Blackwood's Edinburgh Magazine, Volume 56, Number 350, December 1844

Blackwood's Edinburgh Magazine, Volume 56, Number 350, December 1844
Various

Various

Blackwood's Edinburgh Magazine, Volume 56, Number 350, December 1844

THE SCOTTISH BANKING SYSTEM

When any important branch of national polity has been impeached, arraigned, and brought to stand its trial before the bar of public opinion, it is satisfactory to know that the subject has been thoroughly investigated, since a searching investigation alone can excuse a verdict, be it of acquittal or of condemnation. That no man can be twice tried upon the same indictment, is a proud boast of the British constitution. It would be well if the same rule were always applied when mightier interests than those of individuals are at stake!

It is just eighteen years ago since a ministry, feeble in practice, but strong in speculative theory, ventured to put forth its hand against the monetary system of Scotland, under shelter of which the country had improved and thriven to a degree of prosperity never experienced to the north of the Tweed before, and at a ratio which far exceeded that of any other nation in Europe. In the short space of half a century, the whole face of the country had changed. From a bleak, barren, and dilapidated region – for such she undoubtedly was for many years subsequent to the last rebellion of 1745 – Scotland became, with the shortest possible transition, a favourite land of husbandry. Mosses and muirs, which, at all events since the forgotten days of the Jameses, had borne no other crop than rugged bent or stubborn heather, were subjected to the discipline of the plough, and produced a golden harvest of grain. Woods sprang up as if by magic, from the roots of the old Caledonian forest, to hide the nakedness of the land and redeem the national reproach. The towns and boroughs – which had never recovered from the terrible blow inflicted upon them by the failure of the Darien scheme, in which nearly the whole capital of Scotland was embarked, and which had lost the greater and more valuable portion of their trade, and dwindled down into almost hopeless insignificancy – began to revive again. New manufactures were established, the older ones were extended; the fisheries rose immensely in magnitude and importance; the mountainous districts were made profitable by the breeding and export of sheep and cattle; and even the rugged shores of the Hebrides furnished for a time a most profitable article of commerce. All this took place in a poor and very neglected country. England for a long time knew little of what as going on in the north; perhaps her eyes were then riveted, with more than the anxiety of a gamester's, upon the great stakes for which she was contending on the red battle-fields of Europe. This much she knew, that Scotland could produce in time of need – ay, and did produce – levies of men, whose high heroic courage, steady discipline, and daring intrepidity, were the theme even of their enemies' admiration; and of these services she was, and is, justly and generously proud. But of the social condition of their northern neighbours, we repeat, the body of the English, at this period, were singularly ignorant. We had not very long before suffered the penalty of adherence to a fallen cause. We were considered to be still rather too irritable and dangerous for much interference; perhaps, also, it was thought that it might be cheaper to leave us to ourselves – and, so long as we paid our proportion of the common taxation, not to enquire too curiously into our own domestic system of management. In all respects, therefore, notwithstanding the war, we flourished.

Peace came; and with peace, as a matter of course, a more searching investigation into the internal state of the country. Then, for the first time, Scotland became a sort of marvel. Our agriculture, our commerce, our internal resources, so strangely and quickly augmented, attracted the attention of the politician; and the question was speedily mooted – "How, and by what means, have so poor a nation as the Scotch attained so singular a position?" And truly the facts were startling, and such as might justify an enquiry. The whole coined money in Scotland, at the date of the Union, was known not to have exceeded the sum of one million sterling; and a large part of this paltry sum was necessarily hoarded, and so withdrawn from circulation, throughout the whole period of the intestine troubles. That single million, therefore, held the place both of that part of the wealth of the country which is now represented by bank-notes, and also of that which is now deposited in the hands of the bankers. Aladdin's palace, which sprang up in one night at the bidding of the slaves of the lamp, could scarcely have been a greater paradox to the aged Sultan, than this increase of prosperity on the part of Scotland was to our southern legislators. How to explain the metamorphosis seemed for a time a mystery. One thing, at all events, was clear – that English gold had no participation in the change. North of the Tweed, a guinea was a suspected article, apt to be rung, and examined, and curiously weighed, before it was received in currency, and even then accepted with a certain reluctance. The favourite medium of circulation was paper-notes of one pound each, of somewhat dubious complexion to the eye of the stranger, but received and circulated by the Scottish people with the utmost readiness and confidence. The answer to the question was a short one – "We have prospered through our banking system."

It was some time – not until ten years of peace had elapsed – before any open attack was made upon that system, which had proved, if facts can prove any thing, the greatest imaginable boon to the nation; and which, be it always specially remembered, did not originate with the state, but with private individuals – upright, honourable, and patriotic men – who better deserve a monument to their memories, were that required, than the most successful conqueror whose march is on humbled thrones. During that period much was done with regard to internal relations, of which we, in common with every Scotsman who retains one spark of patriotic feeling, most heartily disapprove. The tendency towards centralization in London – the inevitable consequence of the Union treaty – was not only not counteracted, as we maintain it ought to have been, by a wise and paternal government, but forced and hurried on by an excessive exercise of power. Every remnant of our ancient institutions that could be rooted up, and all our local boards with hardly one exception, were transferred to the seat of government – regardless of the drain that was thereby made from the proper resources of the country, and the deep heart-burnings that such a system must necessarily create amongst a proud, observant, and jealous, though enduring people. These things we shall not dilate upon – though the temptation is triply strong, and we know how keenly that subject is felt by many of the best and most loyal of the land; – but in the mean time we shall pass over this period of gradual humiliation, and come at once to the first great attack that was made upon the source of all our national prosperity.

At the close of the year 1825, there arrived a period of public distress, followed by a panic which fortunately has but rarely been felt in this country. We attributed it then, and we attribute it now, to an unexampled glut in the money market, which we hold to be in this trading country the most destructive of any, saving and excepting a glut in agricultural produce and labour; and for this very plain reason, that a glut of money resolves itself sooner or later into a glut of goods, thereby carrying the amount of production in the country far beyond the amount of the consumption and demand, and so necessarily for a time closing the door against all the outlets of industry. But it is of very little consequence to our present purpose how that distress was created. The effects were very grievous. In England the panic took effect, and a run was made upon the banks for gold; the consequence of which was, that a number of the private and joint-stock establishments failed. In Scotland, where the distress was certainly not less in proportion, there was not only no failure on the part of the banks, but no run, and no diminution in the usual credits. At this time, it is very proper to remark, that England had been thoroughly centralized; that is, that the whole course and tendency of its money market was to London; and indeed, for purposes of trade, the principal circulation of the important districts of Lancashire and others, seems to have been bills of exchange payable in London, with from twenty to fifty endorsements on each. With us such a system was unknown. Scotland, then as now, and we devoutly trust for ever, had her own internal circulation, and neither took nor gave, except when statutorily compelled, beyond the limits of her own jurisdiction.

The attention of the ministry was immediately directed to an investigation of the cause of the general distress. This was right and proper, and precisely what a cautious and well-meaning government ought to do under such circumstances, in order to prevent, if possible, the recurrence of a similar disaster. But unfortunately the ministers of the day, though well-meaning, were any thing but cautious. The majority of them were imbued with speculative notions of political economy. They were disciples of a school which rejects facts and cleaves implicitly to theory – men who threw considerations of circumstance, time, and national characteristics aside, as prejudices too low for even the momentary regard of a philosopher; in short, they wished to introduce the standard of an untried rule as the ne plus ultra of human sagacity, and remorselessly to overturn every existing institution – no matter at what sacrifice or risk – if it only seemed to stand in the way of the operation of their darling theories.

It was easy for men so tutored and trained, to overlook the necessary effect which fluctuation of the seasons at home and abroad must have upon the prices of either produce, of the effect of these prices upon manufactures, and the manifest and established fact that there is a point when production will exceed consumption. This state of things it is totally beyond the power of man to remedy. The facts of nature will always be found too strong for the theories of the political economist; but our rulers in the plenitude of their wisdom thought otherwise; and began to search within the social system for a cause of that disorder, which was neither more nor less than an epidemic, as totally beyond the reach of their prevention as if the College of Physicians were to issue their solemn fiat – "This year there shall be neither cholera nor fever." In searching for the cause, however, they stumbled upon an effect which they at once adroitly magnified into a cause. In England there had been a marked increase during the rise in the issue of the country banks. Here was an opportune discovery for the champions of metallic currency! and, accordingly, the paper system was prostrated in England to make way for its more glittering, often more slippery, and always more expensive rival.

Scotland, in the mean time, was going on in her old and steady footing. One and all of the banks – chartered, joint-stock, and private – were as firm as if each had been backed by the whole weight and responsibility of the state. Between them and the public the most perfect confidence subsisted; and very nobly indeed, in that time of trial and distress, did the banks behave, in maintaining credits grievously depressed for the moment, but certain to revive with the return of general prosperity. This mutual confidence is the great secret of the success of the Scottish system. The banker is to the trader as a commercial physician – sometimes restrictive, sometimes liberal, but always a judicious friend. It is impossible to separate the interests of the two; and as they have risen together, so, in the event of a change, must they both equally decline. But we will not anticipate our defence, before we have adduced the facts upon which that defence is founded.

All at once, and without sounding any note of preparation, the ministry announced, that after the expiry of a given season, the whole Scottish banking system was to be changed, all paper currency under the five-pound note abolished, and a metallic circulation introduced and enforced. If Ben Nevis had burst forth at once in the full thunder of volcanic eruption, we could not have been more astonished. What! without complaint or enquiry – without the shadow of a cause shown, or a reason assigned, except it might be that reason – to a Scotsman the most unpalatable of all – the propriety of assimilating the institutions of both countries; in other words, of coercing Scotland to adopt the habit of her neighbours – to excavate the foundation-stone of our whole prosperity, and make us the victims of a theory which, even if sound, could not profess to give us one tittle more advantage than the course which we had so long pursued! We believe that if the annals of legislation were searched through, we could not find a parallel case of such wanton and unprovoked temerity!

We said then, and we say now, with even more emphatic earnestness, it is the curse of the age that every thing is to be managed by political economy and philosophy, and that local knowledge is to be utterly disregarded in the management of local interests. Centralize and assimilate – these were the watchwords of the ministers of that day; and for aught that we can see, Sir Robert Peel is determined to persevere in the theory. What excuse was there, then, for the attempt of any assimilation between the banking systems of the two countries? If it had been alleged that the Scotch paper currency was surreptitiously carried into England – that it was there supplanting the legal currency, and absorbing the gold in exchange, there might have been some show of reason for a slight modification of the system – at all events for a more stringent preventive check. But no such allegation was made. The most determined hater of the Scottish banks knew well that their paper never crossed the Border; for the very best of all possible reasons, that the notes were not a legal tender, and that five persons out of six to whom they might happen to be offered, would unhesitatingly reject them. Again, to absorb the gold would have been neither more nor less than partially to carry out the views entertained by the supporters of a metallic currency, and therefore surely, in their eyes, a venal, if not a meritorious, offence. But such was not the fact. In Scotland there was no such a thing known as a gold circulation. The fishermen, the cattle dealers, and the small traders, would not so much as take it; and the stranger who, through ignorance, had provided himself with a stock of the precious metal, was forced to have recourse to a Scottish bank in order to have it exchanged for notes. Beyond what lay in the bank reserves, there was literally none in the country; and therefore any idea of the interference of the currencies was too preposterous to be maintained.

But it is not here, or at this point, that we intend to discuss the propriety of the measure which was then proposed. Unfortunately, we are called upon to do so with reference to our own times, as well as to those which are now matter of history; and the remarks which we shall have occasion to offer are equally applicable to the one as to the other. In the mean time, let us see how the mere alarm engendered by that unlucky proposition affected Scotland, and what steps were taken to resist the threatened change.

First of all, we have it in evidence that the open threat of the ministerial scheme produced within the country more actual distress and bankruptcies than had previously occurred during the period of the previous depression. This may seem a paradox to a stranger; but the reason will be readily understood, and the fact candidly admitted by every one who is conversant with the Scottish system of banking. A short explanation may be necessary. One large department of the business of every bank was the granting of cash-credits; a method of accommodation to the public which the experience of ninety-four years (cash-credits were granted by the Royal Bank of Scotland so early as 1729) had shown not only to be the safest to the bank, but by far the most advantageous to the public. Indeed it is not too much to say, that were those credits prohibited, and no other alteration made in the existing system, the mainspring of the machinery of Scottish banking would be broken, and its general utility impaired. With that point we shall deal more fully when we come to the consideration of the system in detail; at present it is only necessary to remark, that these credits had been maintained unimpaired during the period of depression, and were the fortunate means of averting ruin from many.

But the attitude which the ministry assumed was so formidable, and the prospect of a sweeping change so alarming, that the bankers were forced in self-defence, though sorely against their will, to make preparation for the worst contingencies. They were, so to speak, compelled to follow the example of England in 1745 – to recall all their outlying forces from abroad, concentrate them at home, and leave their allies to fight their own battles as they best could, and to conquer or fall according to their ability or weakness. Their first step was rigidly to refuse the granting of any new cash-credits; their second, to withdraw – with as much tenderness as might be, but still to withdraw – those which were already in existence. It was then that the country at large began to feel how terribly their interests were compromised. The trader, who was driving an active business on the strength of his cash-credit, and turning over the amount of his bank-account it may be thirty times in the course of the year, found himself suddenly brought to a stand-still. The country gentleman, in the midst of his agricultural improvements, and at the very moment when their cessation would undo all that he had hitherto accomplished, was compelled either to desist for want of ready money, and throw his labourers on the parish, or to have recourse to the pernicious system of discounting bills at a ruinous rate of interest. The manufacturer, in despair, was reduced to close his works, and the operatives went forth to combine, or starve, or burn; for the hand of the ministry was upon them likewise, and their burden was sorer than their masters'.

These were the first fruits of the proposed metallic currency; and it soon became evident to all, that nothing was left for Scotland, if she wished to escape from universal ruin, but to offer a firm and most determined resistance. The struggle was felt throughout the length and breadth of the land to be one, which, if it did not actually involve existence, involved a greater commercial interest than had been at stake for more than a century before. The combination which took place in consequence was so extraordinary, that we may be pardoned if we express our wonder how any minister who witnessed it, can at this hour have the temerity to return to the charge. Party-spirit, always higher and keener in Scotland than elsewhere, was at once forgotten in the common cause. All ranks, from the peer to the peasant, rose up in wrath at the proposed innovation; and from every county, city, town, village, and corporation in the kingdom, indignant remonstrances were forwarded to the foot of the Throne, and to the Imperial Parliament of Great Britain. It was assuredly a dangerous experiment to make with a proud and jealous people. Old watchwords and old recollections, buried spells which it were safer to leave alone, began to revive amongst us; and many a lighter act of aggression, which had been passed over at the moment in silence, was then recalled and canvassed, and magnified into a serious grievance. In short, Scotland, from the bottom of her heart, felt herself most deeply insulted.

It was at this time that the celebrated letters of Malachi Malagrowther appeared. To the general sentiments contained in that work, we subscribe without the slightest hesitation. Strong language is usually to be deprecated, but there are seasons when no language can be too strong. We think meanly of the man who can sit down to round his periods, and prune his language, and reduce his feelings to the level of cold mediocrity, when he knows that the best interests of his country are at stake, and that he is her chosen champion. And such, most assuredly, and beyond all comparison, was Sir Walter Scott. He went into that conflict like a giant, in a manner that disdained conventionalisms; he neither begged, nor prayed, nor conceded, but took his firm ground on the chartered liberties of his country, and spoke out in such manly and patriotic accents as Scotland has rarely heard since the days of Fletcher and Belhaven. All honour be to his memory! Were it for that good work alone, his name ought for ever to be immortal.

In consequence, ministry were condescending enough to allow a Parliamentary enquiry. Even that was not granted readily, as the prevailing impression in the cabinet seemed to be, that Scottish affairs were of too slight importance to occupy the time of the Imperial Parliament. The old country might be dealt with summarily, and left to remonstrate at its leisure. But the spirited resistance of our representatives, and it is no less incumbent upon us to add, that innate sense of justice in Englishmen, which will not suffer any one to be condemned unheard, procured us the investigation, upon the issue of which we were willing to rest our cause. The Scottish banking system underwent the severest of all scrutinies before committees of the Houses of Peers and of the Commons; and the following was the nature of the reports.

The committee of the House of Commons, after recapitulating the leading points which were brought out in evidence before them, came to the following conclusions – which it is very important to bring before the public now, as they refer not only to the deductions which the committee had formed from the history of the past, but to the special reasons which were to influence the legislature in future and prospective change.

"Upon a review of the evidence tendered to your committee, and forming their judgment upon that evidence, your committee cannot advise that a law should now be passed, prohibiting, from a period to be therein determined, the future issue in Scotland of notes below five pounds: —

"There are, in the opinion of your committee, sufficient grounds in the experience of the past for permitting another trial to be made of the compatibility of a paper circulation in Scotland with a circulation of specie in this country.

"Looking at the amount of notes current in Scotland, below the value of five pounds, and comparing it with the total amount of the paper currency of that country, it is very difficult to foresee the consequences of a law which should prohibit the future issue of notes constituting so large a proportion of the whole circulation.

"Your committee are certainly not convinced that it would affect the cash-credits to the extent apprehended by some of the witnesses; but they are unwilling, without stronger proof of necessity, to incur the risk of deranging, from any cause whatever, a system admirably calculated, in their opinion, to economize the use of capital, to excite and cherish a spirit of useful enterprise, and even to promote the moral habits of the people, by the direct inducements which it holds out to the maintenance of a character for industry, integrity, and prudence.

"At the same time that your committee recommend that the system of currency which has for so long a period prevailed in Scotland, should not, under existing circumstances, be disturbed, they feel it to be their duty to add, that they have formed their judgment upon a reference to the past, and upon the review of a state of things which may hereafter be considerably varied by the increasing wealth and commerce of Scotland, by the rapid extension of her commercial intercourse with England, and by the new circumstances that may affect that intercourse after the re-establishment of a metallic currency in this country.

"Apart from these general observations, bearing upon the conclusions at which they have arrived, there are two circumstances to which your committee must more particularly advert.

"It is evident that if the small notes issued in Scotland should be current beyond the Border, they would have the effect, in proportion as their circulation should extend itself, of displacing the specie, and even in some degree the local currency of England. Such an interference with the system established for England would be a manifest and gross injustice to the bankers of this part of the empire. If it should take place, and it should be found impossible to frame a law consistent with sound and just principles of legislation, effectually restricting the circulation of Scotch notes within the limits of Scotland, there will be, in the opinion of your committee, no alternative but the extension to Scotland of the principle which the legislature has determined to apply to this country.

"The other circumstances to which your committee meant to refer, as bearing materially upon their present decision, will arise in the event of a considerable increase in the crime of forgery. Your committee called for returns of the number of prosecutions and convictions for forgery, and the offence of passing forged notes, during the last twenty years in Scotland, which returns will be found in the appendix. There appears to have been, during that period, no prosecutions for the crime of forgery; to have been eighty-six prosecutions for the offence of issuing forged promissory notes – fifty-two convictions; and eight instances in which the capital sentence of the law has been carried into effect."

This may, on the whole, be considered as an impartial report; and, as it is as well in every case to disencumber a question from specialties, we shall state here that experience has since shown that there has been no tendency whatever to the introduction of Scottish notes into England. With regard to the other special point referred to by the committee – that of forgery – such a thing as a forged bank-note is now unknown in Scotland. The evidence taken before the last committee on banks of issue in 1841, established the fact, that since the improved steel plates were brought into general use, there has never been a forgery of a note. Such being the case, it is unnecessary here to dispute the wisdom of that policy which would leave a great national institution at the mercy of a single forger. The experience of this last month alone might show how wretchedly that test would operate if applied even to the Bank of England.

Setting these specialties aside, the only possibly grounds which this committee saw for any future legislative interference were, "the increasing wealth and commerce of Scotland, the rapid extension of her commercial intercourse with England, and the circumstances which may affect that intercourse after the re-establishment of an English metallic currency." To us the first part of this reservation sounds somewhat like a threat of future bleeding when Scotland shall have become more pursy and plethoric. Nevertheless we are ready to join issue with our opponents on any of these grounds.

The report of the Lords was even more favourable; and, at the risk of being thought tedious, we cannot refrain from inserting their admirable digest of the evidence, which, for candour and clearness, might be taken as a universal model.

"With respect to Scotland, it is to be remarked, that during the period from 1766 to 1797, when no small notes were by law issuable in England, the portion of the currency in Scotland in which payments under five pounds were made, continued to consist almost entirely of notes of £1 and £1, 1s.; and that no inconvenience is known to have resulted from this difference in the currency of the two countries. This circumstance, amongst others, tends to prove that uniformity, however desirable, is not indispensably necessary. It is also proved, by the evidence and by the documents, that the banks of Scotland, whether chartered or joint-stock companies or private establishments, have for more than a century exhibited a stability which the committee believe to be unexampled in the history of banking; that they supported themselves from 1797 to 1812 without any protection from the restriction by which the Bank of England and that of Ireland were relieved from cash payments; that there was little demand for gold during the late embarrassments in the circulation; and that, in the whole period of their establishment, there are not more than two or three instances of bankruptcy. As, during the whole of this period, a large portion of their issues consisted almost entirely of notes not exceeding £1 or £1, 1s., there is the strongest reason for concluding, that, as far as respects the banks of Scotland, the issue of paper of that description has been found compatible with the highest degree of solidity; and that there is not, therefore, while they are conducted upon their present system, sufficient ground for proposing any alteration, with the view of adding to a solidity which has been so long sufficiently established.

"This solidity appears to derive a great support from the constant exchange of notes between the different banks, by which they become checks upon each other, and by which any over-issue is subject to immediate observation and correction.

"There is also one part of the system, which is stated by all the witnesses (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 securities, who are jointly bound, and after a full enquiry 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 this 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 those 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 five millions, on which the average amount advanced by the banks may be one-third.

"The manner in which the practice of deposits on receipt is conducted tends to produce the same desirable results. Sums to as low an amount as £10 (and in some instances lower) are taken by the banks from the depositor, who may claim them at demand. He receives an interest, usually about one per cent below the market rate. It is stated that these deposits are, to a great extent, left uncalled for from year to year, and that the depositors are in the habit of adding, at the end of each year, to the interest then accrued, the amount of their yearly savings; that the sums thus gradually accumulated belong chiefly to the labouring and industrious classes of the community; and that, when such accounts are closed, it is generally for the purpose of enabling the depositors either to purchase a house or to engage in business.

"It is contended by all the persons engaged in banking in Scotland, that the issue of one-pound notes is essential to the continuance both of their cash-credits and of the branch banks established in the poorest and most remote districts. Whether the discontinuance of one-pound notes would necessarily operate to the full extent which they apprehend, in either of these respects, may perhaps admit of doubt; but the apprehensions entertained on this head, by the persons most immediately concerned, might, for a time at least, have nearly the same effect as the actual necessity; and there is strong reason to believe, that if the prohibition of one-pound notes should not ultimately overturn the whole system, it must for a considerable time materially affect it.

"The directors of the Bank of England, who have been examined before the committee, have given it as their opinion, that a circulation of notes of £1 in Scotland or in Ireland would not produce any effects injurious to the metallic circulation of England, provided such notes be respectively confined within the boundary of their own country.

"Notwithstanding the opinions which have been here detailed, the committee are, on the whole, so deeply impressed with the importance of a metallic circulation below £5 in England, not only for the benefit of England, but likewise for that of all the other parts of the empire, that if they were reduced to make an option between the establishment of such a metallic circulation in Scotland, or the abandonment of it in England, they would recommend the prohibition of small notes in Scotland. But they entertain a reasonable expectation, that legislative measures may be devised which will be effectual in preventing the introduction of Scotch paper into England; and unless such measures should in practice prove ineffectual, or unless some new circumstance should arise to derange the operations of the existing system in Scotland itself, or materially to affect the relations of trade and intercourse between Scotland and England, they are not disposed to recommend that the existing system of banking and currency in Scotland should be disturbed."

This is just what a Parliamentary report ought to be – calm, perspicuous, and decided. There is no circumlocution nor ambiguity of expression here. After a patient investigation into the whole question, and a minute examination of enemies as well as friends, the Lords arrived at the opinion, that the existing banking system of Scotland ought on all points to be maintained, and they not only stated their general conviction, but gave their reasons for upholding each part in detail, in the luminous manner which has always been the characteristic of that august Assembly, and which has established its proud reputation as not only the noblest, but the most upright tribunal of the world. It is worthy of the most marked attention, that the committee of the Lords in this report, which afterwards received the sanction of the House, advocated no temporary continuance of the banking system in Scotland, but were clearly of opinion that it should remain as a permanent institution. They evidently entertained no ideas, grounded upon mere expediency, that it would be prudent to wait until Scotland, by means of her cherished institutions and her own internal industry, arrived at that point of condition when it might be expedient to introduce the lancet, and drain off a little of her superfluous blood. They vent upon the righteous maxim – that a nation, as well as a man, is entitled to work out its own resources in peace, so long as it does not trench upon the industry or prerogatives of its neighbour, and so long as no impeachment can be laid against the prudence and stability of its institutions. We defy any man to read over this report, and to adduce one word from it which shall convey the idea that it was not intended as a final judgment, with the simple qualifications that we have stated in the last sentence.

These two reports saved the country – we trust we shall not hereafter be compelled to add, only for a time – from its great impending misfortune. The circulation in England became metallic, with what success it is not for us to say, whilst Scotland was allowed to retain her paper currency with at least most perfect satisfaction to herself. One pregnant fact, however, it would be unpardonable for us to omit – as showing the stability of the northern system when compared with that practised in the south – that at the last investigation before a committee of the House of Commons in 1841, it was stated, that whereas in Scotland the whole loss sustained by the public from bank failures, for a century and a half, amounted to L. 32,000, the loss to the public, during the previous year in London alone, was estimated at ten times that amount!

Since 1826, we have had eighteen years' further experience of the system, without either detecting derangement in its organization, or the slightest diminution of confidence on the part of the public. There has been no interference with the metallic currency of England. Forgery is a crime now utterly unknown, as is also coining, beyond the insignificant counterfeits of the silver issue. This, in fact, is a great advantage which we have above the English in point of security, since we are exempt from the risk of receiving into circulation either base or light sovereigns, and since the banks provide for the deterioration of their notes by tear and wear, whilst the holder of a light sovereign has to pay the difference between the standard and the deficient weight. When we reflect upon the small amount of the wages of a labouring man, it is manifest how important this branch of the subject is; for were gold allowed in Scotland to supersede the paper currency, a fresh and most dangerous impetus would be given to the crime of coining; and there cannot be a doubt, that in the remoter districts, where gold is utterly unknown, a most lamentable series of frauds would be perpetrated, with little risk of detection, but with the cruelest consequences to the poor and illiterate classes.

We are not, however, inclined to adopt the opinion expressed by the committee of the House of Commons, to the extent of admitting that it would be either politic or just to disturb the whole banking system of a country on account of private frauds, whether forgeries or the fabrication of counterfeit coin. If their opinion was a sound one, the weight of evidence is now upon our side of the argument; but we hold that the interests at stake are far too great to be affected by any such minor details. If any new circumstance has arisen "to affect the relations of trade and intercourse between Scotland and England," we at least are wholly unconscious of the occurrence, and, of course, it is the duty of those who meditate a change to point it out, in order that it may be thoroughly scrutinized. Internally, the business of the banks has been increasing, and, commensurate with that increase, there has been a vast addition to the number of branch banks spread over the face of the country; so that, whereas in 1825 there was but one office for every 13,170 individuals, in 1841 there was an office for every 6600 of the population. This is plainly the inevitable effect of competition; but lest that increase should be founded upon by our opponents as a proof of over-circulation, we shall say a few words upon the subject of the exchange between the banks themselves, which is a leading feature of our whole system, and the most complete check against over-trading which human ingenuity could devise. Fortunately we have ample data for our statement in the evidence tendered to the committee on banks of issue in 1841.

It is right, however, to premise that, strictly speaking, there are not more, nay, there are positively fewer banks in Scotland at the present moment than there were in 1825, though the amount of paid-up capital in the banks is more than doubled. It is the branches alone which make this astonishing increase. Now, as a branch is merely a local agency of the parent bank, established at a distance for the sake of outlying business, the number of parties engaged in banking who are responsible to the public is not thereby increased, nor is the amount in circulation extended. In fact, the multiplication of the branch banks has been of extraordinary benefit to the public, by affording the inhabitants of even the remotest districts a ready, easy, and favourite method of deposit, and by extinguishing all risks of credit. Further, it has this manifest advantage, that the manager of the branch bank has far greater facilities of ascertaining the character, habits, and pursuits of those persons who may have received the advantage of a cash-credit accommodation, and can immediately report to his superiors any circumstances which may render it advisable that the credit should be contracted or withdrawn. So far are we from holding that the multiplication of branch banks is any evil or incumbrance, that we look upon it as an increased security not only to the banker but the dealer. The latter, in fact, is the principal gainer; because a competition among the banks has always the effect of heightening the rate of interest given upon deposits, and of lowering the rates charged upon advances. Nor does this give any impetus to rash speculation on the part of the dealer, but directly the reverse. The deposits always increase with the advancing rate of interest; and experience has shown, that it is not until that rate declines to two per cent that deposited money is usually withdrawn, which is the signal of commencing speculation. To the mere speculator the banks afford no facilities, but the reverse. Their cash credits are only granted for the daily operations of persons actively engaged in trade, business, or commerce. So soon as that credit appears to be converted into a different channel, it is withdrawn, as alike dangerous to the user and unprofitable to the bank which has given it.

Of thirty-one banks in Scotland which issue notes, five only are chartered– that is, the responsibility of the proprietors in those established is confined to the amount of their subscribed capital. The remaining twenty-six are, with one or two exceptions, joint-stock banks, and the proprietors are liable to the public for the whole of the bank responsibilities to the last shilling of their private fortunes. The number of persons connected with these banks as shareholders is very great, almost every man of opulence in the country being a holder of stock to a greater or a less amount. That some jealousy must exist among so many competitors in a limited field, is an obvious matter of inference. Such jealousy, however, has only operated for the advantage of the public, by the maintenance of a common and vigilant watch upon the manner in which the affairs of each establishment are conducted, and against the intrusion of any new parties into the circle whose capital does not seem to warrant the likelihood of their ultimate stability. Accordingly, the Scottish bankers have arranged amongst themselves a mutual system of exchange, as stringent as if it had the force of statute, by means of which an over-issue of notes becomes a matter of perfect impossibility. Twice in every week the whole notes deposited with the different bank offices in Scotland are regularly interchanged. Now, with this system in operation, it is perfectly ludicrous to suppose that any bank would issue its paper rashly for the sake of an extended circulation. The whole notes in circulation throughout Scotland return to their respective banks in a period averaging from ten to eleven days in urban, and from a fortnight to three weeks in rural districts. In consequence of the rate of interest allowed by the banks, no person has any inducement to keep bank paper by him, but the reverse, and the general practice of the country is to keep the circulation at as low a rate as possible. The numerous branch banks which are situated up and down the country, are the means of taking the notes of their neighbours out of the circle as speedily as possible. In this way it is not possible for the circulation to be more than what is absolutely necessary for the transactions of the country.

If, therefore, any bank had been so rash as to grant accommodation without proper security, merely for the sake of obtaining a circulation, in ten days, or a fortnight at the furthest, it is compelled to account with the other banks for every note they have received. If it does not hold enough of their paper to redeem its own upon exchange, it is compelled to pay the difference in exchequer bills, a certain amount of which every bank is bound by mutual agreement to hold, the fractional parts of each thousand pounds being payable in Bank of England notes or in gold. In this way over-trading, in so far as regards the issue of paper, is so effectually guarded and controlled, that it would puzzle Parliament, with all its conceded conventional wisdom, to devise any plan alike so simple and expeditious.

The amount of notes at present in circulation throughout Scotland is estimated at three millions, or at the very utmost three millions and a half. At certain times of the year, such as the great legal terms of Whitsunday and Martinmas, when money is universally paid over and received, there is, of course, a corresponding increase of issue for the moment which demands an extra supply of notes. It is never considered safe for a bank to have a smaller amount of notes in stock than the average amount which is out in circulation; so that the whole amount of bank-notes, both in circulation and in hand, may be calculated at seven millions. The fluctuation at the above terms is so remarkable, that we are tempted to give an account of the number of notes delivered and received by the bank of Scotland in exchange with other banks during the months of May and November 1840: —

It will be seen from the above table how rapidly the system of bank exchange absorbs the over-issue, and how instantaneously the paper drawn from one bank finds its way into the hands of another.

If further proof were required of the absurdity of the notion, that a paper circulation has a necessary tendency to over-issue, the following fact is conclusive. The banking capital in Scotland has more than doubled between the years 1825 and 1840 – a triumphant proof of their increased stability; whilst the circulation has been nearly stationary, but, if any thing, rather diminished than otherwise. We quote from a report to the Glasgow Chamber of Commerce.

"The first return of the circulation was made in Scotland in 1825. Every one knows the extraordinary advance which Scotland has made between that period and 1840; for instance, in the former of these years, she manufactured 55,000 bales of cotton, in the latter, 120,000 bales. In 1826, the produce of the iron furnaces was 33,500 tons; in 1840, about 250,000 tons. In 1826, the banking capital of Scotland was £4,900,000; in 1840, it was about £10,000,000; yet with all this progress in industry and wealth, the circulation of notes, which in 1825 varied from £3,400,000 to £4,700,000, was in 1839 from £2,960,000 to £3,670,000, and in the first three months of 1840, £2,940,000."