sterling. It is raised by voluntary subscription; and has been subscribed for. £1,000,000 has been called for, and paid in.—(44 Geo. III. c. 23.)

III. Subscribers, if not under obligations to the bank, may, at pleasure, transfer their right. If under obligation to the bank, the obligation must be previously liquidated; or the proceeds of the sale, at a price to the satisfaction of the directors, must be applied towards such liquidation. Transfers are made by a short assignment and acceptance thereof, both in a register appointed for that purpose. The expense, beside the government stamp, is 11s.—(Will. Parl. 1, § 5.)

IV. Bank of Scotland stock may be acquired, in any portions, by any person, community, or other lawful party whatsoever; without selection, exclusion, or limitation of numbers.—(Will. Parl. 1, § 5; 44 Geo. III. c. 23.)

V. Bank of Scotland stock may be conveyed by will, and, if specially mentioned, without expense of confirmation. It cannot be arrested: the holder’s right may be adjudged. Dividends may be arrested.—(Will. Parl. 1, § 5.)

VI. The Bank of Scotland is a public corporation by Act of Parliament. The bank’s transactions are distinct from those of the stockholders: and theirs from those of the bank.—(Will. Parl. 1, § 5.)

VII. The establishment is expressly debarred from any other business than that of banking.—(Will. Parl. 1, § 5.)

VIII. The management is vested, by statute, in a governor, deputy governor, twelve ordinary, and twelve extraordinary directors. They are chosen annually, on the last Tuesday of March, by the stockholders having £250 of stock or upwards. Those above £250, have a vote for every £250, to £5000, or 20 votes. No person can have more than 20 votes. The governor must hold, at least, £2000 of stock; the deputy governor £1500; and each director £750. They swear to be equal to all persons; and cannot hold any inferior office in the bank.—(Will. Parl. 1, § 5; 14 Geo. III. c. 32; 44 Geo. III. c. 23.)

IX. The executive part is conducted by a treasurer, secretary, and other public officers, all sworn. Those having the official charge of cash find due security.—(Will. Parl. 1, § 5.)

X. The board of directors sits for the general administration of the bank, at the bank’s public head office in Edinburgh. The local business of that district is also conducted at that office. For the local business in the other parts of the kingdom, the bank has its regular public offices in the principal towns. At each of these offices there is the bank agent or cashier, who gives due security, and conducts the bank’s business for that district in the manner after mentioned.—(Will. Parl. 1, § 5.)

XI. The bank takes in money at all its public offices, on deposit receipts or on current deposit accounts. At the head-office drafts on the branches, and at the branches drafts on the other branches and on the head-office are granted. Both at the head-office and branches drafts are granted on the London, Dublin, and English and Irish provincial correspondents of the bank. All receipts and drafts are on the bank’s engraved forms, and bear to be granted “for the Bank of Scotland” or “for the Governor and Company of the Bank of Scotland.” At the head office official documents are signed by the treasurer, and at the branches by the agents, and all are countersigned.

Remittances can be made to the principal colonial and continental towns; and bills, payable in the colonies, and in foreign countries, can be negotiated through the bank.—(Resolution of Court, 1793, as since modified.)

N.B.—The bank has always allowed interest on deposits, at a rate varying according to circumstances. At present (November 1857) it is 4 per cent.

XII. Bills on London, Edinburgh, or any town in the United Kingdom, are discounted at all the bank’s public offices. The bank’s agents judge, in ordinary cases, of the bills presented; so that parties meet with no delay. The bank does not re-issue the bills which it has discounted.—(Resolution of Court, 23d Feb. 1789, and Subsequent Modifications).

XIII. Government stock and other public funds may be purchased or sold, and dividends thereon may be received through the Bank.

XIV. The bank gives credit on cash accounts at any of its offices, on bond, with security. The security may be personal co-obligants, or such other security as may be specially agreed on. Applications for cash accounts are given in to the office where the cash account is wanted, and must specify the credit desired, and the security proposed; and the individual partners, where copartneries are proposed. Cash accounts are granted by the directors only; and are not recalled unless by their special authority. It is understood that these credits are not used as dead loans, to produce interest only. In the fair course of business, the advantage of the bank is consulted by an active circulation of its notes, and by frequent repayments to it in a way least affecting that circulation.—(Resolution of Court, 6th Nov. 1729, and 23d Feb. 1789).

XV. The Bank’s dividend has been for some time 8 per cent. per annum on its paid-up capital of £1,000,000 sterling. The dividends are paid regularly twice a year, without expense. They may be drawn either at the bank’s head office, or at any of its other offices, as most agreeable to the stockholder.

The above may suffice as a general outline of the mode in which the business of banking is conducted in Scotland.

The Royal Bank of Scotland was established in 1727. Its original capital of £151,000 has been increased to £2,000,000.

The British Linen Company was incorporated in 1746, for the purpose, as its name implies, of undertaking the manufacture of linen. But the views in which it originated were speedily abandoned; and it became a banking company only. Its capital amounts to £1,000,000.

None of the other banking companies established in Scotland are chartered associations with limited responsibility, the partners being liable, to the whole extent of their fortunes, for the debts of the firms. Some of them, such as the Edinburgh and Glasgow Bank, the National Bank, the Western Bank, the Commercial Bank, &c., have very numerous bodies of partners. Their affairs are uniformly conducted by a Board of Directors, annually chosen by the shareholders.

The Bank of Scotland began, as already stated, to issue £1 notes so early as 1704; and their issue has since been continued without interruption. “In Scotland,” to use the statement given in the Report of the Committee of the House of Commons of 1826, on the Promissory Notes of Scotland and Ireland, “the issue of promissory notes payable to the bearer on demand, for a sum of not less than 20s., has been at all times permitted by law; nor has any act been passed limiting the period for which such issue shall continue legal in that country.”

All the Scotch banks receive deposits of so low a value as £10, and sometimes lower, and allow interest upon them.

The interest allowed by the banks upon deposits varies, from time to time, according to the variations in the current rate of interest. At present (1857) it amounts to 4 per cent. And it has been estimated, by the best authorities, that the aggregate amount of the sums deposited with the Scotch banks was, previously to the late panic, little, if any thing, under £50,000,000.

A witness, connected for many years with different banks in Scotland, and who had experience of their concerns at Stirling, Edinburgh, Perth, Aberdeen, and Glasgow, being examined by the Commons’ Committee of 1826, stated that more than half the deposits in the banks with which he had been connected were in sums from ten pounds to two hundred pounds. Being asked what class of the community it is that makes the small deposits, he gave the following answer; from which it appears that the mode of conducting this branch of the banking business in Scotland has long given to that country most part of the benefits derivable from the establishment of savings banks.

“Question. What class of the community is it that makes the smallest deposits?—

Answer. They are generally the labouring classes in towns like Glasgow: in country places like Perth and Aberdeen, it is from servants and fishermen, and that class of the community who save small sums from their earnings, till they come to be a bank deposit. There is now a facility for their placing money in the Provident Banks, which receive money till the deposit amounts to £10. When it comes to £10 it is equal to the minimum of a bank deposit. The system of banking in Scotland is an extension of the Provident Bank system. Half-yearly or yearly those depositors come to the bank, and add the savings of their labour, with the interest that has accrued upon the deposits from the previous half-year or year, to the principal; and in this way it goes on, without being at all reduced, accumulating (at compound interest) till the depositor is able either to buy or build a house, when it comes to be £100, or £200, or £300, or till he is able to commence business as a master in the line in which he has hitherto been a servant. A great part of the depositors of the bank are of that description, and a great part of the most thriving of our farmers and manufacturers have arisen from such beginnings.”

The loans or advances made by the Scotch banks are either in the shape of discounts, or upon cash-credits, or, as they are more commonly termed, cash-accounts.

A cash-credit is a credit given to an individual by a banking company for a limited sum, seldom under £100 or £200, upon his own security, and that of two or three individuals approved by the bank, who become sureties for its payment. The individual who has obtained such a credit is enabled to draw the whole sum, or any part of it, when he pleases, replacing it, or portions of it, according as he finds it convenient; interest being charged upon such part only as he draws out. “If a man borrows £5000 from a private hand, besides that it is not always to be found when required, he pays interest for it whether he be using it or not. His bank credit costs him nothing, except during the moment it is of service to him, and this circumstance is of equal advantage as if he had borrowed money at a much lower rate of interest.”—(Hume’s Essay on the Balance of Trade.) This, then, is plainly one of the most commodious forms in which advances can be made. Cash-credits are not, however, intended to be a dead loan; a main object of the banks in granting them is to get their notes circulated, and they do not grant them except to persons in business, or to those who are frequently drawing out and paying in money.

The system of cash-credits has been very well described in the Report of the Lords’ Committee of 1826 on Scotch and Irish Banking. “There is also,” say their Lordships, “one part of their system which is stated by all the witnesses (and, in the opinion of the Committee, very justly stated) to have had the best effects upon the people of Scotland, and particularly upon the middling and poorer classes of society, in producing and encouraging habits of frugality and industry. The practice referred to is that of cash-credits. Any person who applies to a bank for a cash-credit is called upon to produce two or more competent sureties, who are jointly bound; and, after a full inquiry into the character of the applicant, the nature of his business, and the sufficiency of his securities, he is allowed to open a credit, and to draw upon the bank for the whole of its amount, or for such part as his daily transactions may require. To the credit of the account he pays in such sums as he may not have occasion to use, and interest is charged or credited upon the daily balance, as the case may be. From the facility which these cash-credits give to all the small transactions of the country, and from the opportunities which they afford to persons who begin business with little or no capital but their character, to employ profitably the minutest products of their industry, it cannot be doubted that the most important advantages are derived to the whole community. The advantage to the banks who give these cash-credits arises from the call which they continually produce for the issue of their paper, and from the opportunity which they afford for the profitable employment of part of their deposits. The banks are indeed so sensible that, in order to make this part of their business advantageous and secure, it is necessary that their cash-credits should (as they express it) be frequently operated upon, that they refuse to continue them unless this implied condition be fulfilled. The total amount of their cash-credits is stated by one witness to be £5,000,000, of which the average amount advanced by the banks may be one-third.”

The expense of a bond for a cash-credit of £500 is 12s. 6d. stamp duty, and a charge of from 5s. to 10s. 6d. per cent. for preparing it.

There have been, until lately, comparatively few failures among the Scotch banks. In 1793 and 1825, when so many of the English banks were swept off, there was not a single establishment in Scotland that gave way. This superior solidity appears to have been owing to various causes, partly to the banks having, for the most part, large bodies of partners, who, being conjointly and individually bound for the debts of the companies to which they belong, go far to render their ultimate security all but unquestionable; and partly to the facility afforded by the law of Scotland, of attaching a debtor’s property, whether it consist of land or movables, and making it available for the payment of his debts. This last-mentioned circumstance was referred to as follows, in the report already alluded to.

“A creditor in Scotland is empowered to attach the real and heritable, as well as the personal estate of his debtor, for payment of personal debts, among which may be classed debts due by bills and promissory notes; and recourse may be had, for the purpose of procuring payment, to each description of property at the same time. Execution is not confined to the real property of a debtor merely during his life, but proceeds with equal effect upon that property after his decease.

The law relating to the establishment of records gives ready means of procuring information with respect to the real and heritable estate of which any person in Scotland may be possessed. No purchase of an estate in that country is secure until the sasine (that is, the instrument certifying that actual delivery has been given) is put on record, nor is any mortgage effectual until the deed is in like manner recorded.

In the case of conflicting pecuniary claims upon real property, the preference is not regulated by the date of the transaction, but by the date of its record. These records are accessible to all persons; and thus the public can with ease ascertain the effective means which a banking company possesses of discharging its obligations; and the partners in that company are enabled to determine, with tolerable accuracy, the degree of risk and responsibility to which the private property of each is exposed.”

But, on the whole, we are inclined to think that the long familiarity of the inhabitants with banks and paper money, and the less risk that has attended the business of banking in Scotland, have been the principal causes of the greater stability of the Scotch banks. Latterly, however, owing to the rapid growth of Glasgow, Dundee, and other commercial towns, the risk attending banking in Scotland has materially increased. And while hazard has been augmenting on the one hand, there appears, on the other, to have been a still more rapid decrease of that cautious policy that was supposed to be a characteristic of Scotch bankers. In the recent crisis two of the principal Scotch banks, the head-quarters of which were in Glasgow, were compelled to stop payments. They had very large capitals, the Western Bank £1,500,000, and the City of Glasgow Bank £1,000,000, with a great many branches, large amounts of deposits, and very numerous and wealthy proprietary bodies. Had their management displayed anything like ordinary skill and prudence, they might have gone triumphantly through a far more serious trial. But it was characterised, especially that of the Western Bank, by the most marvellous folly and recklessness. Having advanced immense sums to a few firms that never were entitled to any considerable credit, the Western Bank was so crippled that, for a lengthened period before their stoppage, they were reduced to the miserable expedient of sending up the bills they had discounted in Glasgow to be rediscounted in London; and when this resource failed them, and the other banks declined to come forward to their assistance, they had nothing for it but to shut their doors. On the affairs of the bank being investigated by a committee appointed for the purpose, it was found that they were in a much worse state than any one could have anticipated. Their entire losses are said to amount to the enormous sum of £2,020,584; so that, in addition to the capital and rest of the bank, making together £1,715,892, which have wholly disappeared, a further deficiency of £304,692 will have to be provided for! No such gigantic failure has ever occurred in Scotland; and it is not easy to imagine the misery of which it cannot fail to be productive.

Eventually, there can be no doubt that the creditors of the Western Bank will be fully paid, for the proprietary comprises some of the most opulent individuals in Scotland. Unhappily, however, it also comprises hundreds belonging to the middle and lower classes, who were tempted, by the dividend of 9 per cent., and the assurance of prosperity, to embark in the concern. And a loss that may be of little or no consequence to the former may send the latter to the workhouse.

The ruin in which the bank has been involved did not come suddenly upon it. On the contrary, it has been accumulating for years. And yet the directors took no steps, or none that were efficient, to arrest the progress of the evil; nor did they apprise their confiding constituents of the perilous condition into which the bank had got. Concealment was practised to the very last moment, till the concern was irretrievably sunk in the abyss of bankruptcy. It is much to be wished that directors who have so acted were really responsible for their conduct. No charge of corruption is brought against them; but their inattention to, and neglect of, the important interests committed to their charge, has been wholly inexcusable. They were bound, on undertaking the office of directors, to bestow unremitting care and diligence upon the performance of the duties which it imposed on them. They might neglect their own business; but they could not, without a flagrant breach of trust, neglect the duties they had undertaken to discharge on account of others. This, however, is precisely what they have done. They appear to have selected the most reckless and incompetent managers, and then to have given them carte blanche. Whatever such conduct may be in law, it is, morally and politically, in the highest degree culpable. Hundreds have been sent to the antipodes and the treadmill for offences that were comparatively innocuous. No doubt, however, the grand source of mismanagement in banks and other associations is to be found in the apathy of the shareholders, in the blind and often undeserved confidence they place in those who are, no matter how, at the head of their concerns. If those who may be ruined by the proceedings of their own officers and servants will not look after them, it were idle to attempt to throw such a duty upon others.

In a public point of view the stoppage of the Glasgow banks was productive of the very worst results. By creating a panic, and occasioning a heavy internal demand for gold, it may indeed be said to have been the main cause of the suspension of the Act of 1844.

The recent occurrences would seem to show that the time for the suppression of £1 notes in Scotland has arrived. The panic, which has had such mischievous results, principally prevailed among the smallest class of depositors and the holders of £1 notes. Everybody in the least degree familiar with money matters knew that, however the Western Bank might have been perverted and abused, its solvency could admit of no doubt. But such considerations could not be expected to influence the lower classes, who are the principal holders of £1 notes, and to whom large sums are due by the savings and other banks; and hence the run on the Western Bank, the City of Glasgow Bank, and on other banks whose character stood highest. It may be fairly presumed that if £1 notes be permitted to continue in circulation, the like results will take place on future occasions. And with a view to obviate their recurrence, and to strengthen the basis of the currency, sovereigns should be introduced instead of £1 notes. The change would occasion little, if any, immediate loss to the banks, and the increased security of which it would be productive would be as advantageous to them as it would be to the other classes of the community.

We also think that it would be good policy to make Bank of England notes legal tender in Scotland and Ireland as well as in England. This might occasionally be a convenience to all parties, and it would tend to familiarise the public in those parts of the empire to the use of Bank of England notes, which ought eventually to be the only notes in circulation.