The Appeal of Scottish Banknotes

'The One Pound note was dear to the Scots. The proposal to abolish it here revealed a complete failure on the part of the Westminster politicians to understand the different position in Scotland.' James Douglas on the 1825 Banking Act. (Plus ça change, plus c'est la même chose).

History and Background

by James Douglas AIB (Scot)

Curator of the Institute's Note Collection
in Scottish Bankers Magazine, August 1980

Why banknotes are collected

As a hobby the collecting of banknotes has now become firmly established, and that degree of maturity has been reached in which serious study is involved. A wide range of literature on the subject has been published and societies catering for the interest of collectors have world-wide memberships. Catalogues, both general and specialised, have served to establish a firm market, and prices for the better items have rocketed over the last few years. This is illustrated by the results of numerous auctions held regularly in many countries. Once the province of a discerning few, the number of collectors is constantly growing, and they compete with each other for the dwindling supply of rarities on the market. It is in fact a logical extension of numismatics. Gone are the days when the larger units of currency in general circulation took the form of coins of precious metals: these coins which now circulate are in base metals and for relatively minor denominations. The prevailing economic situation entails the use of paper as the appropriate medium for circulating larger units, and bank and currency notes have long replaced sovereigns, napoleons, eagles, ducats, and all the grand old coins of the golden era. Notes therefore form an integral part of any modern currency. To most of us a banknote is purely functional - something which we acquire as a result of our labours and in due course part with reluctantly. We take little notice of the design and give even less thought to its historical background. In Scotland this is particularly regrettable as the banknote which we handle today has a heritage of unusual dimensions in Scotland's economic development.

In the History of the Bank of Scotland Mr Stanley Cursiter, at the time Director of the National Gallery of Scotland is quoted:

'How seldom when we place a stamp on a letter or 'bang' a sixpence do we think of either the stamp of the coin as a work of art, or regard as an art collection the few banknotes of which we may gain temporary command. Yet the banknote can be a work of art and offer, on grounds of pure aesthetics, sufficient justification for our joy in its possession. It can revive old memories and have links and associations with the past, adding a value far beyond the legend on its face.'

History and Background of Scottish Banknotes

We cannot claim to add banknotes to the many Scottish inventions - that honour rests with the Chinese. Nor indeed was Scotland the first European country to issue them, Sweden having ante-dated us by a margin of thirty-four years by issuing in 1661. What can be claimed for Scotland, however, is the fact that in no other country, England included, were banknotes held in such high esteem by the populace, or contributed so much to its commercial development.

The first Scottish notes were those of the Bank of Scotland which commenced issue immediately after its foundation in 1695. These notes were in denominations of £5, £10, £20, £50 and £100 sterling, and were followed by similar issues from The Royal Bank of Scotland (1727) and The British Linen Company (1747). Notes of these banks provided the backbone of the Scottish paper circulation of the eighteenth century. However, in Scotland the right to issue notes was one at common law and consequently it was open to any person to issue 'notes' legally. The only restrictive factor was the degree of willingness on the part of others to accept them! Lack of legal restriction or control created in mid-eighteenth century a situation now referred to as the 'note issuing mania': notes were issued by merchants, tradesmen and by private individuals, and often for very trivial sums. While the issues of most of the banks stood the test, the same could not be said for the others, which of course were not banknotes. To suggest that the public viewed this state of affairs with apprehension would indeed be an understatement.

A further unsatisfactory innovation of this period was the introduction of the 'Option Clause'. Coin had always been in short supply, and the banks faced embarrassment if their notes were suddenly presented in bulk with the demand that they be exchanged for gold. To surmount the difficulty a clause was added to the legend of the note promising payment on demand 'or in the option of the directors' the value of a note plus a specified additional sum representing interest, six months after the date of presentation. This was a retrograde step, and when it was also adopted in the many unsavoury commercial issues the image of Scottish banknotes reached an all-time low and bore little resemblance to that degree of integrity to which it aspired at a later date. Legislation in some form was necessary and this was embodied in an Act of 1765, the provisions of which declared the option clause illegal and at the same time prohibited the issue of notes for sums under £1. This heralded the end of most of the 'private' issues and the way ahead was clear for establishing a note issue based on the principles of a sound banking system. From this period public confidence in Scottish notes increased year by year to the point where they were actually preferred to gold! Should this statement evoke surprise it should be realised that the Scottish banking system of the period differed from that which existed elsewhere in the British Isles, in that the larger banks were founded on the joint stock principle with numerous shareholders. These shareholders, or 'partners' as they were referred to at the time, had unlimited liability jointly and individually for the debts of the bank, including of course the note issue. Thus in the event of failure, the note holders were 'covered' by the personal assets of all the shareholders. The system of opening branches in various parts of the country became a feature of Scottish banking ensuring widespread public recognition of the banks and their notes and their ready acceptability in any district. Even the possessor of a forged note was afforded a measure of protection as it became the custom of all Scottish banks to pay all innocent holders of such notes.

In marked contrast was the position in England where small and localised private banks were the order of the day. Most of these had very limited resources and their liabilities were supported only by the personal assets of a few partners, whose number was restricted in law to six as a maximum. In the early years of the nineteenth century more than 900 of these private banks applied for licences to issue notes. With such limitation of capital it was inevitable that in times of economic stress many fell by the wayside leaving their note holders relatively unsupported. It is not surprising therefore that the public in England preferred a metallic currency to the welter of paper money issued by hundreds of private banks, many of doubtful standing. A metallic currency, however, was both costly and inconvenient for settling commercial transactions and often necessitated the transfer of large quantities of coin from one part of the country to another. Bills of Exchange were in use, but these relied entirely upon the integrity of an individual or firm and thus were not always acceptable.

In Scotland however, trade was greatly facilitated by the general use of a paper currency and transactions could be settled without the costly transfer of coin. Banknotes with their in-built insurance policy against failure or forgery were thus preferred to gold north of the border.

The spate of failures among the English private banks resulted in the passing of an act in 1825 designed to regulate matters. The main provisions of this Act were devoted to the protection of the public and included the prohibition of notes for less than £5. When it was proposed to extend this Act to Scotland, all hell broke lose as the One Pound note was dear to the Scots. The proposal to abolish it here revealed a complete failure on the part of the Westminster politicians to understand the different position in Scotland, where the public had such confidence in their banknotes and were in no need of legislative protection. Sir Walter Scott added the power of the pen to the public outcry in the form of his letters of Malachai Malagrowther. Eventually reason prevailed and the Scottish One Pound note was saved.

The 1825 Act had a stabilising effect on English banking and was responsible for the introduction of joint stock banks in that country. This in turn absorbed many of the private banks and during the remainder of the nineteenth century numerous mergers took place. Banking throughout Britain thus developed along Scottish lines with large joint stock banks and an extensive branch system. Resulting from these mergers, which in most cases entailed forfeiture of the right to issue notes, English banknotes, apart from the issue of the Bank of England, gradually disappeared from the scene. Scotland, however, retained its distinctive paper currency, although the number of individual banks of issue diminished. At the onset of the present century there were ten such banks, now there are only three. These three, however, have a total circulation (in 1980) of almost ¹/2 billion, this in a country in which the entire population numbers less than that of Greater London.

Thus the unique background together with their beauty of design have combined to embody in Scottish banknotes a world-wide appeal for collectors. Show me the old 'Commercial' 'Union' or 'North' man who does not exhibit some pangs of nostalgia at the sight of a note of one of these former banks. That degree of nostalgia may well be instrumental in creating a future banknote collector!