Innovation is threaded through the history of Scotland's financial system

William Paterson, a merchant who had spent time in the West Indies and who had experience of the Dutch financial system, submitted a proposal to the English Government in 1691 to create a national bank to bolster the public finances. With an expensive war to fight against France, King William and Queen Mary granted a royal charter three years later to create the Bank of

England, with Paterson as one of its original directors.

Paterson left the bank in 1695 and moved to Edinburgh, where he was instrumental in convincing the Scottish parliament to create a national bank that would help to develop trade with England and the Low Countries.

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It was an English merchant, John Holland, who drafted the constitution of the Bank of Scotland and the act of parliament that created the institution later that same year.

As well as the Bank of Scotland, parliament also created The Company of Scotland Trading to Africa and the Indies, with Paterson again as a director. Since his time in the West Indies, Paterson had wanted to start a colony on the Isthmus of Darien, the strip of land in modern-day Panama that separates the Caribbean Sea from the Pacific Ocean.

Thoughts of trade with Africa and the Indies were replaced with the Darien scheme. Following years of famine and trade restrictions from England, Scottish landowners and merchants invested around a fifth of the country’s liquid capital in the foundation of the colony.

Yet Darien was a disaster – pressure from England and Spain stifled trade and disease claimed the lives of 2,000 colonists, including Paterson’s wife and daughter. The colony was abandoned in 1700 and is credited with hastening the parliamentary union with England, which created Great Britain in 1707, with the Act of Union promising compensation to the Darien investors.

Yet, while the Company of Scotland fell, the Bank of Scotland rose. It became the first bank in Europe to successfully issue banknotes, in 1696, and enjoyed a monopoly until the Royal Bank of Scotland (RBS) was founded in 1727 through a royal charter granted by King George I.

RBS was established using cash left over from the compensation paid to the Darien investors, and became the first lender to grant an overdraft, in 1728. The Bank and Royal Bank fought skirmishes known as the “note wars” during the 1700s, with each collecting large numbers of the others’ notes and then presenting them all at once for payment. Both survived, but their lending was concentrated around their bases in Edinburgh. Merchants in other Scottish cities began to form their own private banks to help fuel the industrial revolution.

The vast majority of the new banks issued their own notes, leading to fears in the 1760s of monetary instability, but legislation in 1765 and the opening of a note exchange brought calm to the system and engendered growing trust between the banks. Lending continued to expand, and banks also began accepting deposits and paying interest, with Scottish banks becoming the first to develop such practices on a large scale.

Other financial services were also beginning to develop. In 1744, the Church of Scotland launched its “Scottish Minister’s Widow’s

Fund” – in effect the world’s first pension scheme – to provide for the wives and children of deceased clergy; Robert Wallace and Alexander Webster set up the fund by examining the average ages and life expectancies of ministers, and figures for how long wives outlived their husbands.

Another minister, Rev Henry Duncan, founded the first savings bank at Ruthwell in Dumfriesshire in 1810, encouraging customers to save. Scotland’s culture of “thrift” was born.

The Scottish banking system’s stability was highlighted by parliamentary committees during the 1820s, at a time when financial instability in England led to calls for restrictions on banks’ printing of notes.

Sir Walter Scott, writing under the pen-name “Malachi Malagrowther”, sent a series of letters to the Edinburgh Weekly Journal in 1826, campaigning to save Scottish banknotes.

Those restrictions were introduced eventually, in 1845, meaning only existing banks could issue notes. Yet the Scottish institutions continued to expand their branch networks, with their lending and savings books swelling.

Finance in other forms was also on the rise. Robert Fleming of Dundee is credited with pioneering the investment trust movement as a vehicle for collective investing.

Although he can’t claim to have founded the first investment trust – that distinction went to Philip Rose and his Foreign and Colonial Government Trust in 1868 – Fleming did launch the Scottish American Investment Trust, or First Scottish, in 1873. Today, he’s better known as the grandfather of James Bond creator Ian Fleming.

Fast-forward into the 20th century and the banks’ expansion eventually led to Scottish institutions buying English peers and vice-versa, which resulted in a rationalisation of the number of banks in Scotland. Names like the National Commercial Bank of Scotland, the National Bank of Scotland and the British Linen Bank disappeared, leaving behind only the “big three” – Bank of Scotland, RBS and Clydesdale Bank.

Those amalgamations continued apace, with RBS buying Citizens Financial Group in 1988 to expand into the US – and then NatWest in 2000, creating the UK’s third-largest banking group, with its landmark new head office opening at Gogarburn on the western edge of Edinburgh in 2005 under the highly ambitious – and now infamous – chief executive Fred Goodwin, inset. Bank of Scotland completed its own merger with Halifax to form HBOS in 2001.

In 2007, RBS led a consortium with Fortis and Santander that bought Dutch bank ABN AMRO, just as the credit crunch and ensuing global banking crisis struck.

RBS tried to weather the storm by issuing the largest number of shares in British corporate history, but eventually required a bailout from the UK Government, which also pumped money into HBOS and Lloyds TSB, leading to the latter two merging to form today’s Lloyds Banking Group.

While the banks’ reputations were dented, Scotland’s insurers, investment managers and other financial services operators were quick to point out that it was a “global banking crisis” and not a “global financial crisis”.

Financial institutions throughout the world continued to invest in Scotland, where £800 billion of funds are now managed.

The resurgence of the financial services industry continues today, with the growth of the financial technology or “fintech” sector, which harnesses not only Scotland’s prowess as a global hub for finance but also its long history as a centre for technological developments.

Last year, the sector’s prominence was cemented with the launch of FinTech Scotland, the body that brings together the industry, the Scottish Government and the University of Edinburgh to promote the nation as the destination of choice for investors.