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

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      It will be seen from the above table how rapidly the system of bank exchange absorbs the over-issue, and how instantaneously the paper drawn from one bank finds its way into the hands of another.

      If further proof were required of the absurdity of the notion, that a paper circulation has a necessary tendency to over-issue, the following fact is conclusive. The banking capital in Scotland has more than doubled between the years 1825 and 1840 – a triumphant proof of their increased stability; whilst the circulation has been nearly stationary, but, if any thing, rather diminished than otherwise. We quote from a report to the Glasgow Chamber of Commerce.

      We are induced to dwell the more strongly upon these facts, because we have strong suspicions that our opponents will endeavour to get at our monetary system by raising the senseless cry of over-issue – senseless at any time as a political maxim, it being the grossest fallacy to maintain that an increased issue is the cause of national distress, unless, indeed, it were possible to suppose that bankers were madmen enough to dispense their paper without receiving a proper equivalent – not only senseless, but positively nefarious, when the clear broad fact stares them in the face, that Scotland has in fifteen years thrown double the amount of capital into its banking establishments, increased its productions in a threefold, and in some cases a sevenfold ratio, augmented its population by nearly half a million, (one-fifth part of the whole,) and yet kept its circulation so low as to exhibit an actual decrease.

      If we were called upon to state the cause of this certainly singular fact, we should, without any hesitation, attribute it to the great increase of the bank branches. The establishment of a branch in a remote locality, has invariably, from the thrifty habits of the Scottish people, absorbed all the paper which otherwise would have been hoarded for a time, and left in the hands of the holders without any interest. It would thus seem, from practice, that the doctrines of the political economists upon this head are absolutely fallacious; that the increase of banks, supposing these banks to issue paper and to give interest on deposits, has a direct tendency to check over-circulation, and in fact does partially supersede it.

      With these facts before us, we consider that the measure of last session, prohibiting any further issue of notes beyond those already taken out by the banks, is almost a dead letter. We have not the least fear, that under any circumstances there can be a call for a larger circulation; at the same time, we demur to the policy which ties our hands needlessly, and we object to all restriction where no case for restriction has been shown. We look upon that measure as especially unfair to the younger banks, whose circulation is not yet established, and whose progress has thus received a material check, from no fault of their own, but from want of ministerial notice. With every system where competition is the acknowledged principle, it is clearly impolitic to interfere; nor can we avoid the painful conviction, that this first measure, though comparatively light and generally unimportant, was put out by way of feeler, in order to test the temper of the Scottish people – to ascertain whether eighteen years of prosperity might not have made them a little more supple and pliable, and whether they were likely to oppose to innovation the same amount of obstinate resistance as before. It is dangerous to permit the smallest rent to be made in a wall, for, with dexterous management, that rent may be so widened, as to bring down the whole superstructure.

      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: —