Starting at the end of the 17th century, there was a wave of financial innovation in England. It isn’t often discussed what happened farther north, in Scotland. Scotland too saw a financial revolution, though it was hampered by the relatively small size of Scotland and some crises along the way. Some of these affected England as well, but the Darien scheme as it was known, was unique to Scotland. Still, reform continued, no doubt because financial development came to be seen as helpful to Scotland and part a virtuous cycle involving trade, money, and credit.
The ‘Financial Revolution’ of 1690s Britain, in which finance seemed to take a leap forward in quite a short period of time, is largely associated with England. There, the creation of the Bank of England and creativity in public finance was the product of a government desperate for ways of funding its war against France. However, the story was not only one of public finance, the Financial Revolution also spawned a stock market and other developments. In all, within a span of twenty-five years or so, England saw the dawn of central banks, the proliferation of securities, and speculative mania. These conditions were not only found in England though, but in Scotland as well.
A financial revolution in Scotland coincided with that of England. The Bank of Scotland was founded in 1695, a year after the Bank of England, and it too received an official monopoly. The bank addressed a shortage of coined money in Scotland, a result of the country’s exports of coins to meet trade deficits. The Bank of Scotland introduced more paper money into circulation. As a result, it created an alternative to debasing the coined money, fixing the trade deficit, or finding new sources of gold and silver, the usual solutions to such a problem up to then. The bank also expanded credit by its own lending since it issued far more paper money than it held in precious metal reserves, using the difference to fund loans.
The Company of Scotland was also founded in 1695. This was a trading company established with capital not just from merchants in Edinburgh and Glasgow but from landowners in the hinterland. It sought to address the trade deficit by enhancing Scottish access to foreign markets with which to increase trade. During Scotland’s financial revolution there was an expansion in the number of Scottish companies in operation; some forty-seven were active in fields as varied as paper production and sugar refining.
The financial revolution was cut short though. An English economic crisis in 1696-97 also affected Scotland where it was compounded by two successive poor harvests. There was an outflow of wealth to pay for imported food and companies failed; only twelve of the forty-seven companies in existence in 1695 hadn’t failed or suspended operations by 1700. The Scottish Parliament was now wary of financial innovation and rejected new financial and commercial projects.
The existing companies which survived were free to devise new schemes though; one of these, the Darien scheme, became the most infamous of this period. It was undertaken by the Company of Scotland. Some 1,500 investors funded an effort to create a Scottish colony in Central America. The effort failed when the Spanish attacked the colony and forced it to surrender. The failure of the Darien scheme only furthered political opposition to promoters lobbying for novel commercial projects. Some £153,000 was lost in the venture and the Company of Scotland was dissolved.
The money lost in the Darien scheme accelerated the unification of Scotland and England. The Act of Union in 1707 joined the two countries under a single parliament. Scotland may have lost its own parliament but received certain advantages such as official access to ports in English colonies. This replaced an already widespread illegal trade between Scotland and the colonies that had been happening anyway.
The union also gave rise to an ‘Equivalent’ payment designed to compensate Scotland for taking on its share of the large English national debt. Nearly £400,000 was received in Scotland, in a combination of coined money and bonds, and the sum was to be spent on a recoinage of Scottish coins and to compensate those who had lost money in the Darien scheme.
However, following the Act of Union, English neglect did not help revive the stalled state of Scotland’s financial revolution. Political instability did not help matters also as the union was nearly dissolved over breaches of the Act of Union and disputes over the succession to the throne after Queen Anne’s death. The instability triggered bank runs, such as one in 1715 that caused the Bank of Scotland to suspend the redemption of its banknotes.
During the aftermath of the Darien scheme and the Act of Union, some of Scotland’s financial innovators, like John Law, now looked abroad. Law himself had tried and failed to found a bank in Scotland in the wake of the Darien scheme but he did not get approval from the Scottish Parliament at the time. This was perhaps for the best given the Mississippi Bubble he subsequently set off in France. Many other Scots went to London but together the country’s financial innovators were responsible for establishing or promoting banks in faraway North America and in France, Germany, and Austria.
South Sea Bubble
England was enthralled with the speculative mania around the South Sea Company in the 1710s, especially at the very end of the decade when the company’s stock price neared its peak. Scotland saw no equivalent domestic mania around a Scottish company but the events in London did affect it, not only because it drew so much capital from Scottish investors but also because the bubble’s bursting dwindled support for future financial schemes.
As for the involvement of Scots in the South Sea Company, one contemporary estimate put the quantity of Scottish capital invested in the London firm at four times the amount invested in the Company of Scotland. Some thought the outflow of money weakened the Scottish economy and from the peak of the bubble in 1720 through about 1722, credit did seem less available.
While stock prices rose there were concerns of what the riches eventually imported back to Scotland would do to prices there. However, these worries proved irrelevant when the bubble burst. There would not be massive gains returned to Scotland but instead much of the money sent south did not return at all. Trading data does not survive but the examples of prominent Scottish investors in the London markets suggest that much of the Scottish money was invested in the latter stages of bubble and so they were more likely to have been victims than the average investor. Many had also paid for their shares with borrowed money.
Royal Bank of Scotland
Eventually, the frozen state of financial innovation within Scotland thawed. Crucially, the Bank of Scotland’s temporary monopoly on Scottish banking ended in 1716 and it had made little political effort to renew the monopoly, presuming the Scottish banking industry was too small and unappealing to spur competitors anyway. The bank had barely survived through the periods of crisis and had to periodically suspend many of its operations, including lending and redemption of its banknotes.
An ‘Equivalent Society’ made up of those who had received Equivalent payments following the union with England had offered to inject £250,000 into the bank, a massive sum compared to its capital then of only £100,000. However, the Bank of Scotland rejected the deal, in large part because the investors also demanded that the bank advance them ninety percent of their investment in Bank of Scotland notes, so the net equity they would have contributed was just £25,000 despite their receiving most of the stock in the company. Other proposals made by the consortium of investors also went nowhere.
A new Scottish bank, the Royal Bank of Scotland, was formed in 1727 though. After their efforts to invest in the Bank of Scotland failed, much of the Equivalent windfall went to capitalize this new bank instead. It was the first new financial firm of any note in Scotland in thirty years. The bank introduced new financial innovations to Scotland, such as overdraft facilities, and further increased the circulation of paper money.
During the financial revolution, paper money and banks had come to change the meaning of money and so the Royal Bank of Scotland could be said to have brought the financial revolution back to Scotland when it had looked moribund. Scottish trade grew considerably after the mid-1730s as did the number of banks. These developments are no doubt related since banks provide money and credit for trade and trade increases the demand for banks. Having just one bank was no longer enough, as it seemed between 1695 and 1727, and neither were two. In fact, there would be thirty-two banks in business in Scotland by 1769.
The lesson of Scotland’s financial revolution is that failures can diminish interest in financial and commercial projects, but only to a point. The creation of the Bank of Scotland could have kicked off a wave of new financial ventures, but because of an economic downturn, the collapse of the Darien scheme, and the South Sea Bubble, it took more than a decade after the end of the Bank of Scotland’s monopoly for a second bank to be formed. The financial imbroglios had diminished the enthusiasm of the politicians, and perhaps much of the public. However, the creation of more banks was a good thing. For Scotland especially, banks and their banknotes went some way towards resolving the shortages of coins and credit. Perhaps inevitably, the spirit of financial entrepreneurship eventually returned.
More from the Tontine Coffee-House
Read what literary icons of the early 1700s, like Defoe, Pope, and Swift had to say about the South Sea Bubble. Consider that John Law, the Scottish financial entrepreneur mentioned above, managed to set off a nearly simultaneous bubble in Scotland. Consider subscribing to this blog’s newsletter here.
1. McDiarmid, Andrew. “The Equivalent Societies of Edinburgh and London, the Formation of the Royal Bank of Scotland, and the Nature of the Scottish Financial Revolution.” Journal of British Studies, vol. 60, no. 1, Jan. 2021, pp. 88–114.
2. “Scottish Economic Development in the Face of English Hegemony: Trade Imbalances, Banking, and the Union of 1707.” Proceedings of GREAT Day, SUNY Geneseo, 2013, pp. 301–313.
3. Walsh, Patrick. “The Bubble on the Periphery: Scotland and the South Sea Bubble.” The Scottish Historical Review, vol. 91, no. 1, Apr. 2012, pp. 106–124.