Elasticity

Organization of the Banks of Scotland

Banking in Scotland is conducted upon a system resembling in many respects the English, and yet differing from it in several important particulars. There are ten banks of issue, each of which has many of the privileges of the Bank of England, but without the monopoly which the latter possesses in England and Wales. These ten banks are strictly private institutions, but are allowed to issue notes after the method of the Bank of England. The act of 1845 regulating the banking system of Scotland, fixed the volume of authorized note issues of all the banks at £3,087,209, which, however, has since been reduced by the suspension of two banks to £2,676,350. All note issues above this amount must be fully covered by coin, one-fifth of which may be silver. The circulation on June 30, 1900, amounted to £7,903,000, and in addition to this, Bank of England notes circulate extensively in Scotland. A large portion of the circulating bank notes of Scotland are in denominations of less than £5, while the Bank of England notes are all of £5 or upwards.

May and November in Scotland are the seasons for making the regular semi-annual settlements. Interest on mortgages is then collected, and annuities are received. The country folk draw the interest on their bank deposits, and there is a general liquidation throughout the country requiring an additional volume of currency. The banks are then pressed to enlarge their circulation, and in order to do this they must in some cases bring specie from the Bank of England, the great storehouse of cash for the United Kingdom. After the drain is over the circulation falls to its normal volume and the boxes of gold are returned to London, without, in many instances, having been opened. The elasticity of the currency would be much greater were it not limited by the requirement of the coin deposit, but safety in Scotland, as in England, is preferred to elasticity, and the quality of safety is so great that the people prefer bank notes to gold.

A novel feature of the Scotch system is the cash credit accounts, by which a customer whose account is secured by the guarantee of two friends, is supplied with funds from time to time as he needs it to the agreed limit. The system practically amounts to the granting of permission to firms or individuals to overdraw their bank accounts to a certain extent. The design is to furnish a working capital to tradesmen and farmers, especially those who are possessed of good character but with little means. The customer is only charged interest from day to day on the amount which he actually draws under his cash credit and his deposits go to reduce the amount of such interest. The difference between this arrangement and the usual way of covering the loan with a note is that the daily deposits of the customer reduce the interest charge and the bank has control of all sums not in active use.

Scotland has eleven banks and these have 1,077 branches. Nowhere else is the system of branch banking so extensively carried on, a feature scarcely known in the United States. Scotland has one bank or branch bank to every 4,000 of population against one to about every 10,000 in England, and one national bank to nearly every 20,000 people in the United States. With a population of only a little over 4,000,000 Scotland has bank deposits of £103,674,-000, or nearly £26 per capita. This speaks well for the thrift of the people and may be attributed in a large part to the diffusion of branch banks into every corner of the public domain. In the early history of banking in Scotland a low rate of interest was paid by the banks on current deposit accounts. This no doubt stimulated habits of saving and thrift among the people and taught them to use the banks as depositories for their funds. Gradually the interest was reduced and finally abolished on all but savings accounts, with little or no diminution of the number and size of the depositors' accounts. Governed by a head bank, the expense of conducting the branches is comparatively small, amounting on an average to not more than 1 1/2 per cent on the deposits, and thus with the economy of resources afforded by the system, the eleven institutions produce earnings which enable them to pay dividends of 8 to 15 per cent per annum.