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

With these facts before us, we consider that the measure of last session, prohibiting any further issue of notes beyond those already taken out by the banks, is almost a dead letter. We have not the least fear, that under any circumstances there can be a call for a larger circulation; at the same time, we demur to the policy which ties our hands needlessly, and we object to all restriction where no case for restriction has been shown. We look upon that measure as especially unfair to the younger banks, whose circulation is not yet established, and whose progress has thus received a material check, from no fault of their own, but from want of ministerial notice. With every system where competition is the acknowledged principle, it is clearly impolitic to interfere; nor can we avoid the painful conviction, that this first measure, though comparatively light and generally unimportant, was put out by way of feeler, in order to test the temper of the Scottish people – to ascertain whether eighteen years of prosperity might not have made them a little more supple and pliable, and whether they were likely to oppose to innovation the same amount of obstinate resistance as before. It is dangerous to permit the smallest rent to be made in a wall, for, with dexterous management, that rent may be so widened, as to bring down the whole superstructure.

In the absence of any distinct charge against the Scottish banks, which were so honourably acquitted in 1826, we shall confine our further observations to the effects which must necessarily follow upon a change in the established currency. In doing so, we shall conjure up no phantoms of imaginary distress, but merely state the consequences as they have already been explained to Parliament by men who are far better able to judge than ourselves, and even – with deference be it said – than our legislators, of the substitution in Scotland of a metallic for a paper currency. That measure is to be considered, 1st, as it will affect the banks; 2dly, as it will affect the public.

The general effect of the change would be to derange the whole of the present system. The first result would probably be the abolition and withdrawal of all the branch banks throughout the kingdom. These offices are at present fed with notes which are payable at the office of the parent bank, whither, accordingly, they invariably return. These are supplied to them at no risk or expense, whereas the transmission of gold would not only be dangerous, but so expensive as entirely to swallow up the profits. Add to this, that the banks would no longer be able to allow interest on deposit accounts; at all events such interest would be merely fractional, and too insignificant to induce the continuance of the saving habit which now so fortunately prevails. In short, all the branch business would stagnate and die. The consequence of the removal of the branch banks would be the ruin of the Highlands.

Mr Kennedy's account of the profits of banking will explain the sweeping nature of the change. "A banker's profits are derived from two sources – the brokerage upon the deposit money, and the returns that he gets from his circulation. We have tried to estimate the amount of deposits in Scotch banks, and we calculate it at about thirty millions; that, at the brokerage of one and a half per cent, yields £450,000 annually. The currency we will take at three millions, and that, at 5 per cent, is £150,000: making a gross sum of £600,000, which is the whole profit derived from banking in Scotland. Out of that are to be deducted the whole of the charges. From these figures it will be perceived that the gross profit of the currency is a fourth part of the gross profit of banking; but the expense that falls upon the currency is not so large as the expense that falls upon the other portions of the banking business; so that I should be inclined to say that, upon the average, the profit derived from the circulation bore the proportion of a third to the aggregate profit of banking."

Assuming Mr Kennedy's calculation to be correct, the profit of £600,000, derived by the banks, would thus be reduced to £400,000 by the change of currency.

But the diminution would not rest there. The brokerage upon the deposits – that is, the difference between the rates of interest given and charged by the banks – on the present calculated amount of deposits, is £450,000. from which the charges are deducted. Now we have already seen that the banks find it necessary, in order to encourage deposits, to give a liberal rate of interest; and we have also seen that, whenever interest falls to two per cent, the deposits are gradually withdrawn, and a period of speculation begins. Let us hear Mr John Thomson, of the Royal Bank, on the effect of a gold currency on deposit accounts: – "I think, on the operating deposits, we could scarcely allow any interest, and on the more steady deposits, that the rate of interest would require to be very considerably reduced."

It follows, therefore, according to all experience, that, if no interest were allowed, the deposits would be generally withdrawn for investment elsewhere; and thus another serious reduction would be made from the already attenuated amount of the Scottish bankers' profits. But besides the loss of profit on the small notes, there would be a further loss sustained by the necessity of keeping up a large stock of gold in the coffers of the bank. Hear Mr Thomson again upon this subject: —

"It would occasion greater loss than the mere profit on the small notes, inasmuch as at present we have to keep on hand a large stock of small notes, to fill up in the circle those that are taken from it by tear and wear, and to meet occasional demands. The present mode of keeping up this stock, which consists of our own notes, is done at no expense; if we had to keep a corresponding stock of gold to keep up the circle in the same proportion, we would, perhaps, if there is £1000 dispersed in small notes, require to keep up a protecting fund of £500 to meet that, or something in that proportion. So that, upon the whole, if there was £1,800,000, which was the sum assumed of notes in circulation, withdrawn, we would require to fill up the place, £1,800,000, in gold, and in order to fill our coffers with a protecting stock, perhaps from seven to nine hundred thousand, to keep up the stock; and, in addition to that, there is the expense of transmission from one part of the country to another, and the bringing it from London."

The small note circulation is here estimated at £1,800,000 but there is no doubt that it is now considerably larger. Taking it, however, at Mr Thomson's calculation, what a fearful amount of unoccupied and inoperative capital is here! This, be it observed also, is only the first reserve, which at present is represented by the small notes of the bank. According to the later evidence of Mr Blair, the Scottish banks are in the habit of holding, besides this, a further reserve of gold and Bank of England notes, equal to a fourth of their circulation, without taking into account exchequer bills, or other convertible securities which bear interest.

Thus it follows, as a matter of course, that if the small notes were abolished, and a gold currency established, there would not be room in the country for one-fourth of the present number of banks. If the banks are removed, and more especially the branches, which must inevitably fall, we should like to know from any theoretical economist, even from Sir Robert Peel, how the country is to be supplied with money?

So much for the effect which the introduction of a metallic currency would have upon the banking establishments. Let us now see what would be the consequence of the change upon the interests of the public, who are the dealers.

Now, although we hold, that upon every principle of public expediency and justice, the legislature are bound to regard with particular tenderness the interests of a body of men, who, like the Scottish bankers, have not only established, but administered for such a long time, the monetary system of the country with stability, temperance, indulgence, and success, equally removed from weak facility and from grasping avidity of gain; we must, nevertheless, allow that the interests of the public are paramount to theirs, and that if it can be shown that the public will be gainers, although the bankers should be losers by the change, the sooner the metallic currency is established amongst us the better. Here is the true test of the clause in the Treaty of Union, providing that no alteration shall be made on laws which concern private right excepting for the evident utility of the subjects within Scotland. There shall be no interference with private rights if that interference is not to benefit the public; if it does so, private right must of course give way, according to a rule universally adopted by every civilized nation. In speaking of the public, we, of course, restrict ourselves to Scotland; for although the Treaty of Union is not, strictly speaking, a federal one, and in the larger points of policy and general government is very clearly one of incorporation, it has yet this important ingredient of federality in its conception, that the laws of each country and their administration are left separate and entire, as also their customs and usages, so long as the same do not interfere with one another. It is a sore point with the supporters of a metallic currency, and a sad discouragement to their theories, that they have never been able in any way to shake the confidence of the Scottish public in the stability of their national bankers. It was no use drawing invidious comparisons between a weighty glittering guinea, fresh started from the mint of Mammon, and the homely unpretending well-thumbed issue of the North; it was no use hinting that a system which professed to dispense with bullion must of necessity be a mere illusion, which would go down with the first blast of misfortune, as easily as its fragile notes could be dispersed before a breeze of wind. The shrewd Scotsman knew, what apparently the economist had forgotten, that the piece of gold exhibited by the latter was in itself but a representative, and not the reality of property; that the gold to be acquired must be bought; that all representation of wealth within a country must be conventional in order to have any value; and further, that however fragile the despised paper might appear, that it was by convention and by law the representative of things more weighty and more solid than metal – of the manufactures of the country, of its agricultural produce, and, finally, of the land itself; all which were mortgaged for its redemption. It was in vain to talk to him of the rates of foreign exchange in the mystic jargon of the Bourse. He knew well, that when the Scottish mint was abolished, and the bullion trade transferred to London, that branch of traffic was placed utterly beyond his reach. He knew further, that the circulation of Scotland did not ebb or flow in accordance with the fluctuation of foreign exchanges, but from causes which were always within the reach of his own ken and observance. All scrutiny beyond that he left to the bank, in the solvency of which he placed the most implicit confidence; and accordingly he dealt with it as freely and as confidently as his father and grandfather had done before him, and laughed the theories of the political economists to scorn. Such is no overcharged statement of the sentiments which the Scottish customer entertains; – is he right, or is he wrong? and how would the change affect him?

In the first place, he would receive no interest upon his deposit account. This point we have already touched upon, when proving that the banks would sustain great loss by the inevitable withdrawal of their deposits; but of course the profit to the bank is one thing, and the profit to the customer is another. An operating deposit account on which a fixed and universal rate of interest is paid, is a thing unknown in England. In that country, according to Mr John Gladstone, a Liverpool merchant, and a declared enemy to the Scottish currency, the bankers only give interest on deposits by special bargain, according to the length of time that these deposits shall be entrusted to their hands. This is clearly neither more nor less than permanent loan to the bank, and, like every other private contract, is arbitrary. But an operating deposit is a totally different matter, by which the circulation of the bank paper is promoted, and which acquires actual value from the frequency of its fluctuations. It is a system so easy in its working, that no householder in Scotland is without it; and for every shilling that he deposits in the bank, he receives regular interest, calculated from day to day, without any deduction or commission, at as high a rate as if he had left, for a stipulated period, a million of money unrecallable by him, to be employed in its trade by the bank. This is surely a great accommodation and encouragement to the trader. But see how the introduction of the metallic currency would affect us. Operating deposits there would be none; for, if the banker were not actually compelled to charge a certain per centage of commission, he would at least be able to pay no interest. Or let it be granted that, by great economy, (though we cannot well see how,) he could still afford to pay a diminished rate, the proportion would be too small to tempt the dealer to the constant system of deposit which now exists, and hoarding would be the inevitable result. Or suppose that the system of deposit should still continue in the large towns, what is to become of the country when the branch banks shall have been removed? A little topography might here be valuable, to correct the notions of the theorists, who would legislate precisely for the thinly inhabited districts of Kintail and Edderachylis, as they would for the town-covered surface of Lancashire.

But there would be more important losses to the public than the mere cessation of interest upon operating deposit accounts. All the witnesses who have been examined, agree that cash-credits must be immediately withdrawn. Of all the facilities that a mercantile country, or rather the foremost mercantile system of a country, can afford to industry, that of cash-credit is certainly the most unexceptionable. Take the case of a young man just about to start in business, whose connexion, habits, and education, are such as to give every possible augury for his future success. The res angustæ domi are probably hard upon him. He has no patrimony; his friends, though in fair credit, are not capitalists; and he has not of himself the opportunity of launching into trade, for the want of that one talent, which, if judiciously used, would in time multiply itself into ten. He cannot ask his friends to assist him in the discount of bills. Large as the affection of a Scotchman may be for some descriptions of paper, he has a kind of inherent repugnance to that sort of floating private currency, which in three or in six months is sure to return, coupled with an awkward protest, to his door. Probably in his own early experience, or in the days of his father, he has received a salutary lesson, better than a thousand treatises upon the law and practice of acceptance; and accordingly, while he will lend you his purse with readiness, he will not, for almost any consideration, subscribe his name to a bill. To persons thus situated, the accommodation granted by the bank cash-credits, is the greatest commercial boon that ever was devised; but as the committee of the House of Lords, in the report already quoted, has borne ample testimony in their favour, it is unnecessary for us to dwell with further minuteness on their utility.

We must again have recourse to Mr Thomson for an exposition of the reasons which, if a metallic currency were forced upon us, would lead to the discontinuance of the cash-credits. "I do not think the cash-credits would be maintained at all; the banker's profits might be made up by the charge of a commission on each credit; but it is not probable that the holders of accounts would pay at such a rate, if they could borrow money upon bills at a cheaper rate, which they would do. They would discount bills at five per cent. A banker would not be disposed to come under the obligation to give a running credit with a cash account, and thereby bind himself to keep in his hands a stock of gold to supply the daily operations of a cash-account, while he might find it perfectly convenient to discount a bill and give the money away at once." In short, it has been stated, and distinctly proved, that the difference to the trader between an operating cash-credit and accommodation by discount, is the difference between paying five and a quarter by discount, and two and a half per cent by cash-credit. Are our merchants and traders prepared or disposed to submit to such a sacrifice; more especially when it is considered, that a bank will often refuse to discount a bill for £100, when it would make no difficulty, from its opportunities of control, in granting a cash-credit for five times that amount?

If individuals are thus to be crippled, the general commercial business of the country must retrograde as a matter of course. Still Edinburgh, and Glasgow, and the larger towns might, although they would suffer immensely, get over the crisis by adopting some system of internal arrangement, without experiencing a general crash. The great question, however, yet remains behind – What is to become of the country districts? To us who are familiar with almost the whole face of Scotland, it seems a gross absurdity to suppose, that under any circumstances, if the branch banks were withdrawn, a gold metallic currency could be made operative in the remoter districts. Mr Dunsmure, then secretary to the commissioners for the public fisheries, gave very singular evidence upon that point in 1826; so singular, indeed, that were it our purpose in this paper rather to amuse than to warn and protest, we should have dwelt more minutely upon his statements. Speaking of the silver currency, his evidence is as follows: – "The quantity of silver on the west coast is so very limited, that there is a great difficulty in getting a proper supply for the necessary purposes. Some of the people have been obliged to issue promissory notes for 5s., long after they had been prohibited by act of Parliament. I happened to be at Barra, and the officer there informed me that, having occasion to purchase some oats for a pony he found it necessary to keep, the farmer whom he paid for them declared he had not seen the face of a shilling for two years before." One of the individuals who was thus forced by necessity to contravene the statute, was a fish-curer and merchant, who kept a large store in Tobermory, and the form of his notes is at once curious and explanatory. "For want of change I owe you 5s., and for four of these tickets, I will give a one-pound note." The establishment of branch banks may somewhat have mended matters on the west coast, though we doubt if the improvement has been commensurate with that of other districts in Scotland, owing to the severe, and in our view mischievous, commercial enactment which supplanted the native manufacture of kelp, by the substitution of foreign barilla; but if the branches are removed, no discovery short of the philosopher's stone will establish the metallic currency there. Do our legislators seriously mean to compel the population of about one-fourth of Scotland, comprehending the whole western and northern divisions, to accept the fish-curer's notes, instead of those of a joint-stock bank, with its paid-up capital for security?

We have not space here to proceed with a minute analysis of the evidence which was formerly given. Suffice it to say, that it is of a much more serious nature than even those who have general notions upon the question can possibly anticipate. In the event of any change which shall derange the present system of currency, the landowners and agriculturists of every class must prepare themselves for crippled markets, curtailment of the sales of their produce, and consequently for a great reduction in the rent and value of land. This will apply equally to the fisheries, the distilleries, and the linen trade – to every branch, in short, of internal manufacture, which is now prosperous, and which has become so from the superior ease, facility, and advantage of our present currency. Compared with these, the interests of the bankers are actually trifling. Such of them as may remain under the altered system, will no doubt, in one way or another, secure their profit; but for that profit the country at large will have to pay a heavy price.

The great question now for Scotland to determine is, whether these interests are to be sacrificed to the theories of any ministry whatever, without resistance of the most determined nature. That resistance, in our deliberate opinion, she is not only entitled, but bound, to make. We have purposely abstained from dwelling – nay, we have scarcely even touched – upon any points of extraneous irritation which may exist between the sister countries. Our wish is, that this question should be tried upon its own merits, independently of any such considerations; and we are glad to see that this line of conduct has been adopted by every one of the numerous bodies who have hitherto met to protest against the change. Believing thoroughly and sincerely that we have a clear case, both on the score of justice and expediency, we do not wish to revive any warmer feeling, though we are convinced that a word could arouse it. Scotland in this matter feels, and will speak, like a single man. We are sure of the unanimous support and energy of the members for the ancient kingdom; and although that phalanx forms but an integral part of the legislature of Great Britain, we will not allow ourselves to believe that any minister will proceed with so obnoxious a measure in the face of their united opposition. One word only of advice we shall venture to offer them, before they leave their native country to do battle in her behalf. Compromise nothing! Do not, as you value the interests of Scotland, permit even the smallest interference with a system which has already obtained the unqualified approval of the state. If you do, rely upon it that one change will be merely the forerunner of another – that the statute-book, in each succeeding session of Parliament, will exhibit new changes and new modifications, until, gradually and by piecemeal, we shall lose all the benefits of those national institutions which you are now ready and pledged to maintain whole and unimpaired. Any other line of tactics must, in the long run, prove not only injurious, but fatal, to the cause you support.

And now we have said our say. It is not for us – more especially as the batteries of our opponents are still masked – to remonstrate with an administration which assuredly, on many points, has a just claim to the support and confidence of the nation at large. Still we may insinuate the question – Is it very politic, in the present state of matters, to rouse up a feeling in peaceful Scotland which may, with little fanning of the fuel, terminate in an agitation quite as extensive as that which at present unhappily prevails in Ireland? It is not only wrong, but – what Talleyrand held to be a greater sin in a statesman – most injudicious, to overlook in such a matter the tendency of the national character. Scotchmen have long memories; and although the days of hereditary feuds have gone by, they are not the less apt to remember and to cherish injuries. Would it not, therefore, be prudent to adhere to the homely but excellent maxim, "Let well be alone;" and to abstain from forcing the country into a position which it is really unwilling to assume, merely for the sake of illustrating another proverb with which we close our remarks upon the Scottish Banking System – "It is possible to buy gold too dear."