The Mystery of Banking

partner restriction “gave a degree of strength to the issuers of
notes, and of confidence to the receivers of them, which several
banks established in our counties have not been able to command.
The natural consequence has been, that Scotch notes have formed
the greater part of our circulating medium.” The petitioners
added that, with one exception, they had never suffered any
losses from accepting Scottish notes for the past 50 years, “while
in the same period the failures of banks in the north of England
have been unfortunately numerous, and have occasioned the most
ruinous losses to many who were little able to sustain them.”
9
8
On the success of the Scottish note-exchange system, see William Gra-
ham, 
The One Pound Note in the History of Banking in Great Britain
, 2nd
ed. (Edinburgh: James Thin, 1911), p. 59; White, “Free Banking,” pp. 8–19.
9
Graham, 
The One Pound Note
, pp. 366–67; White, “Free Banking,” p.
41. The Cumberland and Westmoreland experience well supports Professor
Klein’s argument that, under free banking, “high confidence monies will
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The Origins of Central Banking
185
drive out low confidence monies.” Klein has stressed the importance of pub-
lic confidence under free banking; people will only be disposed to accept the
money of a fully trustworthy issuer, “so that issuers,” as White sums up
Klein’s argument, “must compete to convince the public of their superior
reliability.” In a system of private bank notes redeemable in specie, “the pri-
mary aspect of reliability is the assurance that convertibility will be main-
tained by the continued existence of the note-issuing bank.” Benjamin Klein,
“The Competitive Supply of Money,”
Journal of Money, Credit and Banking
6 (1974): 433; White, “Free Banking,” p. 40.
10
Walter Bagehot, 
Lombard Street 
(Homewood, Ill.: Irwin, 1962), pp.
32–33; White, “Free Banking,” pp. 42–43. Furthermore, Scottish free bank-
ing was never plagued by any problem of counterfeiting. Counterfeiting is
generally a function of the length of time any given note remains in circula-
tion, and the average Scottish bank note lasted a very brief time until a com-
peting bank would return it to the issuing bank through the clearinghouse
for redemption. Emmanual Coppieters, 
English Bank Note Circulation
1694–1954 
(The Hague: Martinus Nijhoff, 1955), pp. 64–65; White, “Free
Banking,” pp. 43–44.
In contrast to the English banking system, the Scottish, in its
120 years of freedom from regulation, never evolved into a cen-
tral banking structure marked by a pyramiding of commercial
banks on top of a single repository of cash and bank reserves. On
the contrary, each bank maintained its own specie reserves, and
was responsible for its own solvency. The English “one-reserve
system,” in contrast, was not the product of natural market evo-
lution. On the contrary, it was the result, as Bagehot put it, “of an
accumulation of legal privileges on a single bank.” Bagehot con-
cluded that “the natural system—that which would have sprung
up if Government had left banking alone—is that of many banks
of equal or not altogether unequal size.” Bagehot, writing in the
mid-nineteenth century, cited Scotland as an example of freedom
of banking where there was “no single bank with any sort of pre-
dominance.”
10
Moreover, Scottish banking, in contrast to English, was
notably freer of bank failures, and performed much better and
more stably during bank crises and economic contractions. Thus,
while English banks failed widely during the panic of 1837, a con-
temporary writer noted the difference in the Scottish picture:
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