As we have noticed, it is possible for people in various parts of the country to be producing a surplus, and yet that surplus, if there is no means of applying it in other parts of the country where it will be used productively, will go to waste. Until the end of the seventeenth century much of the country's surplus did go to waste. The only part that was used productively was that part in the possession of people who were prepared to risk what they already had in order to get more. It was almost impossible for a man who had " constructive ideas " to get them carried out, unless he had money as well. The tendency of the seventeenth century, was towards a more productive use of surplus. The development of joint-stock enterprises from the regulated companies, the flotation of a National Debt, and the beginning of a trade in annuities, all helped to bring treasure and the capital it represented into the hands of men who could apply it.
The goldsmiths had been accustomed to lend money in coins or bills which represented bullion actually in their possession, but even this accommodation was given chiefly to foreign trade. Defoe, in 1697, complained of the " fair pretences of fine Discoveries, new Inventions, Engines," that were persuading the people to invest their money. Among the new nothings he numbers, " LinenManufacturers, Salt-peter works, Copper mines Diving Engines, Dipping, and the like."1
Even the advocates of a bank were zealous chiefly because they saw how lack of the means of obtaining capital hampered foreign trade.2 Banks " will furnish many young men with stock that have, by their industry and well spent time and travels in their apprenticeships, gained good experience in traffic, but when they are come to be for themselves wanting stock, friends, or credit to begin to trade with, are thereby much discouraged.''3
The dislocation of trade that followed the Great Fire of London, and the Dutch war in 1665-7, caused a great scarcity of capital, and various schemes were mooted for the establishment of some credit organization. In 1665, it was proposed to set up an Office of Credit to make advances to traders up to three-quarters of their goods, while in the following year an issue of inconvertible paper money, based on the Crown lands, was suggested.4
The revival of industrial activity in 1676 resulted in the practical accomplishment of some of these schemes, and in the elaboration of several new ones.5 Thus, throughout the last quarter of the seventeenth century, there was an increasing demand for banking facilities.
This obvious need of a banking system, and the known example of the Dutch, soon had a result in England, and, " before the end of the reign of Charles II, a new mode of paying and receiving money had come into fashion among the merchants of the capital. A class of agents arose, whose office it was to keep the cash of the commercial houses;"6 and in 1694 the Bank of England was established. In 1695 the Bank of Scotland received a similar monopolistic charter.7 However, its privilege lapsed in 1716 and no renewal was sought for. In 1727 the Royal Bank of Scotland was founded and the line of Scotch development was in the direction of large national joint-stock banks, while England kept one large national monopolistic bank and numbers of private banking houses. The disadvantage of the latter system was that in times of financial crises8 many of the smaller houses failed.
The disadvantage that both countries shared was the restriction of banking systems to the capitals of the two countries.9 In England in 1750 the " Bristol Old Bank " was the only bank outside London.
Moreover, the banks also advanced money for the purposes of speculation, and in the early part of the eighteenth century much capital was thus wasted that might have helped to fertilize the provinces.10
It was, however, possible in 1750 to obtain credit, and, by means of credit, for wealth belonging to one class of people to be productively employed by another class. In England there was plenty of capital and it easily became available through the private banking houses. In Scotland., however, the backward nature of the country made capital scarce. What existed was mainly gained by foreign trade.11 From 1700 onwards, the new methods in farming were introduced, and many expensive mistakes were made by the proprietors.
From 1765, there were ten years of bad harvests, while along with the agricultural improvements came innumerable sanguine schemes for reclaiming land, building roads and bridges, and opening manufactories of all sorts. Some of the promoters were wealthy, many were not; all were hopeful, none had experience. Moreover, the wild speculation that was going on had made the exchange with London more and more adverse, and defeated its own ends by compelling the banks to restrict credits in order to reduce their note circulation, which was being used by bullion dealers to draw away coin to London.12
Thus, at the beginning of the second half of the century, the expectations of the advocates of a banking system had not been fulfilled in Scotland. For the new trades which had opened, and the new industrial facilities which the credit system offered, were used so widely by the general public that had money to invest,13 that a natural restriction of credit and a general suspicion of large and risky undertakings had become the general policy of the banks.
This was the financial position when Watt turned his attention to the steam-engine.
1 Defoe, Essay on Projects, pp. 11- l3.
2 Thorold Rogers, Industrial and Commercial History of England, p. 70: " Credit is this power which a State or a person has of attracting to itself or himself wealth either in the passive or active form from other persons or other States." " Loans or credits obtained by mercantile persons precede historically those obtained by non-traders."
3 Lambe, Somers Tracts, VI, p. 456.
4 Scott, Joint-Stock Companies to 1720, p. 280. This Office of Credit, which was to be " neither a bank nor a Lumbard," was definitely proposed for the benefit of the mercantile community,
5 lb., p. 293. An office for the discount of mercantile bills was already working, though it was objected to on the ground that such an institution, " having no fund, anchorage, and secure foundation " would come to nothing.
6 Macaulay, History of England, Vol. III, p. 289.
7 Graham, One Pound Note, p. 11 . The noticeable thing about this national joint-stock bank was the distribution of the stock; the shareholders were to be not less than 60 nor more than 1,2OO.
8 lb., p 99.
9 Ib., p. 96. L. Grindon, Manchester Banks and Banders, p. 2.
10 Graham, op. cit., p. 76. Cunningham, op. cit., Vol. II, p. 447
11 John M'Ure, History of Glasgow (1736), p. 168-9: " There are Merchant travellers betwixt Scotland and England many of whom became sea adventurers afterwards. The Scots pedlers in England appear to have been very numerous."
12 Graham. op. cit.. p. 107.
13 Social England, Vol. V, p.157 The estates confiscated in 1745 were taken over by the York Buildings Co.,originally established in 1675 to supply Piccadilly and St. James' Fields with water, but all that the Company did was to introduce a few industries to a languid existence and fill the pockets of the Edinburgh lawyers by means of a rich crop of litigation.