Blackwood's Edinburgh Magazine, Volume 56, Number 350, December 1844

by Various

In the absence of any distinct charge against the Scottish banks, which were so honourably acquitted in 1826, we shall confine our further observations to the effects which must necessarily follow upon a change in the established currency. In doing so, we shall conjure up no phantoms of imaginary distress, but merely state the consequences as they have already been explained to Parliament by men who are far better able to judge than ourselves, and even—with deference be it said—than our legislators, of the substitution in Scotland of a metallic for a paper currency. That measure is to be considered, 1st, as it will affect the banks; 2dly, as it will affect the public.

The general effect of the change would be to derange the whole of the present system. The first result would probably be the abolition and withdrawal of all the branch banks throughout the kingdom. These offices are at present fed with notes which are payable at the office of the parent bank, whither, accordingly, they invariably return. These are supplied to them at no risk or expense, whereas the transmission of gold would not only be dangerous, but so expensive as entirely to swallow up the profits. Add to this, that the banks would no longer be able to allow interest on deposit accounts; at all events such interest would be merely fractional, and too insignificant to induce the continuance of the saving habit which now so fortunately prevails. In short, all the branch business would stagnate and die. The consequence of the removal of the branch banks would be the ruin of the Highlands.

Mr Kennedy's account of the profits of banking will explain the sweeping nature of the change. "A banker's profits are derived from two sources—the brokerage upon the deposit money, and the returns that he gets from his circulation. We have tried to estimate the amount of deposits in Scotch banks, and we calculate it at about thirty millions; that, at the brokerage of one and a half per cent, yields £450,000 annually. The currency we will take at three millions, and that, at 5 per cent, is £150,000: making a gross sum of £600,000, which is the whole profit derived from banking in Scotland. Out of that are to be deducted the whole of the charges. From these figures it will be perceived that the gross profit of the currency is a fourth part of the gross profit of banking; but the expense that falls upon the currency is not so large as the expense that falls upon the other portions of the banking business; so that I should be inclined to say that, upon the average, the profit derived from the circulation bore the proportion of a third to the aggregate profit of banking."

Assuming Mr Kennedy's calculation to be correct, the profit of £600,000, derived by the banks, would thus be reduced to £400,000 by the change of currency.

But the diminution would not rest there. The brokerage upon the deposits—that is, the difference between the rates of interest given and charged by the banks—on the present calculated amount of deposits, is £450,000. from which the charges are deducted. Now we have already seen that the banks find it necessary, in order to encourage deposits, to give a liberal rate of interest; and we have also seen that, whenever interest falls to two per cent, the deposits are gradually withdrawn, and a period of speculation begins. Let us hear Mr John Thomson, of the Royal Bank, on the effect of a gold currency on deposit accounts:—"I think, on the operating deposits, we could scarcely allow any interest, and on the more steady deposits, that the rate of interest would require to be very considerably reduced."

It follows, therefore, according to all experience, that, if no interest were allowed, the deposits would be generally withdrawn for investment elsewhere; and thus another serious reduction would be made from the already attenuated amount of the Scottish bankers' profits. But besides the loss of profit on the small notes, there would be a further loss sustained by the necessity of keeping up a large stock of gold in the coffers of the bank. Hear Mr Thomson again upon this subject:—

"It would occasion greater loss than the mere profit on the small notes, inasmuch as at present we have to keep on hand a large stock of small notes, to fill up in the circle those that are taken from it by tear and wear, and to meet occasional demands. The present mode of keeping up this stock, which consists of our own notes, is done at no expense; if we had to keep a corresponding stock of gold to keep up the circle in the same proportion, we would, perhaps, if there is £1000 dispersed in small notes, require to keep up a protecting fund of £500 to meet that, or something in that proportion. So that, upon the whole, if there was £1,800,000, which was the sum assumed of notes in circulation, withdrawn, we would require to fill up the place, £1,800,000, in gold, and in order to fill our coffers with a protecting stock, perhaps from seven to nine hundred thousand, to keep up the stock; and, in addition to that, there is the expense of transmission from one part of the country to another, and the bringing it from London."

The small note circulation is here estimated at £1,800,000 but there is no doubt that it is now considerably larger. Taking it, however, at Mr Thomson's calculation, what a fearful amount of unoccupied and inoperative capital is here! This, be it observed also, is only the first reserve, which at present is represented by the small notes of the bank. According to the later evidence of Mr Blair, the Scottish banks are in the habit of holding, besides this, a further reserve of gold and Bank of England notes, equal to a fourth of their circulation, without taking into account exchequer bills, or other convertible securities which bear interest.

Thus it follows, as a matter of course, that if the small notes were abolished, and a gold currency established, there would not be room in the country for one-fourth of the present number of banks. If the banks are removed, and more especially the branches, which must inevitably fall, we should like to know from any theoretical economist, even from Sir Robert Peel, how the country is to be supplied with money?

So much for the effect which the introduction of a metallic currency would have upon the banking establishments. Let us now see what would be the consequence of the change upon the interests of the public, who are the dealers.