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 LETTER 
 
 JAMES WILLIAM GILBART, ESQUIRE, 
 
 MANAGER OF THE LONDON AND WESTMINSTER BANK, 
 
 ON THE RELATIVE MERITS OF THE 
 
 ENGLISH AND SCOTCH BANKING SYSTEMS ; 
 
 PRACTICAL SUGGESTIONS FOR THE CONSOLIDATION OF 
 THE ENGLISH JOINT-STOCK BANKING INTEREST. 
 
 BY 
 
 ROBERT BELL, 
 
 ACCOUNTANT, WESTERN BANK OF SCOTLAND. EDINBURGH. 
 
 EDINBURGH: 
 
 BELL & BRADFUTE, 12 BANK STREET 
 
 AND RIDGWAY & SONS, LONDON. 
 
 1 
 
 MDCCCXXXVIII.
 
 EDINBURGH : 
 
 Printed by Thomas Allan & Co. 
 
 265 High Street.
 
 LETTER, &c. 
 
 Sir, 
 
 Your position, at the head of one of the most power- 
 ful joint-stock banks in England, and your connection with 
 many similar establishments throughout the country, have led 
 me to address the present letter to you. It seems to me that 
 you are in an especial manner called upon, from the situation 
 which you occupy, as well as from the talent which in this 
 department you have displayed, to take a prominent part in 
 consolidating and protecting what may be called the joint-stock 
 banking interest of England. And although such an under- 
 taking will undoubtedly demand a large sacrifice of your time, 
 and an energetic contest, not only with prejudices, but Avith 
 conflicting and adverse interests, yet I can entertain no doubt, 
 that, with the enlightened co-operation of those to whom you 
 must have access, or with whom you are already professionally 
 connected, you have the means of conferring one of the most 
 important benefits which, under existing circumstances, can 
 be conferred, on the monied interests of this country. 
 
 One difficulty, which stands at the very threshold, arises 
 from the disrepute and discredit into which joint-stock bank- 
 ing in England has fallen, in consequence of the mismanage- 
 ment of the rash and ignorant persons to whom the manage- 
 ment and direction of several of the provincial establishments
 
 have been confided. But this is not the only difficulty ; for, in- 
 dependently of many instances of individual ignorance or mis- 
 conduct, there appears to he some radical defect in the joint- 
 stock banking system of England. It is true that you have pro- 
 fessed to copy the Scotch mode of banking ; and in some of the 
 details of your system you have even made valuable improve- 
 ments on that of Scotland. Still, however, you have failed to 
 adopt what may be called the distinctive and most valuable prin- 
 ciple of Scotch banking. You have left the English establish- 
 ments with no efficient control on the operations of each other, 
 and, in particular, without that most salutary practical check 
 on their issues, which is, and long has been, in operation in 
 Scotland. The consequence has been, that the English joint- 
 stock banks, under the influence of a short-sighted rivalry, 
 by indicating distrust of each other, have, in the aggi'egate, 
 failed to obtain the confidence of the public, without which it 
 is in vain to think of successful banking. Public confidence 
 is, in truth, the fundamental principle on which the whole 
 banking system rests ; and unless you find the means of se- 
 curing that in its largest acceptation, England cannot expect 
 to enjoy the inestimable benefit of a stable and permanent 
 system of joint-stock banking. 
 
 That the English joint-stock banks have not yet obtained the 
 necessary degree of public confidence, is evinced by the facts, 
 that investments in their stocks yield a return of from five to 
 seven and a half per cent. ; and that the paper circulation of 
 the country, notwithstanding their widely diffused constitu- 
 encies and their numerous branches, is to a great extent in the 
 hands of the Bank of England, and of the private banks. It is 
 true that this is a result traceable in part to other causes. The 
 monopoly, privileges, and influence of the Bank of England 
 have long operated as checks on banking cntei'prise in England. 
 And although the restriction which was formerly enforced all 
 over England, as to the number of partners in banking com-
 
 panics, has now been removed, yet the exclusive privilege still 
 possessed by the Bank of England in London, and for sixty 
 miles around it, has not been without its effect. But, apart 
 from these considerations, you have also had to contend, in 
 England, with the suppression of the small bank notes, prac- 
 tically a sacrifice to the interests of the Bank of England, and, 
 as a measure of policy, one of the most unfortunate mistakes 
 which was perhaps ever committed. 
 
 It was believed, and much insisted on, at the time, by a cer- 
 tain class of our political economists, that the commercial 
 crisis of 1825-26 owed its origin to the encouragement given 
 to over-trading by improvident banking ; and that the private 
 banks had been induced to afford that encouragement by the 
 profits arising from the circulation of their small notes. The 
 bank of England saw at once the advantages likely to accrue 
 to that establishment, from the suppression of those notes ; and 
 Sir Robert Peel, misled by the outcry raised by the econo- 
 mists, and echoed by the bank, introduced the statute by which 
 they were abolished. A similar measure, it is believed, would 
 not have been distasteful to one or two of the great banking 
 establishments in Scotland, and exertions with that view were 
 actually made ; but this portion of the kingdom was saved from 
 that misfortune by the memorable and patriotic exertions of 
 Sir Walter Scott; whose sagacity, in foreseeing the consequen- 
 ces of such a measure, was no less remarkable than the ability 
 with which he successfully averted the evil, by demonstrating 
 its pernicious tendency. 
 
 But even supposing that the private banks and their small 
 notes were answerable for the commercial distress of the year 
 1825, every practical banker knew, what has since been tested 
 by painful experience, that the remedy proposed was wholly 
 inadequate as a protection against the evil, while at the same 
 time it imposed on the country the heavy expense and the 
 great inconvenience of a metallic currency. The remedy for
 
 this evil, whether imputable to the private bankers or not, 
 never ought to have consisted of a curtailment of the profits of 
 banking. On the contrary, the duty of Government was to 
 sustain those profits, so as to have induced men of capital and 
 chai'acter to embark in a trade on which the whole commercial 
 transactions of the country depended, and at the same time, if 
 possible, to have placed banking under a system of control cal- 
 culated to have discouraged speculation and over- trading. 
 
 The course pursued by Sir Robert Peel, however, was dia- 
 metrically the reverse of this. Having curtailed the banks of 
 the profits arising from the small-note circulation, he withdrew 
 the limitation on the number of partners in banking compa- 
 nies, and the result was precisely what might have been an- 
 ticipated. Joint-stock banks sprung up in every quarter of 
 the country, which being placed, in too many instances^ under 
 the management of men unacquainted with the first principles 
 of practical banking, the grossest errors and abuses ensued ; 
 and business was pushed, not only to the full extent of the 
 capital of those establishments, but to the utmost limit of their 
 credit. Nor was this improvidence confined to the newly 
 founded companies. Private banks and the Bank of England 
 vied with the new establishments in this race of folly ; and a 
 degree of excitement was thus given to trade, to production, 
 and to mercantile speculation, M'liich seemed to be boundless. 
 That check, however, which ouglit to have been maintained 
 by the operation of an efficient system of internal exchange, was 
 effectually but severely manifested, in the national exchange with 
 foreign countries, and more particularly with America. The 
 Bank of England, by the rapid withdrawal of gold from its 
 coffei's, was roused from the false security in which it had 
 been reposing. But instead of applying a wise and cautious 
 remedy to the evil, the bank made a sudden pause in its ac- 
 customed operations, and a concomitant rise in the rate of in- 
 terest. And the consequent alarm and inconvenience, brought
 
 about a commercial or monetary crisis at home, and involved 
 America in bankruptcy. 
 
 The causes and history of the recent crisis strikingly illus- 
 trate the inefficacy of the withdrawal of the small notes as a 
 check to over-trading. If ever a commercial crisis was pro- 
 duced by improvident bank accommodation, the crisis of 
 1836-37 was of that description. And yet what is the specific 
 which is now proposed as a protection against a recurrence 
 of the evil ? Why, nothing short of making the Bank of 
 England the sole bank of issue ! The American President's 
 scheme of superseding the whole system of paper currency, 
 and supplying its place by gold and silver, with treasury 
 strong boxes, is preferable to this. There is a transparent ab- 
 surdity in the American proposal, which is less insidious, and 
 likely on this very account to be less pernicious, than the 
 scheme of the Bank of England. In its operation on commer- 
 cial prosperity, the American expedient would have indeed 
 no parallel except in the short-sighted improvidence of the 
 aborigines of that continent, who, as we are told, have been 
 known to set fire to the forests which surround them, in order 
 to dislodge and kill the game which may fly from the confla- 
 gration ; forgetful, in their eagerness to provide for a present 
 exigency, that they are depriving themselves of the shelter and 
 protection on which their future comfort, if not their very ex- 
 istence, may depend. But while we can regard with derision 
 the semi-barbarous views of the American President on the 
 subject of banking and circulation, we have in truth but little 
 cause to plume ourselves on our own superiority. For it is a 
 melancholy fact, that the Transatlantic treasury strong-box 
 system, is practically embodied in Sir Robert Peel's unfortu- 
 nate measure for substituting the expensive medium of gold 
 and silver for the English small notes. 
 
 If Sir Robert Peel had given the subject of banking and the 
 currency that attention which he is so eminently qualified to be-
 
 stow, ami which their importance so imperiously demands from 
 every statesman, he could not have been blind at the time ; and 
 even if lie had been so, assuredly he cannot be blind now, to the 
 vital error which he committed when he abolished the small 
 bank notes. But if this distinguished statesman, and the politi- 
 cal economists whose theories he adopted, remain still uncon- 
 vinced, let them look to Scotland, and observe the working of 
 the banking system here. In this country, by far the greater 
 portion of our trade is carried on by means of a small-note 
 circulation ; and it is an undeniable, and at the same time a 
 remarkable fact, that while England, during the past year, has 
 suffered in almost every branch of her national industry, 
 Scotland has passed comparatively uninj ured through the late 
 monetary crisis. Indeed, when Sir Robert Peel views the 
 subject, aided by the lights of recent expei'ience, he will find, 
 that the evil to be guarded against is not to be found in one 
 description of notes more than another, but in the uncontrolled 
 issue of any notes, whether large or sihall. 
 
 Now, Sir, this is the point to which I wish more particular- 
 ly to draw your attention. The great object of civilized go- 
 vernments, in issuing and maintaining a gold and silver coin- 
 age, has been to afford a standard currency, in which pay- 
 ments may be reciprocally made and received. When the calls 
 of an increased and extensive commerce demanded the addi- 
 tional accommodation of a paper currency, the difficulty to be 
 surmounted was, to maintain, not only a nominal, but a real 
 parity between these two descriptions of currency, and at the 
 same time so to control the issue of paper, as to prevent the 
 country from being drained of bullion, by a general deprecia- 
 tion of the circulation, arising from over-issues of paper. 
 
 Had Sir Robert Peel confined his attention to these definite 
 objects, the country would have derived incalculable benefit 
 from his labours. The suspension of cash-payments during 
 the war was a temporary remedy for an accidental and press-
 
 ing emergency; and Sir Robert Peel was guided by the 
 soundest principles of political economy, when, on the conclu- 
 sion of the war, he adopted his wise and cautious measure 
 for the resumption of cash payments. That this measure was 
 accomplished at the expense of agi'eat national sacrifice, involv- 
 ing a most serious change on all monetary relations, is unde- 
 niable ; but it was a necessary sacrifice, and it has been ac- 
 quiesced in and endured by the country. It must never be 
 forgotten, however, that the policy of that measure rested on 
 a principle entirely different from that which led to the aboli- 
 tion of the small notes ; although the two measures have been 
 ignorantly blended, by speculative reasoners on the subject. 
 
 The numerous failures among private bankers in England 
 during the years 1825, 1826, called for legislative interfe- 
 rence ; and it was then that the abolition of the small notes 
 was accomplished, and that at the same time the foundation 
 was laid for joint-stock banks in England, by the repeal of 
 the statute as to the number of partners in a banking com- 
 pany. But the mistake was, that this great change was not 
 accompanied by corresponding guarantees against the conse- 
 quences of opening such a field for adventure. The public con- 
 fidence, upon which banking depends, requires as its basis an 
 efficient control over the issues of paper ; and the beauty of the 
 Scotch system, although it seems to have been almost entirely 
 overlooked in England, is, that this control is maintained, not by 
 legislative enactments, but by what in practice has been found 
 greatly more efficacious, viz. the surveillance of the entire bank- 
 ing community of the country, over the issues of each individual es- 
 tablishment. 
 
 During periods of great national prosperity, banks which 
 have not obtained the confidence of the public, in the largest 
 acceptation of the word, have frequently established such a 
 credit in their immediate vicinage as to command a large 
 amount of deposits and circulation. But when a period of
 
 10 
 
 mercantile or commercial difficulty arrives, the transient cre- 
 dit which tliey have obtained is lost or impaired, and they are 
 called upon to repay the sums wliicli have been deposited with 
 them, and to retire the notes which they have pushed into cir- 
 culation, precisely at the time when those of their customers 
 who have become dependent on them in seasons of prosperity, 
 -cannot lessen tlie amount of their engagements, and when, if de- 
 prived of their accustomed banking accommodation, they must 
 be reduced to bankruptcy. The natural consequence of this state 
 of things is, that such banks become themselves embarrassed, 
 and, if not supported by extraneous assistance, must come to 
 a stand. But if the commercial distress be general, this ex- 
 traneous assistance cannot be obtained ; and the manner in 
 which the Bank of England, on such occasions, administers 
 its assistance, has not been sucli as to encourage implicit re- 
 liance on that establishment, on the part of the banking inte- 
 rest generally, and least of all on the part of the new joint- 
 stock banks. ; 
 
 These, then, are the circumstances under which you are 
 called upon to make provision against the day of adversity ; 
 and it is to the means of attaining that object that I intend to 
 confine myself in the remainder of these observations. 
 
 Two great errors appear to have been committed in the 
 formation of joint-stock banks in England, and, until these 
 are remedied, such establishments can hardly expect to reach 
 a higher degree of importance or credit than is attainable 
 by a wealthy private bank. These evils are, in the first place, 
 too small a capital relatively to the extent of business under- 
 taken ; and, in the next place, the circumstance of the issues 
 of the joint-stock banks being left uncontrolled by any effective 
 system of Exchange. Hence it happens that the stock even of 
 your most successful joint-stock banks is not much above par 
 in the share market, while your circulation is circumscribed 
 to the district immediately surrounding the seat of the bank. J
 
 11 
 
 In these two most essential points, the English system dif- 
 fers from the Scotch ; and the difference is so important as, 
 in my humble apprehension, sufficiently to account for the 
 greatly higher value of the stock of similar banks in Scot- 
 land ; and, in general, to explain how It happens that our 
 banks of issue are so favourably distinguished, even from the 
 very best of the English banks. 
 
 The advantage of a small capital in banking is, that it ena- 
 bles the establishment, if at all successful in business, to pay 
 a large dividend. The profits of banking depend, in a great 
 measure, on the amount of deposits and circulation, and ac- 
 cording as these are great or small, compared with the extent 
 of the capital, will the company be enabled to divide a larger 
 or smaller dividend. It therefore becomes the obvious po- 
 licy of those establishments, the managers of which conceive 
 that the success of a bank is proved by the early payment 
 of a high dividend, to keep the capital of the company within 
 the narrowest possible limits. This system has been carried 
 to the utmost extreme in England ; and hence, although large 
 dividends have been paid to the shareholders, there has been 
 no corresponding increase of confidence on the part of the 
 public. 
 
 The Scotch banks, on the other hand, have pursued a di- 
 rectly opposite course. Their object has been to secure pub- 
 lic confidence by the extent of their capital, and they have 
 continued to pay moderate dividends to their shai'eh older s, 
 until justified in augmenting them by years of success, and 
 a large accumulated sinking-fund. So well, indeed, is this 
 system understood, and so completely has it attained its pur- 
 poses, that the slightest appearance of improvidence displayed 
 by a Scotch joint-stock bank, in fixing the amount of its divi- 
 dend, has been invariably attended with a decrease of the public 
 confidence in the stock of the establishment. In this manner 
 public confidence has been secured, the value of Scotch bank
 
 12 
 
 stock has risen in the market, and the shareholders have re- 
 ceived their extra profits as a bmins, or in the increased value 
 of their own shares. Thus, instead of being looked upon as 
 establishments aiming at the ephemeral advantage of making 
 a large dividend, for stock-jobbing or temporary purposes, our 
 banks have almost invariably assumed the character of per- 
 manent national establishments, identified with the prosperity 
 of the country, and, by means of their small-note circulation, 
 conferring benefit on, as well as obtaining the confidence of, 
 every class in the community. 
 
 The impatient and purblind eagerness of some of the Eng- 
 lish joint-stock banks to declare large dividends, has intro- 
 duced the pernicious system of re-discounting, which has been 
 so justly reprobated. It is hardly possible to imagine a sys- 
 tem better calculated than this is to bring joint-stock bank- 
 ing into discredit with the public. In this way banks with 
 constituencies, fitted, under good management, to confer the 
 greatest benefits on the country, as well as on the copartners, 
 are made dependent on the Jews and bill-brokers of London ; 
 and the fate of the Northern and Central Bank of England is a 
 notable and instructive example of the slender reliance which 
 can be placed on such resources, when a monetary crisis 
 
 arises. 
 
 These errors, which have been less or more apparent in the 
 formation and management of many of the recently established 
 English joint-stock banks, have been greatly aggravated by 
 the want of that clicck and control over the issues of these 
 several banks, which has been found so efficacious in Scotland. 
 I allude to the arrangement under which the exchanges of the 
 notes of the different Scotch banks is managed, and their over- 
 issues (wherever they have been made) returned upon them in a 
 manner, and within a time so short, as to hold out very slender 
 encouragement to that species of mismanagement. Indeed, by 
 means of this expedient, any issue of notes which the resources
 
 13 
 
 of the particular bank cannot sustain is rendered almost imprac- 
 ticable ; and as I cannot help thinking, that joint-stock bankers 
 in England are not sufficiently alive to the practical advantages 
 of this part of the Scotch system, I shall endeavour to explain, 
 very briefly, how it is managed. 
 
 The system of exchanges centres in Edinburgh. In that 
 city a general exchange of the bank notes of all the banks of 
 issue in Scotland, takes place twice a week. This exchange is 
 made alternately within the office, and under the superintend- 
 ence of the Bank of Scotland, and of the Royal Bank. On 
 these exchange days clerks from all the banks having esta- 
 blishments in Edinburgh assemble, bringing with them the 
 notes which each bank has collected, not only in Edinburgh, 
 but, by means of their branches, all over the country ; and 
 as the Edinburgh banks act as agents for the several pro- 
 vincial banks, and, as such, exchange or give value for their 
 notes, the whole banking interest of Scotland, so far as con- 
 cerns the exchange of notes, is represented in the " Clearing, 
 room." 
 
 On these occasions a mutual exchange is made by the several 
 clerks assembled, giving the notes of other banks which they 
 hold, and taking their own in exchange. After this exchange 
 of notes, a balance is struck, and each clerk hands over to the 
 officer of the presiding bank a statement, showing the amount 
 of the balances as between his own bank and each of the other 
 establishments. The aggregate balance on this statement, 
 shows the result of the day's exchange, as it affects each bank ; 
 and that balance will be for, or against, any given bank, in the 
 precise proportion in which its recent transactions have ex- 
 ceeded or fallen short of its emerging and available resources. 
 
 The ultimate balance against every bank was formerly paid 
 by a draft on London at ten days' date. But this mode of 
 settlement ha^ang been found inconvenient, and having on 
 one occasion led to considerable loss, in consequence of the
 
 14 
 
 failure of a plivate bank in Edinburgli, a different arrange- 
 ment was then made, and is now acted upon. According 
 to that arrangement, every Scotch bank of issue, having an 
 establishment in Edinburgh, is bound to hold a certain quota 
 of L.IOOO exchequer bills. This quota is proportioned to the 
 average circulation of the particular bank ; and with these ex- 
 chequer bills the balances of exchange are paid, the fractional 
 parts of L.IOOO being settled by L.lOO Bank of England 
 notes, or gold. 
 
 As the object of this system is to oblige each bank to hold a 
 certain amount of tangible government paper to meet any fluc- 
 tuation and excess in its issues, the several banks are farther 
 bound, under the general exchange arrangement, to sell or to 
 buy exchequer bills to or from each other, whenever the num- 
 ber of bills which any one bank holds exceeds one third, or falls 
 short in the same proportion, of the conventional quota. These 
 purchases and sales of exchequer bills made from and to the 
 banks reciprocally, are settled for by the bank making the 
 purchase, by a draft on London at five days' date, with a com- 
 mission equivalent to the eight days which the draft has to run 
 at the exchequer bill rate of interest. In order to prevent the 
 risk of these mutual sales and purchases of exchequer bills be- 
 ing converted into stock-jobbing transactions, the purchases are 
 made at par, and each bank holds its quota in its own name, 
 direct from government, while the general supply of exchequer 
 bills is kept in the circle by being specially marked as " Edin- 
 burgh Exchange Exchequer Bilhr 
 
 Still farther to complete the control of the banking interests 
 over these exchange arrangements, a statement is produced by 
 each bank, on every exchange day, showing the amount of 
 exchequer bills which it holds. And it is only necessary to 
 add, that these exchange regulations, which have been found 
 so salutary in practice, are the result of mutual and voluntary 
 concert among all the banks; and although it may be said*
 
 15 
 
 that tliey are not compulsory, yet in eflPect they are so, since 
 any bank of issue refusing to accede to them would incur the 
 risk of having its notes refused by the combined banks, which 
 in Scotland would be tantamount to a suppression of the non- 
 acceding bank as a bank of issue. 
 
 In addition to these exchanges in Edinburgh, there are also 
 exchanges made on the same days in Glasgow ; and the ba- 
 lances being advised by post to Edinburgh, are settled for 
 next morning in the same manner, by exchequer bills and 
 Bank of England notes. So also, in order to save the trouble 
 and risk of transmitting to Edinburgh or to Glasgow, notes 
 collected by the different agents in the country, wherever 
 there are two or more branch -banks in the same town, their 
 managers or agents exchange notes, and advise the state of 
 balances to Edinburgh, when they are included in the next en- 
 suing general exchange. 
 
 What I have now said may be sufficient, without going into 
 farther detail, to give a general idea of our system of exchanges. 
 The Scotch banking interests have been mainly indebted, it is 
 believed, for the complete organization of this system, to Mr 
 Blair, the treasurer of the Bank of Scotland, one of the most 
 talented of our Scotch bankers ; and although in description it 
 may appear complicated, nothing can be simpler or more satis- 
 factory than its operation in practice; nor can any check be more 
 efficacious. Legislative enactments might be evaded, or they 
 might prove needlessly inquisitorial, or they might impose un- 
 due and impolitic restraints on the freedom of trade. But this 
 system leaves the internal operations of each bank entirely un- 
 controlled, while at the same time any over-trading, or impro- 
 vident issue, is immediately exposed and checked by its rivals in 
 trade — truly by means of a great mercantile union amongst 
 the traders themselves, for protecting the public, and giving 
 that general stability and credit to the entire banking inte- 
 rest which, in Scotland at least, seems to be thought essential
 
 16 
 
 to the well-being and success of each individual establish- 
 ment. 
 
 I am well aware, that in many of the provincial towns of 
 England there is a sort of exchange established. That is to 
 say, where there are two or more banks in the same town, 
 they exchange each other's notes, and settle the balance by a 
 draft on London. But it would be a great mistake to suppose 
 that this resembles the general system now acted on in Scot- 
 land. By the English practice, the notes of neighbouring 
 banks are rendered current for a few miles around the offices 
 of the respective banks, whereas, by the Scotch system, the 
 notes of the most insignificant bank in Scotland circulate 
 from one extremity of the country to the other. In short, while 
 the Scotch notes pass current and unquestioned throughout 
 Scotland, the notes of an English joint-stock bank are doubt- 
 ed or rejected whenever they pass beyond the immediate in- 
 fluence of the bank by which they are issued. A rival bank in 
 England rejects the notes of a competitor, and thinks he does a 
 service to his own establishment ; whereas in Scotland the note 
 of a rival bank is readily taken by any other bank, and thereby 
 withdrawn from the circulation, and reduced into money at the next 
 exchange. Besides, while this mutual distrust of each other, 
 by which English banks are guided, necessarily recoils on 
 themselves and on the whole system, it is attended with very 
 great practical inconvenience. For a man caimot pass from one 
 county to another until he has exchanged all his local notes, at 
 the particular bank where they are payable, for Bank of Eng- 
 land notes or gold, or for a letter of credit. 
 
 Doubtless there are obstacles to the establishment in Eng- 
 land of such a system as we have in Scotland ; and not the 
 least formidable of these obstacles is the influence of the Bank 
 of England, and the circumstance of the notes of that estab- 
 lishment being a legal tender. But still there appears to be a 
 short-sighted jealousy among the provincial English banks,
 
 17 
 
 which it would be of the utmost consequence to counteract. 
 How is it possible that your English joint-stock banks can 
 secure the confidence of the public, while they betray such 
 a want of confidence in each other ? A system of exchanges, 
 well arranged and based on the system which I have explain- 
 ed, might go far, I humbly think, to accomplish this desirable 
 object, and to consolidate the joint-stock bank interest of 
 England. Until some such arrangement is introduced, your 
 currency cannot be maintained in a vigorous and healthy state ; 
 nor will the joint-stock banks derive the full pi'ofits from 
 their circulation. 
 
 It has been said that England is too extensive a country to 
 admit of the introduction of such a system. But this objection 
 seems not to be of much weight ; since, by selecting one or two 
 large towns as centres for the system, and concentrating the 
 whole in London, the most remote agency in England might 
 be brought nearer the place of general exchange, than many of 
 our northern bank agencies in Scotland are to Edinburgh. 
 
 A more formidable objection, perhaps, to the introduction 
 of the Scotch system of exchanges in England, is to be found 
 in the fact, that the profits of the English circulation are not 
 equal to that of the Scotch. The profits derived in Scotland 
 from the small-note circulation enable our banks to sustain 
 the expense of our system of exchanges ; and it is undoubtedly 
 true, that the suppression of the small-notes in England has 
 burdened that country with a heavy load of gold currency, by 
 which several millions of the national capital are rendered un- 
 productive ; and several hundred thousands of pounds annually 
 lost by the wear and tear of the coin, and the expense of coin- 
 age. But if, in addition to these evils, the want of small notes 
 should prove a barrier to the introduction into England of the 
 salutary system of exchanges which we in Scotland enjoy, it 
 may well deserve the consideration of Pai'liament whether it
 
 18 
 
 would nol be adviseable to restore that valuable medium of 
 circulation. 
 
 The resumption of cash payments, merely made the paper 
 currency legally convertible into gold. But our system of ex- 
 changes has in truth converted our paper issues into gold, or 
 its equivalent exchequer bills, by withdrawing every super- 
 fluous note from circulation. Hence it is that our Scotch 
 paper currency is, for all practical purpose?, as secure and in- 
 finitely more convenient than the English gold currency. At 
 the same time we have made it the interest of every banker in 
 the country to collect the notes of rival establishments, and 
 thereby to withdraw them from cii'culation, and convert them 
 into gold or Government paper. Here, then, we have a result 
 which in England it required the sanction of the Legislature 
 to confer on the notes of the Bank of England, brought about 
 in Scotland solely by a well-devised and enlightened union of 
 private interest with public convenience and safety. 
 
 Nor are these benefits, great as they are, the only advantages 
 which we have derived from our system of banking. Our one- 
 pound notes connect and familiarise every artizan and labourer 
 in the country with our banking establishments; and the im- 
 plicit confidence in our paper currency thus created, and perpe- 
 tuated by the general experience of the sufficiency of our banks, 
 has on many occasions been remarkably illustrated. It is no 
 exaggeration to say, that at this moment nine tenths of the 
 labouring classes of Scotland, if they had their choice, would 
 prefer a one-pound note to a sovereign ; and, as a consequence 
 of this feeling of security, combined with a sense of the oilier 
 advantages of the system, no one in Scotland can have forgot- 
 ten the truly national stand, on behalf of our currency, which 
 was made by rich and poor in the year 1825, when your Eng- 
 lish economists, proposed to visit us, with an injury similar to 
 that which was in that year inflicted on England. 
 
 With banking establishments thus pre-eminently possessed
 
 19 
 
 of national confidence, no mercantile convulsion has hitherto 
 created any general run on our great joint-stock banks. It has 
 been otherwise in England, where, in consequence of legislative 
 enactments, the public have been taught to regard gold and silver 
 as the only representatives of value. The bond of union be- 
 tween the banks and the mass of the people has thus been 
 severed ; and when a monetary crisis occurs, its consequences 
 are incalculably more injurious. With us (though very rare- 
 ly), runs have been occasionally made on particular banks ; 
 but it has been merely to withdraw a deposit from one bank 
 to place it in another ; or to exchange the notes of a suspected 
 bank for the notes of one of our national joint-stock banks, the 
 prevailing confidence in our paper currency remaining un- 
 shaken. In this way the disposable banking capital or re- 
 sources remain in the aggregate unchanged ; whereas with 
 you the run is for gold ; and the coin thus withdrawn from one 
 bank is not redeposited in another, but hoarded till the panic 
 is over, by which means the entire banking resources of the 
 country are involved in the consequences of the temporary dis- 
 aster ; and this too, at the very time when these resources are 
 most needed. 
 
 The English joint-stock bankers will take but a very con- 
 tracted view of the subject, as well as of their own true inte- 
 rests, if they allow any professional jealousy to interfere with 
 the introduction into England of a system of exchanges simi- 
 lar to that which we possess in Scotland. By giving cur- 
 rency to the notes of rival establishments, on a fair principle 
 of reciprocity, and under a conventional arrangement as to 
 security, such as we have in our supply of exchequer bills, 
 it must be evident, that instead of curtailing their own profits, 
 these banks will greatly augment them by extending their cir- 
 culation over the whole kingdom. Those who conduct joint- 
 stock banks in England wield a most powerful engine, whether 
 for evil or for good. Ignorance of the true nature of the evil,
 
 20 
 
 on the part of our political economists and statesmen, and sel- 
 fish motives on the part of the Bank of England, expose all 
 those establishments to the danger of rash, ill-considered, and 
 ruinous interference on the part of the Legislature ; and if all 
 these risks and evils could be averted by a liberal and enlight- 
 ened combination and union amongst those having substanti- 
 ally one common object and interest, the result would be such, 
 I am satisfied, as would afford a lasting source of congratu- 
 lation to all who might be instrumental in bringing it about. 
 Such a combination, embracing even halfa dozen of the largest 
 establishments, who have branches widely spread over the coun- 
 try, would acquire an influence, and a degree of public confi- 
 dence, which would make it an object with every similar estab- 
 lishment in the country to become a member of this salutary 
 union. 
 
 England only requires such a combination as this to enable 
 the joint-stock bank interest to defy even the influence of the 
 Bank of England, and to rival the very extensive circulation 
 of that establishment. That the joint-stock banks are very 
 far from this desirable consummation at present, is but too evi- 
 dent from the fact, that, notwithstanding their number, the 
 last returns show that they have not obtained much above ten 
 per cent, of the circulation of the country, and this notwith- 
 standing their widely- diffused constituencies and their nume- 
 rous branches. The views, therefore, which I have expressed 
 are not theoretical or speculative. They are illustrated, on the 
 one hand, by the undeniable success which lias attended joint- 
 stock banking in Scotland, and by the comparative failui-e, or, 
 to say the least of it, the prevailing impression of insecurity 
 and suspicion, with which these establishments are regarded in 
 England. Union and consolidation are the remedies ; and by 
 mutual confidence thus generated and acted on, the Bank of 
 England may be encountered on something approaching to
 
 21 
 
 equal terms, while with you, as with us, the private banks 
 necessarily must be driven out of the trade. 
 
 In addition to the direct advantages which might thus be 
 derived by the shareholders of English joint-stock banks, 
 those intrusted with their management, by organizing such an 
 union, would do more to protect the commercial world against 
 the evils of over- trading, than Parliament could accomplish were 
 it to dedicate years to the concoction of legislative remedies. 
 Besides, as I have already observed, the combination now sug- 
 gested is not a measure of aggression, but actually of defence ; 
 for unless these joint-stock banks can secui'c public confi- 
 dence, and unless they can, by the strength of their position, 
 and the consequent benefits which they may be enabled to con- 
 fer on the community, raise such a feeling in their favour, 
 as exists in Scotland in favour of our banks, it is manifest, 
 from the present tendency of public opinion, that all your 
 joint-stock banks must fall a sacrifice to the interests of the 
 private banks and of the Bank of England ; and that, under 
 the delusive name of guarantees and statutory securities, en- 
 actments will be passed, pre-eminently ineffective, undoubt- 
 edly, but at the same time most prejudicial to those great in- 
 terests with which you are particularly connected. 
 
 It is, in truth, a mistake to look upon joint-stock banks as 
 mere commercial speculations. On the contrary, they ought 
 to be viewed as integral parts of a national system, deserving 
 the encouragement and support of the Legislature, as forming 
 the only secure basis on which the trade and paper circulation 
 of a great commercial country like England can rest. Hither- 
 to the whole monetary resources of that country have been con- 
 fided, by way of a monopoly, to one great establishment ; and 
 that establishment, it is to be regretted, has, on emergencies, 
 too frequently proved that it is actuated by unintelligible ca- 
 prices, by groundless apprehensions and panics, and by a per- 
 vading and contracted regard to its own interest, hardly ere-
 
 ditable to an institution on which, for national purposes, pri- 
 vileges so valuable and exclusive have been conferred. 
 
 It is true, that the countiy has had, in addition, the private 
 banking interests to look to in seasons of embarrassment ; but 
 however respectable and affluent some of these etablishments 
 may be, it is plain that, as a body, they neither possess that 
 share of public confidence, nor those independent resources, 
 which can enable them to sustain commercial credit during a 
 formidable monetary panic ; and, looking to what we have 
 seen in such emergencies in Scotland, no one, I think, can 
 reasonably doubt the pre-eminent advantages enjoyed by joint- 
 stock banks in this respect. An illustration of this must at 
 once present itself to every commercial man in Scotland, who 
 recollects the manner in which, in Glasgow, during the mer- 
 cantile convulsions of 1825, the Royal Bank of Scotland, un- 
 der the vigorous management of Mr John Thomson, stept for- 
 ward to allay the panic which at that time pervaded England, 
 and threatened also to involve Scotland in bankruptcy. Still 
 more recently, in Scotland, similar causes have contributed to 
 a no less satisfactory result. 
 
 The practical conclusion, therefore, at which, on the whole, 
 I arrive, is, that a combination, such as has been suggested, is 
 necessary, in order to secure to the joint-stock banks of Eng- 
 land their due share of public confidence, and at the same 
 time to defend them against the empirical projects of well- 
 meaning but ignorant politicians, and the selfish designs of 
 interested individuals. This is a duty which those intrusted 
 with the management of joint-stock banks owe not only to 
 their constituents, but also to the community; for it is daily 
 becoming more apparent, that so long as the monopoly of 
 the Bank of England cannot be efficiently counteracted, we 
 shall be exposed to periodical returns of monetary panics 
 and convulsions. Nor have we any reason to expect that it 
 should be otherwise, or to look for an enlarged or disinterest-
 
 28 
 
 ed administration of the money concerns of the country, by a 
 single mercantile company, vested, for political and financial 
 purposes, with privileges which, on every principle of political 
 economy, are incompatible with the freedom of trade, and 
 with the interests of the public. 
 
 Every one who has turned his attention to the subject must 
 have perceived that, ever since the establishment of the Eng- 
 lish joint-stock banks, the Bank of England, with the narrow 
 views of a mere mercantile company, has been availing itself 
 of its great resources and peculiar privileges, in order to pre- 
 vent any rival establishment from participating in what may 
 be described as the fair profits of banking. That the mercan- 
 tile interests have suffered from the consequences of the strug- 
 gle is undeniable ; but it is no less clear, that one or more in- 
 sulated joint-stock banks necessarily must maintain a contest 
 with the Bank of England, on very unequal terms ; whereas 
 a general union, for the common behoof, based on the princi- 
 ples already adverted to, while it will benefit each individual 
 member of the confederacy, cannot fail at the same time to 
 secure to the public the incalculable advantages of a secure 
 and uniform system of banking. 
 
 It would be Utopian to expect that any system of banking, 
 however perfect, should operate as an infallible guarantee 
 against occasional or periodical returns of mercantile distress 
 or embarrassment. But assuredly a great step towards the 
 alleviation of the evils of such periods will be taken, if, by a 
 genera] co-operation of the banking interests, the disposable 
 capital of the country can be applied to the legitimate purposes 
 of trade, without reference to the capricious or arbitrary re- 
 solves, or the particular interests or exigencies, of anyone bank- 
 ing establishment. What England seems to require in order to 
 attain this desirable object, is a Federal Unixm (so to speak) of 
 powerful banks, such as we have in Scotland. With us the 
 natural competition of trade secures every fair banking ac-
 
 24 
 
 commodation to those who may stand in need of it ; while at 
 the same time, and happily without the intervention of the Le- 
 gislature, improvident hanking, and overtrading, are effectual- 
 ly checked in the manner above explained. In England, judg- 
 ing from present appearances, there seems to he a remarkable 
 predisposition in certain quarters to place joint-stock banking 
 under legislative regulations. What the result may be it is 
 impossible to predict, but, on principle, nothing can be more 
 pernicious or more to be deprecated than this species of in- 
 terference ; and if a practical and safe system be the desidera- 
 tum with you, it may be well for legislators, as well as for 
 bankers, to make themselv^es fully acquainted with the Scotch 
 banking system, before they embark in the perilous enterprise 
 of trammelling this department of trade, by statutory re- 
 straints. 
 
 The foregoing observations have been thrown together at in- 
 tervals, when released from the calls of professional duty. You 
 will find them desultory, I fear, and in some respects not so 
 perspicuous as I could have desired. But at the same time I 
 trust that enough has been said to draw your attention to a 
 subject of great national importance, and to induce you to di- 
 rect your well-known professional energies to the attainment 
 of an object which, if attained, will most amply reward your 
 best exertions. I have the honour to be. 
 
 Sir, 
 
 Your most obedient humble servant. 
 
 Edinburgh, 53 Queen Street, 
 2Gth December 1837. 
 
 Printed by Thomas Allan & Co. 265 High Street, Edinburgh.
 
 UNIVERSITY OF ILLINOIS-UHBANA 
 
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