One thing that many visitors to the UK and more specifically those travelling to Scotland, find unusual is the range and design of our banknotes. Unlike most countries several British banks, including three in Scotland, are licensed to print circulatory banknotes; which makes for a wallet-full of interesting designs and colours. The value of these notes doesn’t vary between the banks; so a Bank of England £10 is exactly the same as a Royal Bank of Scotland £10 for example, but there are subtle differences. This is the story of the Scottish banknote.
It was the 1690s and England was engaged in a protracted and costly war against France; and the government was running out of money. Traditionally the Crown would ask parliament to raise taxes, or borrow from the rich landed nobility. The first option was unpopular, and the second exhausted. Enter William Paterson, an inspired Scottish merchant with a gem of an idea: a bank that would act as the government’s creditor.
Investors would lend the government the money it needed in return for a healthy profit and banking privileges; and it was hugely popular. So, in 1694 the Governor and the Company of the Bank of England was founded. Unlike any British bank before or since, this was the government’s bank and had sole monopoly in lending to it. In time banks across the nation who wished to trade in London did so through the Bank of England, and lodged funds with it accordingly. Certainly by the 19th century it had evolved into the United Kingdom’s Central Bank, regulating all others.
Bank of Scotland Headquarters on the Mound, Edinburgh
The Bank of Scotland was founded a year later in 1695 when Scotland was still an independent nation; and indeed it is the only surviving commercial company established by the old Scottish parliament. Unlike the Bank of England, this new company was set up to aid and provide credit for Scottish business and not the government; at no point then or now has it ever been a central bank. It did have one innovation though – banknotes.
The banknote or value-backed promissory note was nothing new. The Chinese used a form of paper money in ancient times, and even in medieval Europe Italian banks exchanged goods and services using notes: but in 1696 the Bank of Scotland became the first to successfully introduce a nationwide, and nationally accepted, system of paper in lieu of gold and silver.
Although Scotland had her own currency, the Scots Pound, the Bank chose to issue its notes in Pounds Sterling, the English currency. The reason was two-fold: Sterling was worth a lot more than the Scots Pound, and most of Scotland’s trade was with England. Sterling Silver is an alloy of silver and copper that is 92.5% pure silver; and during the late Middle Ages a pound weight of sterling silver was a unit of payment; with smaller denominations, such as the shilling and penny being fractions of the whole. Of course over time the actual value of One Pound Sterling became a lot less than the weight value; but the name stuck.
Trading in sterling was also a stroke of commercial foresight, for in 1707 Scotland and England signed a Treaty of Union, dissolving the independence of both countries and forming the United Kingdom of Great Britain. Article XVI of the Treaty states: “That, from and after the Union, the coin shall be of the same standard and value throughout the United Kingdom as now in England.” Sterling was now the universal British currency, although the Scots Pound continued to be used through the 18th century until it basically withered on the vine. The union also strengthened the role of the Bank of England in the financial affairs of the whole country, Scotland included.
The Bank of Scotland was joined in 1727 by the Royal Bank of Scotland, which also decided to issue its own notes. Both banks were based in Edinburgh which was becoming, thanks to many factors including the artistic, intellectual and scientific advancements of the Enlightenment, a major financial centre. Banknote production also helped to grease the wheels of industry and overseas expansion of businesses; indeed it was a key factor in Scotland’s economic success during the 18th and 19th centuries. One of the poorest nations in Europe had risen like a phoenix to become one of the richest, thanks in part to paper money.
In 1826 the government decided to prohibit the printing and issuing of notes of under £5 in value, mainly as a way to hinder counterfeiting. The pound itself had a lot more buying power then, and most daily transactions took place with coins, so it wasn’t too much of a problem. However, in Scotland the famous author Sir Walter Scott led a campaign to save the Scottish One Pound note; which the Bank of Scotland had been issuing for 130 years. His voice was just loud enough and the proscription was not extended to Scotland. This is the reason he appears on all Bank of Scotland notes to this day. This Act of Parliament however, ushered in a new age of financial regulation and greater central control both by the Treasury and the Bank of England.
Bank of Scotland £20 with Sir Walter Scott
Centralisation was tightened further with the ‘Bank Charter Act 1844’ which monopolised banknote issue with the Bank of England; no new banks could start printing, but those already doing so could as long as they remained independent. The last private bank in England and Wales ceased issuing in 1921. The Act did not apply to Scotland however; but the ‘Bank Notes (Scotland) Act 1845’ defined the rules north of the border. For each pound printed banks had to lodge equal funds with the Bank of England, or carry a reserve of equivalent value in Bank of England notes. This arrangement was cemented with the ‘Banking Act 2009’ safeguarding against banks going bust, and the notes becoming worthless.
And thus Scottish banknotes continue to be issued; by the Bank of Scotland, RBS and the Clydesdale Bank. However, there is often the question of legal tender and notes being accepted in England; and, this is where the subtle difference comes in.
If you go into a shop and buy something, say a television, you are essentially trading one thing for another. It is up to the retailer to accept what you offer – cheque, credit card or cash. In this sense payment is an agreement and none of these, including Bank of England notes are ‘legal tender’; they are legal currency – that is agreed by the UK Government and backed up by Bank of England securities. So, all Scottish notes, which are essentially promissory notes based on a virtual currency held at the Bank of England are legal for trade across the UK; but can be refused just as legally.
The difference comes with settling debt. If you go into a restaurant, have dinner and get the bill you now owe a debt (as you can’t return the food). Again, it is up to the creditor to accept what you offer as payment, and they can refuse anything except Bank of England notes; which is the definition of legal tender, and as such Scottish notes are not legal tender anywhere, including Scotland. However, in practice and in custom they are accepted in all places in Scotland; and most places in England too.
Legal tender or legal currency, it hardly matters. Millions of pounds of transactions occur every day using our colourful and historically unique bank notes. It is very much part of the psyche of being Scottish and our own conceit of ourselves as a distinctive country. So the next time you get a Scottish note in change, take a good look, and think on over 300 years of heritage and the storms weathered it took to get it to you.
This article was written by David McNicoll who runs Vacation Scotland, a travel company specialising in tours and vacation packages to Scotland. For more info check out their website – www.vacationscotland.biz
December 18, 2011
History