From 1694 through 1825, while England’s banking system consisted of the Bank of England and the small country banks and goldsmith banks that operated on a small scale and under restrictive regulation, a completely different sort of banking system operated nearby in Scotland. The Scottish system, in sharp contrast to the English one, was the very model of competition, innovation, accessibility of credit for the private sector, and stability. In all of those respects, Scotland’s system was a constant reminder to its neighbors in England of what a banking system could be, and what the English banking system was not.Which must have chaffed for Englishmen, because Scotland was the backward society--which also produced the redneck culture in the American South, via exporting its people in the early 18th century.
Unlike the Bank of England, which initially operated only from its Threadneedle Street headquarters, or the small English country or goldsmith banks, Scotland’s branching banks linked urban headquarters with branches that operated in areas that could not otherwise have supported a banking presence. Scottish banking innovation went beyond branch banking; its bankers also invented interest bearing deposits, the interbank clearing of bank notes, and lines of credit (the so-called “cash credit account” invented by the Royal Bank of Scotland in 1728) that permitted borrowers to arrange for credit in advance and draw upon their accounts as needed.I.e., the beginning of modern finance. Made possible because in 1694-95, when the Banks of England and Scotland were founded, while sharing the same monarch, the two countries had separate parliaments. With very different incentives.
At the time that King William was hunting for a way to finance his war against France, Scotland was poor and remote. Little would be gained from creating a monopoly Scottish bank that would help to finance the Crown. At the same time, the creation of such a bank would have required negotiating with the Scottish Parliament. While they generally favored King William over the deposed James II, the Scottish Parliament was not as committed to the idea of financing the king’s imperial ambitions as the Parliament of England. In point of fact, the charter of the Bank of Scotland prohibited it from lending to the Crown without an Act of Parliament—a fact that suggests that the Scottish Parliament was quite conscious of the problems that could arise if the Bank of Scotland were turned into a vehicle of public finance. From the point of view of the British Crown, it was simply easierto adopt a policy of laissez faire with respect to the more distant Scots, and use the Bank of England (as well as other English joint stock companies) to finance the Crown’s war efforts.That left the Scots free to concentrate on financing productive enterprise, which they did, to the world's benefit. It wasn't until after Napoleon was defeated--after 130 years of warfare with France--in the early 19th century, that English banking, provoked by a serious banking panic in 1825 got around to what Scotland had been doing.
The English banking system began as a crony enterprise primarily serving the fiscal interests of the State and the personal interests of a small group of well-connected private citizens. By the second half of the 19th century, the political pressures that democratization and industrialization had put on the banking system, coupled with an end to the government’s need for war finance, undid that monopoly arrangement. As the result of fundamental changes in the industrial organization of the banking system (the creation of a nationwide system of branching banks), reforms in the nature of the government safety net policies for banks and borrowers, and a reduced need for the English government to rely on the banking system to finance its wars, by the late 1860s England’s and Scotland’s banking systems had converged. The newly integrated British banking system would enjoy many decades in which banking crises were absent and banks were an important source of credit for the private sector.