Bank Notes (Scotland) (Hansard, 10 April 1984)

§ Mr. Michael Forsyth (Sterling)
I beg to move. That leave be given to bring in a Bill to regulate the issue of bank notes in Scotland. Hon. Members who have the good taste to visit Scotland will be aware that our banks enjoy the right to issue their own bank notes—[Interruption.]

§ Mr. Speaker
Order. Perhaps the hon. Gentleman will wait a moment while hon. Members leave the Chamber.

§ Mr. Forsyth
Those hon. Members who take their holidays in Scotland will be aware that our banks have the right to issue bank notes. As more and more people from north of the border come to England, hoteliers and traders have become aware of the fact. It may be for the convenience of the House if I briefly outline how that came about.
The banking tradition of Scotland is markedly different from that of England, and I make no nationalist point in saying so. Scottish banks were founded to finance trade and industry, whereas the Bank of England was established to lend money to the state. Indeed, the 13ank of Scotland's governing rules specificially provided for heavy penalties if it lent money to King William, which was very wise.
Under wiser legislation in Scotland joint stock banks were encouraged, while they were all but banned south of the border. Scottish banks have been innovative in their approach. They pioneered the idea of branch banking. For good or ill, they virtually invented the overdraft.
The history of banking in England is one of growth in the privileges and power of the Bank of England, together with the development of a large number of small, locally based private banks outside London. In Scotland, there were fewer banks covering larger areas. Whereas English banking suffered a series of troubles during the 18th and 19th centuries with the over-issue of bank notes, inflation and recurring crises, the picture in Scotland was different —one of stability and prudence.
It may appeal to some Opposition Members if I mention that Karl Marx—not often quoted on these matters— rose to the defence of the Scottish banking system. He pointed out that Scotland never experienced a real monetary crisis. He said: The fact that a few banks—exceptions—collapsed because they had made careless loans is irrelevant". There was no depreciation of notes, no complaints and no inquiries into the sufficiency or insufficiency of the currency in circulation. That is conclusive proof that, even in the 19th century, Karl Marx understood the importance of monetary policy.
As a result of the unhappy English experience, Sir Robert Peel introduced major reforms to the banking system in 1844 and 1845. No new banks were allowed to issue bank notes, and existing banks could do so only under certain strict conditions. The fiduciary issue— those notes that had no backing other than public confidence in the bank—were restricted to their existing quantity and any further notes had to be backed by gold. Nowadays, Bank of England coins and notes have taken over this role.
However, in England further restrictions applied. The right to issue notes was lost if a bank merged with another or, revealingly, if it set up business within 65 miles of the 201 City of London. The aim, which was clear, was to develop a Bank of England monopoly of bank notes, and it succeeded. The economic necessity of mergers and the financial attractions of the London market meant that the number of banks entitled to issue their own notes rapidly diminished. There were 279 in England in 1844. The last one, Fox, Fowler and Company Limited of Wellington, Somerset, lost the right in 1821 when it merged with Lloyds.
Neither restriction applied in Scotland. There were 19 banks entitled to issue their own notes in 1945. Amalgamations have reduced that total to three, these being the Royal Bank of Scotland, the Bank of Scotland and the Clydesdale Bank. Apart from a small fiduciary element of £2.7 million, their notes are all backed by the Bank of England. The right, however, is so well used that they provide two thirds of the notes circulating in Scotland.
There is another way in which Scotland differs from England. We have a much longer and stronger tradition of trustee savings banks. This brings the benefit of banking facilities and services to ordinary working people and their families. Over 21 per cent. of the United Kingdom TSB deposits are held in Scotland. At the time of the Peel reforms, the savings banks were small and localised and their very nature precluded the issue of bank notes. That situation has changed and the TSB movement has gradually been extending its range of services on offer to their customers, and through amalgamations has created one bank in Scotland that will eventually become part of the UK-based organisation. In Scotland, the new TSB is broadly of comparable size to the existing three banks and is willing and able to compete with them on equal terms, or almost equal terms. It does not enjoy the right to issue its own notes and, therefore, does not enjoy the financial advantage which that brings and the considerable advertising benefits that accrue.
My Bill proposes to give it that right and to give to Commissioners of the Inland Revenue the power to extend that right to any other Scottish bank that might in future reach such a size as to merit it. No such bank exists at present.
It would seem that the only argument against this modest measure is that TSB (Scotland) will eventually be 202 part of a United Kingdom bank, but the Clydesdale Bank, which is wholly owned by the Midland Bank, is in that position, and similarly the Royal Bank of Scotland, which derives half its business from the Williams and Glyn's operation. Nor can there be any objection from the Treasury to such an extension of existing rights. A series of parliamentary questions has confirmed that the right to issue bank notes, which have to be covered by holdings of the Bank of England, imposes no costs on the Government, deprives it of no income and does not interfere with its management of the economy.
This is a modest step compared with the more radical reforms of Scottish banking that have been proposed recently from a variety of sources. None the less, it would be a significant step. It would strengthen the identity of a bank that has long held close and personal relations with the Scottish people. It would reinforce the separate character of Scottish banking and it would encourage competition. Banking and financial services are a growth area in the Scottish economy. The Scottish banks have a proud record of service to the people of Scotland. It is a record that should be recognised by continuing this unique development along purely Scottish lines. Competition and the emergence of new banks have always been part of that development.
Peel's reforms inhibited that process. The Bill aims in a small way to remove once such inhibition. Giving TSB (Scotland) the right to issue bank notes will encourage competition and at the same time strengthen an individual characteristic of Scottish banking by extending its scope. The Bill has friends on both sides of the House, and I ask the House to give it support.