Source: https://www.capitalismmagazine.com/2019/08/scottish-banks-and-the-bank-restriction-1/
Timestamp: 2019-09-19 13:05:49
Document Index: 360218658

Matched Legal Cases: ['art 1', 'art 2', 'art 3', 'art 1', 'art 2', 'art 3']

Scottish Banks and the Bank Restriction, 1797-1821, Part 1 - Capitalism Magazine
by George Selgin | Aug 19, 2019 | Money & Banking
Murray Rothbard, “The Myth of Free Banking in Scotland“
In this post, I’ll first review the events leading to the passage of the Bank Restriction Act. Then I’ll discuss how that act altered the legal rights of Scottish bank creditors. Finally I’ll propose an explanation for the fact that no Scottish banks were sued for suspending payment. In Part 2 I’ll consider the adverse effects of the Scottish suspension on the Scottish public. The restriction’s main victims, I plan to argue, were tradespeople and others whose livelihood depended upon ready access to small change. But their plight, far from enduring throughout the full period of the restriction, was confined to its opening months. Finally, in Part 3, I’ll argue that the Scottish restriction does not, after all, warrant any major revision of claims that Larry White and I and other members of the “modern free banking school” have made regarding the implications of unrestricted freedom in banking. On the contrary: to the extent that Scottish bankers were guilty of “violating the property rights of their depositors and note holders,” the fault lay mainly, not with freedom in banking, but with provisions of the 1765 Scottish Bank Notes Act that placed unwise and unwarranted limits upon that freedom.
So far as Scottish bank creditors were concerned, the effect of the Bank Restriction Act was to deprive them of the right to “summary diligence,” a procedure in Scots law “whereby certain constituted obligations can be enforced without the need to apply to a court.” Because the act also made the act of receiving Bank of England notes in lieu of specie tantamount to the extinction of the debt for which the notes were paid, it confronted anyone seeking to redeem a Scottish banknote with a stark choice: either accept Bank of England notes in lieu of specie, or refuse payment and initiate a legal process that might at very least mean a considerable delay in payment. However, Parliament did not otherwise alter Scottish banks’ legal obligations. That is, it did not supply any grounds for their clients to suppose that, if a suit were brought, it would only result in a verdict in the bankers’ favor.
Because no Scottish banker was actually sued for refusing payment in specie during the course of the Bank Restriction, we don’t know what verdict a Scottish court would have reached in the event of such a suit. However, in 1801 a suit was brought, by one Mr. Grigby, against an English country bank, Oakes and Co., and that suit resulted in a verdict for the plaintiff. As it plainly illustrates the court’s refusal to bend the law in a bank’s favor, by second-guessing the preferences of the British government or otherwise, the opinion in that case, as rendered by Chief Justice Lord Alvanley at the Court of Common Pleas, with which all the other justices concurred, is worth quoting at length — and all the more so given Alvanley’s evident lack of sympathy for the plaintiff:
But what, precisely, were those “circumstances”? The trouble and delays that suing involved may well have deterred many. But they can’t explain why some relatively well-heeled creditor didn’t bother to press a claim, and especially so once gold commanded a substantial premium over paper, as it did after 1808.
I believe that the lack of lawsuits stems from the fact that many Scottish bank creditors were also debtors to their banks: although they held bank notes and deposit balances, they also depended on “cash credits” granted to them by their bankers — lines of credit, with interest charged only upon sums actually drawn. Most outstanding Scottish bank notes and deposit balances were the by-products of the banks’ practice of granting such credits, so that almost all Scottish bank obligations to the money-holding public had as their counterpart like obligations of that public to the Scottish banks. Perhaps owing to his penchant for confusing banks with warehouses, Rothbard, in claiming that, by suspending specie payments, Scottish bankers systematically violated their patrons’ property rights “while they themselves are permitted to continue in business and force payment upon their debtors,” overlooks the fact that those patrons were as likely to be in debt to their bankers as vice versa, as well as the fact that the Scottish banks had always allowed their debtors to settle debts with them in either Scottish or Bank of England paper rather than gold or silver.
Continue Reading Scottish Banks and the Bank Restriction, 1797-1821 : Part 1 | Part 2 | Part 3
[3] [Henry Dunning MacLeod], “History of Banking in Scotland,” The Bankers’ Magazine 37 (1) (January 1877), pp. 33-4. For further details see Sir William Forbes, Memoirs of a Banking House (London and Edinburgh: William and Robert Chambers, 1860), p. 83. The Scottish resolution echoed a similar one to which several thousand London businessmen had pledged themselves immediately upon hearing of the suspension there. See Henry Adams, “The Bank of England Restriction,” in Charles Francis Adams and Herny Adams, Chapters of Erie, and Other Essays, p. 232.