CHAPTER XXIII

THE SCOTCH BANKS

[158]The functions performed by the eight Scotch banks and their 1,245 branches[159] are essentially similar to those already described as being carried out by their English brethren. The differences between the currency systems of the two countries are in degree rather than in essence. In Scotland the note issue has made a harder fight for its existence than in England, owing no doubt to the fact that the Bank of England's monopoly did not extend to Scotland and that the great Scotch joint-stock banks therefore extended the system of using notes as currency, while the development of joint-stock banking in England was necessarily opposed to it, since joint-stock banks in England with an office in London were unable to issue notes. Nevertheless, even in Scotland the advantages of the cheque have told in its favour, and, as will be seen below, liabilities of Scotch banks under note issue are now much smaller than those under deposit as current accounts.

DEMOCRACY OF SCOTCH BANKING

The Scotch note circulation increased from L5,332,000 in 1872 to L7,173,000 in 1908. This increase, when compared with the fact that the note issues of the English country banks have during the same period diminished almost to vanishing point, shows that the bank note is much more tenacious of life north of the Tweed. This is partly owing to the fact that in Scotland notes may be issued of the denomination of L1, whereas in England the smallest allowed is of L5, so that the note was thus circulated more easily among the poorer classes in Scotland and so gained and retained a hold upon a much wider circle of the community. In this respect, as in others, Scotch banking is more democratic than English, and provides its facilities for a poorer and lower class of the community, though this distinction between the banking systems of the two countries is being rapidly diminished. Especially in its early days it laid itself out much more readily to the encouragement of the small capitalist and borrower, often granting him facilities against security, or an absence of security, which would have been only regarded as feasible under quite exceptional circumstances in England. A very interesting system was at one time fairly general in Scotland, and is even now by no means obsolete. It was the system described as that of cash credits, by which borrowers were able to go to banks and obtain advances against the joint personal security of themselves and one, or two, or three friends. By this means, in which a kind of co-operative responsibility was recognised as a security by the Scotch bankers, very poor borrowers were enabled to obtain banking facilities, and many instances are recorded in which by a loan of this kind, of quite small importance from the banking point of view, foundations of fortunes have been laid and the general commercial prosperity of the community has been furthered in a very satisfactory manner. And even now the essential difference between Scotch and English banking is this readiness of the former to take into consideration the personal standing of the applicant rather than the stuff or paper which he brings to it as security for an advance.

USE OF NOTES AS "TILL MONEY" IN RELATION TO THE ESTABLISHMENT OF BRANCHES

Banking by branches in Scotland has proceeded even more rapidly than in England, and the percentage of branches per head of the population is higher in the northern part of the Kingdom. This wide diffusion of banking facilities in Scotland has been largely brought about by the fact that its banks, having the privilege of note issue, were able to hold their own notes as "till money," so economising in the matter of cash. The following passage is from a work entitled _Scottish Banking, 1865-1896_, by A. W. Kerr, author of a _History of Banking in Scotland_:

Were it not for the power to issue notes, and the readiness with which the public receive them, the banks could never have afforded to open a third of the branches which have been established. The reason for this is a very simple one. Without the right of issue a bank must, at every one of its offices, hold the whole of its balance of cash in the shape of coin, or of notes of other banks, which, as far as it is concerned, are as unprofitable as coin. Such balances entail a complete loss of interest which can only be borne where the amount of business is of considerable extent. There are probably not above 100 (at most 200) localities in Scotland that would satisfy such conditions. When, however, a bank can hold its till money in the shape of notes, it is enabled to extend its operations into districts which would otherwise be quite inaccessible....

The authority of a practical Scotch banker is equally emphatic on the point. Mr. Robert Blyth, general manager of the Union Bank of Scotland, read a paper at the thirty-first annual convention of the American Banking Association, in October, 1905, on the subject of Scottish banking. In the course of this very interesting paper he made the following statement: "It is in another quarter altogether that the Scotch banks find the value of the L1 note. It is the unissued notes in the tills of the branch offices, forming the till money at more than a thousand branches, wherein the real value lies. Without them the banks would require to keep L8,000,000 or L10,000,000 of gold coin, not as a reserve but as till money. It is these L1 notes which have enabled branch offices to be planted in every part of the country."

It thus appears, from the highest possible authority, that the Scotch banks are enabled by their right of note issue to economise gold to the extent of L8,000,000 or L10,000,000, and it is amusing to observe how the objects aimed at by Peel's legislation with regard to note issue have thus been defeated even more completely in Scotland than in England. In England banking turned the flank of Peel's Act by developing the use of cheques, which superseded the note as the common form of payment in daily transactions. In Scotland, banking evaded the spirit of Peel's regulations, which were intended to insure that every addition to currency should be secured on an addition to the bullion held by it, by actually economising bullion to the extent of L8,000,000 or L10,000,000.

EVASION OF PEEL'S ACT

Scotland used the same weapons as England, namely, the cheque and the development of deposit banking. The eight Scotch banks have, according to their latest balance sheets, L7,000,000 of notes outstanding, and L108,000,000 of liability on deposits and drafts. With regard to the latter item Peel's regulations had nothing to say, and since ordinary banking prudence demanded that some cash should be held against it, and since the gold held against notes was not specially earmarked as such, Scotch banking was able to treat its cash against deposits as the basis both of its notes and deposits and so produce the economy which is boasted of by its champions. The law says nothing concerning cash to be held against deposits, and the metallic basis of these is probably extremely slender, if the cash held against notes is set on one side; but it is impossible to detect its actual amount, since the Scotch banks include with their cash their balances at the Bank of England, etc. And the net result is, that when the proportion of its cash to its total liabilities on notes and deposits is worked out it is found to be decidedly low, even when compared with English practice. For the eight banks taken together, gold and silver coin, notes of other banks, cash at Bank of England, and cheques in course of transmission represent almost exactly 10 per cent. of their note and deposit liabilities.

It should be observed that the notes which the Scotch banks hold as till money do not appear in their statements, for until they are issued they are not a liability, and though they are treated by the banks in practice as an asset, they can not figure as such in a balance sheet. That they are practically treated as such is witnessed by Mr. Blyth, as quoted above, when he says that without them the banks would require to keep L8,000,000 or L10,000,000 of gold coin. And it is, of course, this habit of regarding unissued notes as a banking asset in the shape of till money that accounts for the low reserve of actual cash that the Scotch banks show.

DEFECTS

Scotch banking is so generally regarded as one of the highest achievements of the banking intelligence that some hesitation is natural in criticising the system by which, according to its own evidence, it has obtained most of its success. At the same time, it is difficult to avoid the conclusion that a serious danger lurks in a system which regards a banker's unissued promise to pay in the light of a banking asset. Mr. Blyth points out that these unissued notes are "not a reserve but till money," but the distinction between till money and reserve is one upon which it is possible to lay too much stress. In assessing the strength of a bank it is usual to compare the amount of its cash in hand, as a whole, with the amount of its liability to the public on deposit and current account, etc., and note circulation if any. The cash in hand, as a whole, consists of the till money and cash reserve. If the till money consists to any extent of the bank's own promises to pay, it follows that the bank's cash reserve as a whole is to that extent weakened, for it need not be said that in case of serious trouble, which is a contingency of which all provident bankers have at all times to beware, a bank's own promises to pay would be of little service to it. If a bank's credit were doubted, these promises to pay would not be available for it in meeting demands upon it. At such periods the public requires from its bankers not promises to pay but physical gold. In Scotland the confidence of the public in its bankers is so great, and the readiness with which it circulates their promises to pay appears to be so ingrained in the national character, that the contingency of the demand of the public for gold seems to be extremely remote. The criticism therefore which detects a weak point in this asset upon which Scotch banking prides itself so highly may be said to be merely academic. Nevertheless, when we examine Scotch banking by the test of figures, we find that it does actually work, as indeed would be expected from the statement of its exponents, on a cash basis which is decidedly narrow.

Though the functions that they perform are practically the same as those of the English bankers, Scotchmen have succeeded in avoiding the excessive competition in carrying them out which is a weakness of English banking. In Scotland, on the other hand, cohesion and co-operation among the banks are carried to an extreme of which the mercantile community frequently complains. The banks are few and stand together like a close corporation; they agree absolutely and arbitrarily among themselves as to the rates they will allow to depositors, the rates at which they will advance or discount, and the terms and commissions for which they will do business for customers. The extent to which this regulation of the price of the product that they turn out is carried, is almost incredible from the English point of view, and though it is contended by the champions of the Scotch system that it encourages that wholesome democratic influence in Scotch banking which is in favor of the small borrower of limited resources, who is thus able to obtain accommodation on the same terms as much larger and more important customers, yet it must be obvious that the Scotch banks, by making these hard and fast agreements among themselves as to the price of the accommodation that they will give, and maintaining it in every case, are in fact putting the same price upon a very different article. The result of it is beginning to tell upon them a little in these days, since, when the big Scotch merchants and manufacturers find that their local bankers charge them the same rates for accommodation as the small tradesmen of the towns, they are naturally impelled to make arrangements to provide themselves with monetary facilities somewhere south of the Tweed, where rates are ruled by the circumstances of each case, and competition and higgling often in times of monetary ease deliver the bankers into the hands of the borrowers. As it is, the Scotch banks in regular conclave fix their rates in accordance with those current in the London money market or the Bank of England's official minimum, and, having fixed them, stick to them. The system is very profitable to themselves, and their customers certainly can not complain on the whole of the facilities with which they provide them. Nevertheless, the cast-iron rigor with which they work hand in hand in combination appears to be an excessive development of banking unity, and an ideal banking system would seem to lie somewhere in the middle between the excessive competition of the English bankers and the cast-iron combination of their Scotch brethren. Finally, it may be added that it is a little inaccurate to speak of a Scotch banking system, if the phrase be taken to imply that Scotch banking stands by itself and works on its own resources. In fact, it is only an appendage of the English system and relies habitually on drawing gold from the Bank of England, as its centre and the keeper of its reserve.

BANK OF SCOTLAND

INTERVIEW WITH SIR GEORGE ANDERSON, GENERAL MANAGER[160]

Q. When was the Bank of Scotland founded?

A. In 1695.

Q. When does your present charter expire?

A. By act of Parliament the "governor and company of the Bank of Scotland" have "perpetual succession."

Q. How many branches have you?

A. One hundred and sixty-three branches and twelve sub-branches in Scotland: also an office in London.

Q. How are your branches managed?

A. By agents (managers at London and Glasgow) appointed by the directors.

Q. Do your branches have business relations with merchants, farmers, and all classes of people in their respective localities?

A. Yes.

Q. What is the law governing your note issues, and how are note issues limited and how secured?

A. The bank is authorised to issue, without holding coin against them, notes to the value of L396,852, but for any excess beyond that amount we must hold, at the head office, an equivalent value in gold coin, one-fourth of which may, however, be in silver coin.

Q. Will you state (a) the class of bills usually discounted by you, giving the number of names required; (b) the minimum size; and (c) the maximum length of time to run?

A. Mercantile bills, also a few accommodation bills, usually two names; minimum, say, L10. The maximum length of time to run is six months.

Q. What classes of collateral are accepted by you for loans?

A. Personal security, marketable securities, life policies, mortgages over ships, shipping documents, etc. In the important banking centers of Scotland lending against collateral security has become largely prevalent.

Q. Do you rediscount bills from other banks?

A. No.

Q. Explain the phrase "cash credits," and upon what conditions are they given?

A. A "cash credit" is a credit allowed, in virtue of which a customer may draw cheques on the bank until the balance due to us reaches a certain fixed limit. The account is an ordinary operative one, and interest is charged on the balances actually due to the bank from day to day.

Q. Have you in mind how many branches you had ten years ago?

A. One hundred and twenty.

Q. Do you ever buy any shares of railroad or industrial companies?

A. Yes; of the highest class.

Q. Do you ever own bank shares?

A. No.

ROYAL BANK OF SCOTLAND

INTERVIEW WITH ADAM TAIT, CASHIER AND GENERAL MANAGER[161]

Q. When was the Royal Bank of Scotland founded?

A. In the year 1727.

Q. When does your present charter expire?

A. It is perpetual.

Q. How many branches have you?

A. One hundred and fifty-two.

Q. Are all your branches of the same class, or have you main and subsidiary branches?

A. In some cases there are sub-branches. Some are mainly or almost entirely deposit branches; others have few deposits, but a large advance business.

Q. Is the business conducted at your branches of the same class as at your office in London?

A. No; the London office is itself a branch office and much of the ultimate settlement of balances takes place there. The conduct of the ordinary London business is on the same lines as that of any other London branch bank. No notes can be issued in London.

Q. Do your branches have business relations with merchants, farmers, and all classes of people in their respective localities?

A. Yes, they have business relations with all classes of people.

Q. What is the law governing your note issues, and how are note issues limited and how secured?

A. The act of Parliament of 1845 governs our note issue. There is no limit to the amount of notes that may be issued, but the bank is required to hold gold (and silver to an extent not exceeding one-fifth of the total) against the notes in the hands of the public on the average of each month, and that at its head office in Edinburgh--gold held at branch offices does not count--to an amount sufficient each week on Saturday to cover the notes in the hands of the public in excess of a certain amount specified, L216,451.

Q. To what extent are your notes legal tender in Great Britain?

A. Our notes are not legal tender at all.

Q. What other banks have the right of issue in Scotland?

A. The Bank of Scotland, the British Linen Bank, the Commercial Bank of Scotland (Limited), the National Bank of Scotland (Limited), the North of Scotland and Town and County Bank (Limited), the Union Bank of Scotland (Limited), the Clydesdale Bank (Limited).

Q. Are the notes of your issuing banks secured; and if so, how?

A. They are not secured. In case of the liquidation of the five last-named banks, however, their shareholders are unlimitedly liable for their notes and they are liable to contribute a sum necessary to restore to the general assets the sums that may have been paid out of the same in respect of claims under notes.

Q. What is the total amount of their outstanding issues?

A. About L7,500,000.

Q. Do you pay the Government in the form of taxes or otherwise, either directly or indirectly, for your privilege of note issue?

A. Yes, we all pay a license duty of L30 for each place at which notes are issued, and a tax of 8_s._ 4_d._ per L100, or a penny per L1, on the average amount of notes in the hands of the public at the close of each week.

Q. Is it your custom to carry a fixed amount in government securities?

A. Yes, but the amount is not rigidly fixed.

Q. Do you discount any but prime bills?

A. Yes; we do all classes of business.

Q. Is it your custom to employ surplus funds in purchase of bills from discount houses?

A. Yes; bills accepted by London banks.

Q. Do you rediscount bills for other banks?

A. No; except for foreign or colonial banks who are correspondents.

Q. Is the bank, through its branches, employed by other banks to any considerable extent for the transfer of funds from one city to another?

A. Yes.

Q. What, if any, artificial means are taken by you to secure changes in the volume of currency (notes and coin) to make it responsive to business demands?

A. None are deemed necessary. Our system works automatically. Our note issue is unlimited; we are only required to provide gold to cover the amount in the hands of the public at the close of each week and on the average of each four weeks.

Q. What is the customary charge for acceptance of a ninety-day bill?

A. Five shillings per cent.

Q. Your acceptance constitutes what is known in London as a prime bill?

A. Yes.

Q. Do you pay interest on both current accounts and deposit accounts?

A. It is our custom to pay interest on deposits only. In London, however, it is different; there interest is allowed in special cases on large balances on current accounts if left for some time.

Q. How does the bank rate affect the rate allowed by you on deposit?

A. The Scotch banks all allow the same rate and charge the same rates for discounts and overdrafts, and these are fixed relatively to the Bank of England rate. Our deposit rate is usually 1-1/2 per cent. under the minimum bank rate.

Q. Were most of your branches organised by you or were most of them other institutions purchased by you?

A. Most of them were originated by ourselves.

Q. Have you in mind how many branches you had ten years ago?

A. About 136.

Q. What relations do the Scotch banks bear to the Bank of England? Do they deal with it directly?

A. The Royal Bank of Scotland has an account with the Bank of England, which has been in operation since 1728, and it collects bills and cheques for the Bank of England all over Scotland.

Q. Do you regard your system of currency issue as sufficiently elastic for your needs?

A. Yes; there never has been any difficulty. Moreover, no Scotch bank has ever failed to pay its creditors, including the holders of notes, in full.

COMMERCIAL BANK OF SCOTLAND (LIMITED)

INTERVIEW WITH ALEXANDER BOGIE, GENERAL MANAGER[162]

Q. When was the Commercial Bank of Scotland (Limited) founded?

A. In the year 1810.

Q. When does your present charter expire?

A. It is not limited in point of time.

Q. Has the Government any voice in the management of the bank or any interest in it through the ownership of shares?

A. None.

Q. Have the managers of the branches full control of the business in granting discounts, etc.; if not, what discretion is usually given them?

A. Agents have power to grant advances, but subject to the approval of head office. In advances of considerable amount, an agent's duty is to get authority from the head office before granting it. The discretion allowed is dependent on the size of the branch and the nature of the business and the class of customer, and on the record of the agent. By our system of reports on advances (weekly, monthly, and quarterly) we keep in close touch with the advances and means of borrowers. The London branch is, of course, on different lines, and our manager there has greater powers than an agent at a branch in Scotland.

Q. Is the business conducted at your branches of the same class as at your main office in Edinburgh?

A. Yes; very much the same. The head office has administrative work and supervision of branches, investment, etc., which does not, of course, arise elsewhere.

Q. Do you discount to any considerable amount for individuals and merchants?

A. Yes; it would perhaps be well to point out that in Scotland a large portion of advances made to traders are granted in the form of overdrafts on current accounts. _The number and amount of bills in Scotland are less now than in former years. Cash payments for the purpose of obtaining discount are more frequent, and the number of bills discounted by wholesale houses is reduced in consequence._

Q. Is it your custom to employ surplus funds in purchase of bills from discount houses?

A. Only occasionally, when rates suit.

Q. Do you rediscount bills for other banks?

A. It is not our practice to do so.

Q. To what extent does bank rate govern your discount and loan transactions?

A. In ordinary transactions, altogether. In all transactions the bank rate governs as regards the minimum.

Q. Explain the phrase "cash credits," and upon what conditions are they given?

A. A cash credit account is an operative current account in security of which the principal debtor and two or more co-obligants have granted a personal bond in favor of the bank. The account is operated upon by the principal debtor, but all the parties are bound as principals and are jointly and severally liable to the bank.[163]

Q. Is the bank, through its branches, employed by other banks to any considerable extent for the transfer of funds from one city to another?

A. We act as correspondents for the large English and Irish banks and for colonial and foreign banks.

Q. Do you favor the issue of L1 notes? Why?

A. Yes; under the Scottish system, as it enables the banks to plant branches at little expense and so to open up the trade of the country in all districts and directions.

Q. It is your practice to employ your surplus funds in the purchase of prime bills through bill brokers?

A. We occasionally have such transactions.

Q. Were most of your branches organised by you, or were most of them other institutions purchased by you?

A. All of them were organised by ourselves.

Q. Is the question of the amount of reserves, either in specie or in bank, regarded as of importance by Scotch bankers?

A. I should think so, though I only know positively my own opinion.

Q. Do you ever buy any shares of railroad or industrial companies?

A. No industrial company shares and only gilt-edged railway stocks.

Q. Do you ever own bank shares?

A. No.

UNION BANK OF SCOTLAND (LIMITED)

INTERVIEW WITH ROBERT BLYTH, GENERAL MANAGER[164]

Q. When was the Union Bank of Scotland (Limited) founded?

A. In 1830.

Q. When does your present charter expire?

A. The bank has no charter expiring at any specified time. It is incorporated under the companies acts.

Q. Have the obligations of the bank to the public or to the Government been changed from time to time?

A. The liability of the shareholders was formerly unlimited, but when the bank became registered under the companies act, 1879, the liability of the shareholders--unless in respect of notes--was limited to the amount of the uncalled capital.

Q. The tendency is for the consolidation of banking in Great Britain, is it not?

A. It is, but this tendency set in at a much earlier period in Scotland than it has done in England.

Q. Do you rediscount bills for other banks?

A. Yes; but only to a very limited extent.

Q. Is private banking carried on in Scotland?

A. Private banking ceased to exist in Scotland prior to 1845.

Q. Do you ever buy any shares of railroad or industrial companies?

A. No.

Q. Do you ever own bank shares?

A. No.

FOOTNOTES:

[158] Adapted from Hartley Withers, _The English Banking System_. Publication of The National Monetary Commission, Senate Document No. 492, 61st Congress, _2nd Session_, pp. 41-50.

[159] (September, 1915).

[160] Adapted from _Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland and Italy_, Publications of the National Monetary Commission, Senate Document No. 405. 61st Congress, _2nd Session_, pp. 142-155.

[161] _Ibid._, pp. 127-139.

[162] _Ibid._, pp. 172-185.

[163] The cash credit system, sometimes pointed to as a unique feature of Scotch banking, is by no means unknown in England.--EDITOR.

[164] _Ibid._, pp. 157-170.