The 1730's saw the opening of non-issuing private banking houses in Edinburgh. They operated off of cash credit accounts held at the issuing banks and offered commercial loans along with bills of exchange. Cash credit accounts closely resembled what is today known as a line of credit, and were just one of many innovations brought about by the Scottish banks to attract customers. Merchants that offered loans and other banking services as a side business generally started the non-issuing banks. Eventually, they moved into banking full-time and dropped their previous business. This evolution was enabled by the absence of restrictions on entry into banking.
In 1749 and 1750 respectively, the Bank of Scotland and the Royal Bank formed partnerships in Glasgow, which they saw as an opportunity to increase their note demand. They originally considered opening their own branches, but because of previous poor results with attempts at branching, they took what they saw as safer route and formed banking partnerships. However, these partners did not act as the banks had hoped and began issuing their own notes instead of circulating the chartered banks' notes. In an act of retribution, the chartered banks met and agreed to withdraw all credit from the Glasgow banks. Like many cartels before and after, they were not able to come to a satisfactory agreement and the attempt to make the Glasgow banks illiquid failed.
In July 1746, the British Linen Company was chartered. It followed the same path into banking as some of the smaller merchants had in Aberdeen during the 1730s, but with success on a much larger scale. In 1747, the British Linen Company started issuing interest-bearing notes to pay "agents, weavers, manufactures, and other customers." (Malcolm, p. 26) It had become a necessity for its agents, who were spread out all over the country, to have these funds at hand in order to facilitate the company's linen trade. In 1750, they moved further into the banking business by issuing non-interest bearing notes. By 1760, the British Linen Company had completely stopped the linen trade and was devoted fully to banking. Using their agents throughout Scotland, they instituted the world's first successful branch banking arrangement (12 branches by 1793) and by 1845 had the largest note circulation in Scotland.
The Banking Company of Aberdeen entered the market in 1747 and promptly issued too many notes for its specie holdings. They were readily made illiquid by the return of notes from Edinburgh and went under in 1753. Perhaps the most important aspect of this occurrence was a ruling that summary diligence did not hold for bank notes except those issued by the Bank of Scotland. A Banking Company of Aberdeen note holder filed the lawsuit. It was not until over 10 years later, in 1765, that this ruling was reversed.
As an industry, the 1750s and 1760s were a time of many new entrants into the market, but most were small and provincial. The industry went from 14 firms in 1750 to 23 in 1765 and then 32 in 1769. However, the large number of new entrants also led to some firms being mishandled, which was exemplified by the management of the Ayr Bank.
The Ayr Bank was founded in 1769 and promptly found itself illiquid. It had over-issued notes and by 1772 was bankrupt with losses of about 666,000 British pounds. The failure also bankrupted 8 small private bankers in Edinburgh, resulting in the loss of 9 of the 29 banks that were in business at the start of 1772.
Be Sure to Continue to Page 3 of "A Brief History and Analysis of Scottish Free Banking, 1716-1845".
