Organisational flexibility and governance in a civil-law regime: Scottish partnership banks during the Industrial Revolution

Abstract

Unlike their English counterparts, Scottish partnership banks during the Industrial Revolution operated under partnership law which was similar to the French société en commandite. The article suggests that the definitive feature of this partnership law was that it permitted partnerships to separate ownership from control and stock to be traded. Archival evidence also suggests that Scottish partnership banks had mechanisms to ameliorate potential insider opportunism arising from the separation of ownership from control. The available evidence also suggests that the ability of Scottish banks to separate ownership from control may have contributed to the relative stability of the banking system.

Keywords:

• Scotland
• banks
• partnerships
• common law
• civil law
• banking stability
• legal personality
• unlimited liability

Acknowledgements

The assistance of the following archivists is gratefully acknowledged: Ruth Reed (Royal Bank of Scotland, RBS), Helen Redmond, Seonaid McDonald, Sian Yates, Rosemary Moore and Reto Tschan (Halifax-Bank of Scotland, HBOS). Acheson would also like to acknowledge financial support provided by the Accounting and Financial Services Research Group, University of Ulster.

Notes

 1. Freeman, Pearson, and Taylor (2007) suggest that Scottish partnership law did not bestow certain aspects of legal personality, i.e. Scottish partnerships could sue or be sued and they were unable to hold heritable property in their own name.

 2. Anderson and Tollison (1983) claim that English firms during the eighteenth and nineteenth centuries used the law of trust so as to create a quasi-joint-stock organisational form.

 3. 6 Anne, c.22, s.9 and 7 Anne, c.7, s. 61.

 4. ‘Hold-up’ costs are those costs associated with assuring that another party to a contract will not engage in opportunistic behaviour once a contract is entered into.

 5. For dissenting views see Carr, Gleid, and Mathewson (1989), Cowen and Kroszner (1989), Dow and Smithin (1992), Rothbard (1988), and Sechrest (1991).

 6. Cameron (1967, pp. 97–98) argues that the freedom of Scottish banking from legislative interference was closely correlated with its success.

 7. Checkland (1975) suggests that this particular difference in the two systems has been overstated.

 8. Several studies have suggested that legal origin may simply be a proxy – see Mahoney (2001), Stulz and Williamson (2003), Pagano and Volpin (2005), and Roe (2006).

 9. Lamoreaux and Rosenthal (2005) suggest that the alleged inflexible, jurist-inspired civil law of France offered businesspeople a greater menu of organisational choice during the late nineteenth and early twentieth centuries than the practitioner-based common law of the US. Another recent study has suggested that civil-law countries were more financially developed than their common-law counterparts in the early twentieth century (Rajan & Zingales, 2003). See La Porta, Lopez-De-Silanes, and Shleifer (2008) for a rejoinder to this body of work. See also Malmendier (2009) for a perspective on this debate from the Roman Republic.

10. Austin-Benthamite-inspired legal reform refers to using the legislature to pass utilitarian laws in the spirit of the famous jurist and philosopher Jeremy Bentham and his leading disciple John Austin.

11. Similarly, English country banks were established by local merchants, businesspeople, and industrialists (Pressnell, 1956, p. 234).

12. Notably, echoing Adam Smith's concern about beggarly bankers, the founding partners of Aberdeen Banking Company were critical of the low-quality bank notes issued by small traders – see Smith (1776/1986, p. 422). See Contract of Copartnery, Aberdeen Banking Company, HBOS Archives ABC/1/1/1, 1766.

13. See Lamoreaux (1986) for a study on insider lending in the early New England banking system.

14. Contracts of Copartnery, Perth Banking Company (1807, 1829), HBOS Archives 1110/02/1. This would have been a flexible and reliable way of borrowing money, and may have made owning shares highly desirable. The bank also benefited from this arrangement as it may have ameliorated any moral hazard problems associated with lending as the borrower stood to lose their stock if they were unable to repay a loan.

15. See, for example, Clapham (1944, vol. II, p. 91).

16. An excellent elucidation of this feature can be found in Kraakman et al. (2004, p. 7).

17. 6 Anne, c.22, s.9 & 7 Anne, c.7, s. 61.

18. See Ackrill and Hannah (2001, pp. 1–58) for examples of social ties.

19. Aberdeen Banking Company, Contracts of Copartnery (1767–1828), HBOS Archives ABC/1/1//1.

20. Contract of Copartnership, Montrose Banking Company, HBOS Archives 945/12/1/1.

21. Contracts of Copartnery, Sederunt book (1785–1811), Perth Banking Company, HBOS Archives 11102/9/4 (see also Rait, 1930, p. 134).

22. Contract of Copartnery, Perth Banking Company, 1829, HBOS Archives 1110/02/18.

23. Newton (2010) suggests that such ownership restrictions acted as a brake on insider lending.

24. Bell (1858, p. 212) demonstrates how far Scottish partnership law had moved away from the société en commandite when he notes that unlimited liability of sleeping partners ‘rests on justice and general expediency, for the dormant partner is actually, or by possibility, aparticipator of that fund on which the creditors rely for payment, and has empowered another to act for him in a contract of loss and gain, to the consequences of which he must be responsible’.

25. See Campbell (1933, pp. 208–209) for similar cases which arose in England in the decade prior to this, where the following principle was fully established: ‘every man who has a share of the profits of a trade ought also to bear his share of the loss’.

26. Partnership list for 1829 is from Dividend Book (1809–31), Perth Banking Company, HBOS Archives 110/2/9/7–9. Stock transfers and 1808 partnership list are from StockLedger (1808–29), Perth Banking Company, HBOS Archives 110/2/4/16. For an analysis of female ownership of early English joint-stock banks, see Newton and Cottrell (2006).

27. Contracts of Copartnery, Aberdeen Banking Company (1767), HBOS Archives ABC/1/1/1; Contract of the Dundee Banking Company, Sederuent book, RBS Archives DU/7/1.

28. Contract of Copartnership, Dundee Commercial Banking Company No.1 (1792), RBS Archives DC/1/1.

29. Contracts of Copartnery, Aberdeen Banking Company (1767), HBOS Archives ABC/1/1/1.

30. This is consistent with other recent studies (see Grossman, 1995; Hickson & Turner, 2003; Newton, 2010; Weinstein, 2003).

31. Contracts of Copartnery, Aberdeen Banking Company (1767, 1807), HBOS Archives ABC/1/1/1; Contracts of Copartnery, Perth Banking Company (1807, 1829), HBOS Archives 1110/02/18.

32. Notably, in 1836, 125 of the 600 shares in the Dundee Union Bank were held in the bank's name. See List of shareholders (1837), Dundee Union Bank, RBS Archives DN/1/37.

33. Contract of the Dundee Banking Company, Sederuent book, RBS Archives DU/7/1.

34. Contract of the Dundee Banking Company, Sederuent book, RBS Archives DU/7/1.

35. Contracts of Copartnery, Aberdeen Banking Company (1767, 1807), HBOS Archives ABC/1/1/1.

36. Contract of Copartnery, Dundee New Bank (1806), RBS Archives DN/1/2.

37. Transfer Journal, Perth United Banking Company, HBOS Archives 1110/2/10/3; Stock Ledgers, Perth Banking Company, (1787–1808; 1808–29; 1829–57), HBOS Archives 1110/2/9/5, 16, 17.

38. Transfer Books, Royal Bank of Scotland, RBS Archives RB/402/1 – RB202/16.

39. In 1774 the dividend as percentage of nominal value of shares was 1.5%, but by 1780 it had reached 5.5%. Dividend books, Perth United Banking Company, HBOS Archives 1110/2/10/1.

40. Newton and Cottrell (2006, p. 325) use a similar approach to determine kinship links in early English joint-stock banks.

41. Notably, 25.3% of the trades between 1808 and 1810 were partners from the previous constitution transferring their shares.

42. Contract of Copartnery, Perth Banking Company (1829), HBOS Archives 1110/02/18.

43. Contracts of Copartnery, Perth Banking Company, HBOS Archives 1110/02/18; Sederunt book, Perth Banking Company (1785–1811), HBOS Archives 11102/9/4. The initial capital of the bank consisted of 340 shares, with an average of 95.10 partners throughout its 21-year life. In the 1808 reconstitution the number of shares increased to 440 shares with an average of 151.41 partners, and in the 1829 reconstitution the number of shares increased to 667 with an average of 184.32 partners.

44. A similar concept of post-sale liability extension existed in the joint-stock banking legislation of the mid-1820s, and its purpose was to prevent shares being dumped by owners (Hickson & Turner, 2003, p. 935).

45. Contracts of Copartnery, Perth Banking Company (1807, 1829), HBOS Archives 1110/02/18. The Perth Banking Company adapted its board structure in 1841 by creating theroles of governor, deputy governor and 12 extraordinary directors to assist the directors in their decision-making. (Minute Books 1828–52, Perth Banking Company, HBOS Archives 1110/02/9/5).

46. Aberdeen Banking Company, Contracts of Copartnery (1767–1828), HBOS Archives ABC/1/1/1.

47. See Lamoreaux (1986) for a discussion on insider lending in early New England banks.

48. Contract of the Dundee Banking Company, Sederuent book, RBS Archives DU/7/1.

49. See Newton (2010) for the use of such requirements in English joint-stock banks.

50. Contracts of Copartnery, Perth Banking Company (1807, 1829), HBOS Archives 1110/02/18.

51. Aberdeen Banking Company, Contracts of Copartnery (1766–1828), HBOS Archives ABC/1/1/1.

52. Notably, such dissolution clauses featured in the deeds of many early joint-stock banks.

53. Contract of the Dundee Banking Company, Sederuent book, RBS Archives DU/7/1.

54. Contracts of Copartnery, Aberdeen Banking Company (1767, 1807), HBOS Archives ABC/1/1/1.

55. By 1807 this had increased to five partners. Contracts of Copartnery, Aberdeen Banking Company (1767, 1807), HBOS Archives ABC/1/1/1.

56. See Newton (1996) for examples of these mechanisms at work in nineteenth-century Sheffield banks.

57. Although the Royal Bank of Scotland and Bank of Scotland have been viewed as having a controlling influence over the provincial banks, the same holds true for the Bank of England and English country banks (see Checkland, 1968).

58. Banking Copartnerships Act (1826) – 7 Geo. IV, c.46. See Cottrell and Newton (1999) for the background to and effects of this legislation.

59. In 1801, while there were 20,833 persons per bank office in England, the equivalent figure for Scotland was c.17,000. In 1801 Scotland also had more bank assets per capita (£8.30) than England (£6.18). Figures are from Cameron (1967, pp. 28, 34, 66). Population figures for England were obtained from Mitchell (1988, p. 11).

60. Campbell (1967), without presenting evidence, suggests that Scotland's flexible partnership law was not a major factor in Scotland's economic development.

61. 7 Geo. IV, c.67.