Making It Happen: Fred Goodwin, RBS and the men who blew up the British economy

by Iain Martin

  The aftermath might have proved embarrassing to the Royal Bank, especially once the Jacobite rebellion had ended in humiliating defeat in April 1746 at Culloden. Luckily for Campbell, the Royal Bank’s role was hushed up. The deputy governor, Lord Milton, returned to Edinburgh and was furious with Campbell, who was now suspected of secretly having Jacobite sympathies. Yet Milton could not risk any scrutiny of the affair for fear of the government in London noticing what had been happening. Campbell prospered, by continuing as cashier until his death in 1777 and fathering fourteen children. A portrait of him, resplendent in full tartan, still hangs in the Royal Bank in Edinburgh. The defeated Prince fled the battlefield for exile in France. Donald Cameron of Lochiel followed him, joining the French army and dying in battle in 1748. His brother Archibald, another relative of Johnny Cameron’s, was the last Jacobite to be executed. He was imprisoned at Edinburgh, then taken to the Tower of London. In June 1753 at Tyburn he was hanged, not until dead, and then beheaded.

  In the final Jacobite crisis, the Royal Bank had gone through an important stage in its evolution. Tied to the Whig political cause when it was founded, it had now shown that what really mattered to the bank above all else were its interests and its survival. Campbell had responded pragmatically under pressure and carried on the business of the bank, giving the customer, Bonnie Prince Charlie, what he wanted but keeping it quiet.

  Scotland, and the Royal Bank, prospered in the peace that followed, when there was a dizzying intensification of the revolution in ideas that became known as the Scottish Enlightenment. The Scottish conceit, of a small country defying the odds and punching well above its weight, stems in part from the startling intellectual and financial developments of this period. (‘Here’s tae us, wha’s like us?’ as Robert Burns put it.) This intellectual explosion was fuelled by Scots having unusually good access to basic education, thanks to the innovation of schools introduced by the ‘kirk’, or church, meaning abnormally high literacy rates for the time. Upwards of 70 per cent of Scots were able to read and write by the mid-eighteenth century. At a time when England had only two such institutions, Oxford and Cambridge, Scotland had four ancient universities in the shape of St Andrews, Aberdeen, Edinburgh and Glasgow. From the latter intellectual hothouse came Adam Smith, the great classical liberal author of The Wealth of Nations (1776). Smith taught at Glasgow, gave popular public lectures in Edinburgh and became the father of modern economics. The ideas of philosophers including David Hume and Adam Ferguson, and scientists such as Joseph Black, helped shape our world. Even the modern insurance industry can be traced to Edinburgh and the establishment in the 1740s of the ‘Fund for a Provision for the Widows and Children of the Ministers of the Church of Scotland’, which created the model, with the use of actuarial tables, whereby a mutual insurance company could ensure that it had sufficient funds to insure against early death.8

  It was in this innovative climate that the Royal Bank and the old Bank of Scotland pioneered what became modern British banking. It wasn’t just the Royal Bank’s simple individual overdraft. There was the refinement of the entire cash-credit system, in which merchants could open an account, pay bills and deposit their takings secure in the knowledge that the bank allowed the balance to fluctuate each day within agreed limits. This made it much easier for firms to plan ahead, to order stock, to make payments and to grow. Most importantly, the two Scottish banks were from the start examples of what is known as joint-stock banking. They were owned by a wide range of shareholders. The banks could use the money brought in by issuing shares to increase their pool of capital and expand lending. Shareholders could sell their holdings on, creating a secondary market in the bank’s shares. Such banks only became commonplace in England after an 1826 Act of Parliament.9

  The Royal Bank and the Bank of Scotland gained another edge when they sued for peace in 1752 – agreeing at a clandestine meeting to cooperate. They would now accept each other’s notes. Eventually they developed the issue of small notes, creating the £1 note for smaller transactions and gradually all but eliminating the need for large amounts of ‘specie’ or coins of the kind that Bonnie Prince Charlie had needed to pay his troops a generation earlier. With sound institutions the customer could trust to look after their money, paper money was deemed sufficient for many transactions. The idea of the Scots as Britain’s instinctive bankers – their canny financial husbandry sometimes caricatured as meanness – was soon an integral element of popular perceptions about the country.

  There were some spectacular reverses. The dour Presbyterian ethic, which sprang from the Scottish Reformation and its violent rejection of Catholicism, involved the veneration of hard work, education, modesty and prudence, all highly commendable virtues. In this way the post-Reformation Scots were perhaps tailor-made to be Britain’s prototype bankers. Yet there seemed to be a flip side, as though all that Scottish emphasis on sound money management suppressed desires which occasionally spilled over into mad projects and wild endeavours.

  John Law, the swindler, womaniser, cardsharp and economic theorist who almost bankrupted France in 1720, was a Scot. After killing his opponent in a duel he escaped from prison in London, established the Banque de France, introduced paper money and created an enormous bubble that gulled French investors. His purchase, on behalf of the French government, of the Mississippi Company in Louisiana was designed to boost trade. It was inspired in part by the Company of Scotland and the mania for joint stock companies and trading in shares. Law fled France once his bubble burst. In Scotland too, periodically, restraint would also vanish in a miasma of financial innovation and greed. The Ayr Bank had liabilities of more than £1m and crashed spectacularly in 1772, stalling the Scottish economy for a while and ruining many farmers and merchants. Established just three years previously, with the aristocracy of Ayrshire and surrounding counties heavily invested, the Ayr Bank had expanded too fast, made too many loans and became overextended. To fill the gap it started borrowing ever-larger amounts from elsewhere. Then came disaster, with the sudden collapse of the London-Scottish banking house of Neale, James, Fordyce and Downe, with which the Ayr Bank had done business.10 Adam Smith, writing in The Wealth of Nations, several years later, described the Ayr Bank’s reckless approach to running its affairs in the following terms: ‘The project of replenishing their coffers in this manner may be compared to that of a man who had a water-pond from which a stream was continually running out, but who proposed to keep it always full by employing a number of people to go continually with buckets to a well at some miles distance in order to bring water to replenish it.’

  Despite occasional crashes, the general trajectory was upwards for Scotland and the Royal Bank. The country’s trade soared in tobacco, textiles, manufacturing and eventually coal. William Paterson’s vision of Scotland as a great trading nation began to be realised in the Industrial Revolution and push for Empire of the late eighteenth century. With its share of the proceeds, the Royal Bank opened larger and much more salubrious premises in Edinburgh. The Enlightenment desire for improvement had reshaped the Scottish capital, with the creation of the New Town in the late eighteenth century, which still stands as one of the finest examples of Georgian architecture and refined town planning. In 1821 the Royal Bank abandoned the cramped Old Town, with its romantic memories of the bank’s birth and the 1745 rebellion, and moved to an elegant headquarters in St Andrew Square. In February 1825 it purchased the Italianate Dundas House next door, the former mansion of Sir Lawrence Dundas. Later it attached a spectacular domed banking hall topped with a star-adorned roof. This was a temple to Scottish bankers, to their values, ethics and achievements and these buildings would remain the headquarters of the Royal Bank until 2005 when Fred Goodwin moved the flagship office to a vast new complex built on the distant edge of Edinburgh at Gogarburn.

  In the nineteenth century, ensconced in its new offices, the Royal Bank was the ultimate Edinburgh company: careful, deeply conservative and embedded in the clannish Edinburgh esta
blishment. Scotland’s compact capital then, as now, is most unlike London. The senior lawyers, bankers, actuaries and insurance professionals who ran its affairs tended to live in close proximity, either in the smart Georgian houses of the New Town or in Victorian villas not far away. And many of them tended to know each other. The more junior staff the Royal Bank employed were given security and a route for advancement, if they accepted the ethos underpinning a bank embodying self-proclaimed Presbyterian values of hard work, modest behaviour and loyalty.

  Scottish banking blossomed. Rival outfits opened in Dundee, Ayr, Aberdeen and Perth and banks such as the Bank of Scotland started to develop national networks of branches – another innovation well ahead of England. There were more periodic panics, as there usually are. In 1857 the Western Bank in Glasgow failed spectacularly in the middle of a bank-run. It went down with liabilities of almost £9m. Its shareholders were wiped out. In 1878 there was an even worse disaster when the City of Glasgow Bank folded, following its botched investment in the Racine and Mississippi railroad in America. A difficult situation was exacerbated by extensive fraud on the part of the bank’s management. Amid great public excitement there was a trial, resulting in the imprisonment of the manager and directors. These recriminations were followed by much introspection and soul-searching. Scotland was famed for its skill in banking, so why had it produced a banking collapse? The government’s failure to regulate properly was identified as a factor, although the incompetence and greed of some of the directors was held to be key.

  The Royal Bank had had its own more modest difficulties in the 1830s when it became overextended, lending too much in a boom. It survived the fall-out and continued gradually accumulating customers, taking over other banks such as the Dundee Banking Company in 1864 and widening its branch network. There were some conflicts with English bankers, as the Royal Bank and the Bank of Scotland fought off attempts by the Bank of England to end the practice of the Scottish banks issuing their own notes (which they still do). The directors, tentatively at first, started the bank’s move into London, in 1863 buying property in the City in Lombard Street, near the Bank of England, and opening an office. The Royal Bank, fortified by the famous reputation of Scottish banking, was broadening its horizons.

  So exalted was the standing of Scottish banking, that William Jevons, one of the most influential economists of the nineteenth century, wrote in Money and the Mechanism of Exchange in 1875:

  Englishmen and Americans, and natives of all countries, may well admire the wonderful skill, sagacity and caution with which Scotch bankers have developed and conducted their system. There is no doubt that Scotch bankers are guiding the course of development of the banking system in England, India, and the Australian colonies, and elsewhere, with conspicuous success. If we were all Scotchmen, I believe the unlimited issue of one pound notes would be an excellent measure.

  By 1927, when the Royal Bank of Scotland celebrated its bicentenary, this had long been the settled view. Scotland had played a disproportionately large role in the development of British banking and could be justifiably proud of the independence of its robust financial institutions. The Royal Bank saw itself as being by far the most prestigious of these companies. Prudent management had resulted in the gradual growth of deposits and profits, all conducted at a manageable pace over many decades. In contrast to recent developments, it took many decades to grow. In 1865, deposits were only £8,127,791 and the annual profit was £177,941. In 1927 deposits had climbed to £44,186,574 and profits stood at £481,977, still under half a million pounds. It was a result of solid, steady development concentrated on taking in deposits and trying to lend only what was prudent.

  On the evening of Friday 3 June 1927, 300 guests gathered in Edinburgh’s North British Hotel (now the Balmoral Hotel), to celebrate these achievements and mark two hundred years of the Royal Bank.11 At the top table sat an eminent cast list, which included Montagu Norman, Governor of the Bank of England, and Earl Haig, commander of British forces in the First World War and by 1927 a director of the Royal Bank. The Duke of Buccleuch, the governor of the bank, chaired proceedings. Not one woman was present.

  Winston Churchill, then the Chancellor of the Exchequer, sent apologies for his absence. His telegram celebrating the anniversary was read out to the assembled directors, senior staff, branch managers and a sprinkling of guests. The Duke of Buccleuch, responding to the toast to the health of the Royal Bank, noted that ‘the banking system of Scotland is probably the greatest and most original work which the practical genius of the Scottish people has produced’. Following further laudatory speeches, punctuated by laughter and applause, and rich with historical references to events such as the 1745 Jacobite rebellion and the old rivalry with the Bank of Scotland, Sir Alexander K. Wright stood to reply to the toast made to the staff. Some six hundred of the bank’s 1270 staff were stockholders, or shareholders, and the sense of pride in shared ownership and achievement is still palpable in Wright’s concluding remarks: ‘I venture to express the hope that when our successors meet together to celebrate the bank’s tercentenary (in 2027), the institution will still be occupying a high position in the life of the country and that on the evening of the dinner there will be a Duke of Buccleuch in the chair.’

  As the guests on that June evening in the 1920s filtered out of the ballroom of the North British Hotel and on to Edinburgh’s Princes Street, there seemed every reasonable expectation that such hopes would be fulfilled.

  3

  New World

  ‘Our dream is to create an international bank run from Edinburgh’

  Charles Winter, group chief executive of the Royal Bank of Scotland (1987)

  The Royal Bank at which George Mathewson arrived in 1987 had been living off its proud past for years. The hiring of pugnacious ‘wee George’ had been ordered by elements of the management and board who realised that something had to change, and quickly. It seemed as though the Royal Bank might not even have a future as a stand-alone entity and that a proud history would culminate in an ignominious swallowing up by a foreign giant. Goodness, the buyer might even be English. The thought appalled the nationalistic Mathewson.

  The Royal Bank was not alone in suffering an existential crisis. Outwardly, in the decades immediately after the Second World War, the Scottish economy, like the UK economy, appeared to be doing relatively well. This obscured the looming reality of deindustrialisation as old businesses with roots in the distant Industrial Revolution struggled to adapt. Ships could be made more cheaply in South Korea. Germany and others were dominant in chemicals and car manufacturing. Meanwhile, Scotland, like its banks, seemed to be relying increasingly on a fading and self-congratulatory version of its fabled past.1

  Not that the Royal Bank had stood still in the period since it celebrated its bicentenary in 1927. In 1930 it had followed up its 1924 purchase of Drummonds in London by buying Williams Deacon’s Bank Ltd, and then came Glyn, Mills & Co in 1939. The purchase of these English banks offered a glimpse of what an expanded UK-wide operation could look like. In 1960 a new international operation was born, with the opening of an office in New York. Offices in other American cities and in Hong Kong followed. At home, the managers of the 1960s introduced early computer systems and new products aimed at attracting savers and customers. Williams & Glyn’s were fused together. The industry also went through a wave of consolidation, mergers and takeovers, as smaller institutions were swallowed up, and the remaining players attempted to improve and professionalise their businesses. Ultimately, in the case of the Royal Bank, it was all rather unsatisfactory. The 1969 purchase of the National Commercial Bank of Scotland made the Royal Bank Scotland’s biggest bank, but it did not produce the efficiencies and dynamism that had been hoped.

  The Royal Bank looked tired, like a target for takeover, which it duly became. Lloyds had tried first, in 1979, having built up a shareholding. The notion of surrender to an English bank appalled the board and scandalised Edinburgh opinion. The offer w
as turned down. When, the following year, Standard Chartered came calling with the offer of a merger, it sounded much more appealing to the board. Although it was registered in London, most of Standard Chartered’s activities were abroad, in Asia, Africa and the Far East. The Royal Bank would have the security that comes from being part of a large international group, while being dominant in terms of the proposed combined company’s UK activities. Standard Chartered agreed that the UK bank could be run from Edinburgh. The board approved the deal and the Bank of England’s governor, Gordon Richardson, gave his blessing.2 Without the intervention of the Hong Kong and Shanghai Banking Corporation it would most probably have happened.

  The then head of overseas operations at what is today known as HSBC was Willie Purves, an old-school Scottish banker who had joined his local branch of the National Bank on leaving school in Kelso at sixteen. During national service in 1951 he had been awarded the Distinguished Service Order, and if he hadn’t been a national serviceman it would likely have been the Victoria Cross. Then he returned to banking, moving east, to Hong Kong. Purves and his colleagues thought that Standard Chartered was getting the Royal Bank for a steal, so they came in with a higher offer.

  There was an almighty row. Political pressure was applied, with MPs demanding intervention and a Scottish ‘ring fence’ so that the country’s banks could not be bought by foreigners. The Monopolies and Mergers Commission ruled against the HSBC takeover as well as the merger with Standard Chartered.3 In its report in January 1982 the Commission declared that: ‘The degree of control and management exercised by Scots from Edinburgh, the size of the company and the importance of it and its industry for Scotland lead us to conclude that removal of management and control of the group from Scotland would be a serious detriment.’