Defects
Scotch banking is so generally regarded as one of the highest achievements of the banking intelligence that some hesitation is natural in criticising the system by which, according to its own evidence, it has obtained most of its success. At the same time, it is difficult to avoid the conclusion that a serious danger lurks in a system which regards a banker's unissued promise to pay in the light of a banking asset. Mr. Blyth points out that these unissued notes are "not a reserve but till money," but the distinction between till money and reserve is one upon which it is possible to lay too much stress. In assessing the strength of a bank it is usual to compare the amount of its cash in hand, as a whole, with the amount of its liability to the public on deposit and current account, etc., and note circulation if any. The cash in hand, as a whole, consists of the till money and cash reserve. If the till money consists to any extent of the bank's own promises to pay, it follows that the bank's cash reserve as a whole is to that extent weakened, for it need not be said that in case of serious trouble, which is a contingency of which all provident bankers have at all times to beware, a bank's own promises to pay would be of little service to it. If a bank's credit were doubted, these promises to pay would not be available for it in meeting demands upon it. At such periods the public requires from its bankers not promises to pay but physical gold. In Scotland the confidence of the public in its bankers is so great, and the readiness with which it circulates their promises to pay appears to be so ingrained in the national character, that the contingency of the demand of the public for gold seems to be extremely remote. The criticism therefore which detects a weak point in this asset upon which Scotch banking prides itself so highly may be said to be merely academic. Nevertheless, when we examine Scotch banking by the test of figures, we find that it does actually work, as indeed would be expected from the statement of its exponents, on a cash basis which is decidedly narrow.
Though the functions that they perform are practically the same as those of the English bankers, Scotchmen have succeeded in avoiding the excessive competition in carrying them out which is a weakness of English banking. In Scotland, on the other hand, cohesion and co-operation among the banks are carried to an extreme of which the mercantile community frequently complains. The banks are few and stand together like a close corporation; they agree absolutely and arbitrarily among themselves as to the rates they will allow to depositors, the rates at which they will advance or discount, and the terms and commissions for which they will do business for customers. The extent to which this regulation of the price of the product that they turn out is carried, is almost incredible from the English point of view, and though it is contended by the champions of the Scotch system that it encourages that wholesome democratic influence in Scotch banking which is in favor of the small borrower of limited resources, who is thus able to obtain accommodation on the same terms as much larger and more important customers, yet it must be obvious that the Scotch banks, by making these hard and fast agreements among themselves as to the price of the accommodation that they will give, and maintaining it in every case, are in fact putting the same price upon a very different article. The result of it is beginning to tell upon them a little in these days, since, when the big Scotch merchants and manufacturers find that their local bankers charge them the same rates for accommodation as the small tradesmen of the towns, they are naturally impelled to make arrangements to provide themselves with monetary facilities somewhere south of the Tweed, where rates are ruled by the circumstances of each case, and competition and higgling often in times of monetary ease deliver the bankers into the hands of the borrowers. As it is, the Scotch banks in regular conclave fix their rates in accordance with those current in the London money market or the Bank of England's official minimum, and, having fixed them, stick to them. The system is very profitable to themselves, and their customers certainly can not complain on the whole of the facilities with which they provide them. Nevertheless, the cast-iron rigor with which they work hand in hand in combination appears to be an excessive development of banking unity, and an ideal banking system would seem to lie somewhere in the middle between the excessive competition of the English bankers and the cast-iron combination of their Scotch brethren. Finally, it may be added that it is a little inaccurate to speak of a Scotch banking system, if the phrase be taken to imply that Scotch banking stands by itself and works on its own resources. In fact, it is only an appendage of the English system and relies habitually on drawing gold from the Bank of England, as its centre and the keeper of its reserve.