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.