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

by Iain Martin

  William Paterson, a Dumfriesshire-born trader and imaginative financier who had spent time in England and the Caribbean, thought he had come up with the answer. Paterson wanted Scotland to colonise the area then known as Darien, where goods might be transferred overland from the Pacific to the Caribbean. The historic gap between east and west would be bridged and Paterson, and Scotland, would become heroically wealthy. That was the theory.1

  The architect of this adventure clearly had an inventive brain and an appetite for risk. In London, Paterson had already helped to found the Bank of England in 1694, which was established to enable the government to raise funds for its military campaigns. The institution then became the world’s prototype central bank, issuing notes and eventually underpinning the entire British banking system. For his next trick, Paterson tried and failed to raise funds on the continent to support his Darien initiative. Then the Company of Scotland was established in 1695 by a Scottish Parliament keen to invigorate foreign trade. At the same time parliamentarians also authorised the establishment of the country’s first bank, the Bank of Scotland, which almost three centuries later ended up as part of HBOS and then Lloyds. The Company of Scotland, the new national trading company, would, it was hoped, give Scotland an outfit to rival the English-owned East India Company by challenging it in Africa and the Indies.

  The East India Company was obviously not keen on this new competitor and King William in London was persuaded to withhold his support for Scottish colonial expansion. Outraged by the king’s snub, and in an atmosphere charged with patriotic fervour, the Company of Scotland took up Paterson’s Darien idea. A great public subscription drive was mounted to raise funds and the affluent in Scottish towns rushed to invest.2 Rivals Glasgow and Edinburgh, competitive even then, both contributed £3000. The burghs of Irvine, Inverness and Inverkeithing raised £100 each, while Renfrew, Ayr, St Andrews Ayr, Paisley, Linlithgow, Haddington and Dumfries were in for more. Perth committed £2000. The noble families of Scotland were heavy investors, with the Duchess of Hamilton handing over £3000. Andrew Fletcher of Saltoun, the philosopher, politician and soldier, staked £1000 of his fortune. Merchants, lawyers, lairds, landlords and clergymen also subscribed. The amounts involved sound small by the standards of our age, loose change to modern investment bankers, but in a pre-industrial economy they were very significant sums. In all, more than £400,000 was raised from more than 2000 subscribers, an investment which it is estimated constituted at least a fifth of Scotland’s then cash wealth. If the expedition was a success everyone would get their money back and make large profits. Trebles all round. Alas, the possibility of failure does not seem to have been contemplated.

  As the historian William Ferguson3 wrote of the Darien Scheme: ‘In theory this was a brilliant idea, which if realised would have generated a great trade, cutting out as it would the long stormy voyage around Cape Horn.’ Indeed, in 1914 the Americans opened the Panama Canal, vindicating Paterson’s original vision. If the theory sounded good, in practice Darien turned into a disaster for the Scots as a dream of national rebirth became a pestilent nightmare. From Leith, five ships left on the initial expedition on 14 July 1698, with as many as 1200 settlers on board, including Paterson. He played only a limited role in the mission after being removed from the management of the Company of Scotland. There had been a scandal when a colleague he had brought into the company was found to have embezzled funds entrusted to him for investment in London.

  The eager settlers had been persuaded, by pamphleteers and publicity, that Darien was an undeveloped paradise which would easily generate riches. It does not seem to have occurred to Paterson or his colleagues that while the Spanish had colonised parts of the neighbouring areas they had long since abandoned any effort to settle in Darien. The land was now christened Caledonia and a main settlement was built called ‘New Edinburgh’, where tropical diseases started to kill off the settlers. Exacerbating an already difficult situation, there was little trade to be done, with King William’s representatives warning English merchants to stay away for fear of riling the Spanish. A further expedition set off with another 1300 settlers on board, even though the tattered remnants of the first expedition were already heading home via New York. The second wave of Scottish arrivals initially defeated Spanish forces on land and were then blockaded by the much stronger Spanish fleet. The stragglers agreed to leave, capitulating on 31 March 1700 and abandoning Darien forever the following month.

  A miserable postscript followed when the Company of Scotland sent two ships – the inappropriately named Speedy Return and the Content – out to the Indian Ocean so that they might carry out some more conventional trading on the west coast of Africa in the hope of making up some of the huge losses from the failure of Darien. Both ships were taken by pirates, and ended up burned.

  Back in Scotland the impact of these events on national morale and economic confidence was absolutely shattering. Of fourteen ships commissioned by the Company, eleven were lost. As many as two thousand settlers and crew had lost their lives and there was initially little compensation for the many who had invested. English obstructionism was blamed, because the king had not backed the venture and had refused to organise a rescue mission when it became clear that the settlers were under attack by the Spanish. In truth, blaming the English seems like a convenient excuse. The Scottish failure was as much a result of poor planning, inept leadership and an unnecessarily rapid expansion rooted in patriotic fervour and blind optimism about the prospects.

  Of course Darien was not the sole cause of the full Union with England that followed a few years later. At the same time the English government had become concerned that Jacobite Scots loyal to the Stuart line, which had been removed and replaced by the Protestant King William III, might rise up and seek to restore the old king with the support of the Catholic French. The English did not want a hostile power to the north, so the Whigs – the architects of the post-Stuart settlement who had set about dominating national affairs – looked for a way to subdue Scotland. The economic distress caused by Darien also suggested that perhaps Scotland could no longer afford to go it alone. If the Scots wanted to improve their economic prospects and stand any chance of extending their trading into the exciting New World, then they would surely be better doing it in partnership with the English, rather than relying on their own pitiful navy. It had only a handful of ships. After negotiations, and despite considerable public opposition, involving rioting in several towns, the Treaty of Union between England and Scotland came into effect on 1 May 1707. Britain was born.

  Justifiably the Scots wanted compensation, because now they would have to contribute to funding England’s national debt. A sum of £398,085 10s, known as ‘the Equivalent’ was agreed, and crucially a large slice of the compensation fund was also to be used to assist those who had invested in Darien and lost money in the defunct Company of Scotland. Commissioners were appointed in 1707 to handle these payments, although the process descended into years of bitter squabbling and it was only in 1719 that the Westminster Parliament in London finally made proper arrangements to pay all those who held certificates. Two separate societies were formed, one in London and one in Edinburgh, to protect the interests of those due money.4 William Paterson, who had understandably moved back south after the abject failure of his Panamanian scheme, was one of the directors in London. The mastermind behind the Bank of England and Darien died in Westminster in 1719.

  While a stream of income from the Equivalent was all very well, eventually the directors wanted more. They began to issue loans and with the establishment of the Equivalent Company in 1724 they looked to move formally into banking. Their overtures for a merger with the old Bank of Scotland having been rejected, on 31 May 1727 the Equivalent Company was instead allowed by the government in London to establish a brand-new bank. This was the Royal Bank of Scotland. The failure of Darien and the Act of Union had sown the seeds.

  The Royal Bank opened for business with only eight staff in 1
727, from a house in Ship Close on the north side of Edinburgh High Street, in premises which the directors rented for the sum of £65 a quarter on a three-year lease.5 Refurbishment was undertaken and a vault built where the ‘strong boxes’ were placed. Individual loans were not to exceed £5000, and the directors had to adjudicate on all loans requested above £800. The Royal Bank’s total authorised capital was just £111,347.

  The prime mover in this new enterprise in 1727 was an Eton-educated aristocratic schemer who was fast becoming the central figure of the age in Scotland. Archibald Campbell was the Earl of Ilay and later 3rd Duke of Argyll after the death of his elder brother. His portrait, as the bewigged first Governor of the Royal Bank, still appears on RBS banknotes. Hugely ambitious and commercially minded, Ilay was an adept political climber and the natural figurehead for a new financial enterprise. Ilay not only ran the Royal Bank, he also ran the country and was dubbed ‘King of Scotland’. In the decades immediately after the Union, Scotland remained a wild place that was extremely difficult for London to govern. Ilay offered to administer it in return for influence over patronage and public and judicial appointments north of the border. Shortly before becoming the first Governor of the Royal Bank, Ilay had been appointed Minister without Portfolio responsible for Scotland by Sir Robert Walpole, the Whig statesman regarded as the first holder of the office of Prime Minister. In addition Ilay was also Keeper of the Privy Seal and Lord Register of Scotland, appointments which meant he embodied Whig power in Scotland.

  Scotland was logistically nightmarish to tame. In the early 1700s, as much as half of the population lived in the Highlands within the hierarchical clan structure, in rural communities rooted in hand-to-mouth agriculture. Support for the Jacobites was strong among various Highland clans and there was an entirely justified fear in London of plots and a Jacobite invasion of England. Indeed, in 1715, James Francis Edward Stuart, known as the ‘Old Pretender’, had tried to take back his deposed father’s crown by instigating a rising both north and south of the border. Ilay’s brother, the 2nd Duke of Argyll, played a central role in putting down that rebellion.

  The politics of insurgency and loyalty to the Crown mattered a great deal to a new bank established in Edinburgh in the 1720s, mainly because the old Bank of Scotland was deeply distrusted by the Whig establishment in London. Correctly, it was suspected of Jacobite sympathies, as some of its officers had close links with the rebels. In contrast, the Royal Bank would be the Whig bank, an instrument in Scotland of the then newly formed British elite with its directorate and customers drawn from the ranks of Edinburgh lawyers, judges, landlords and crown officials.

  The Scottish capital of the 1720s and 1730s in which these men lived was much less than half the city of today. Edinburgh was then restricted largely to what is now known as the ‘Old Town’, where tourists go to see the Castle perched atop volcanic rock, and to walk down the Royal Mile at the time of the arts jamboree that is the Edinburgh Festival. In the early eighteenth century the famous New Town, with its exquisite Georgian architecture and neatly laid out streets, had yet to be built. Edinburgh, or ‘Auld Reekie’, was the Old Town, a maze of ancient alleys, or ‘closes’, and tall tenement buildings bedevilled by poor sanitation. However, these unpromising surroundings were soon to be the focus of great energy and intellectual excitement, when the Scottish Enlightenment took hold in the city’s university and taverns. Improvement – be it educational, agricultural, scientific or financial – became the new obsession of the elite and the emerging middle class. These were the Royal Bank’s customers.

  The Bank of Scotland hated its younger rival and the ill feeling was reciprocated. Both institutions now spent decades trying to put their rival out of business in a banking war. This was waged by securing substantial amounts of the other’s notes, ‘promissory notes’, and suddenly presenting them and demanding ‘specie’, hard currency or coins, in return. The idea was to drain the rival of funds, or to demand more than could be produced by the other bank so that it would disrupt their activities. The banking both provided was pretty basic; it involved taking deposits and lending it out in sensible quantities to those it thought would pay it back (an approach that some of today’s bankers might usefully revisit). In the mid-eighteenth century there was no network of branches, just offices in Edinburgh’s Old Town and eventually agents in other parts of the country who agreed to represent the bank. Formal branches would come later, another of the innovations stemming from the so-called ‘Scotch’ system of banking which was later copied widely. From the start the Royal Bank was innovative. It even has a good claim to have invented the modern British overdraft. In 1728 customers were offered the chance to go overdrawn if they could show good faith and undertake to return their accounts to credit later. The Royal Bank was growing, extending lending and demonstrating that the monopoly enjoyed by its rival, the Bank of Scotland, had needed challenging.

  War threatened to disrupt this progress. The outbreak of the final Jacobite rebellion in 1745 was an extremely dangerous moment for a bank favoured by the ruling Whigs in London, especially if the rebels were going to occupy Edinburgh. Bonnie Prince Charlie, Charles Edward Stuart, arrived from France aiming to raise an army from the clans still loyal to his cause. He landed on the west coast of Scotland in August 1745, with only a handful of men and little in the way of funds. He hoped to persuade his allies in France to join the fight if he took Edinburgh and then launched an invasion of England.

  In one of those quirks of history that proves that Scotland is a village, the ancestor of one of Fred Goodwin’s most senior lieutenants was pivotal in the rising. Johnny Cameron, head of RBS’s investment bank arm at the time of the financial crisis of 2008, is a senior figure in Clan Cameron, whose leader is traditionally known as Cameron of Lochiel. Today, Johnny Cameron’s brother has the title and the ancestral lands in the western Highlands. In 1745, the Jacobite Donald Cameron, ‘the Gentle Lochiel’, ran the show. In the hierarchical old Highlands, the clan chief could command the men on his land to follow him into battle, and without Cameron there would have been no 1745 uprising. Prince Charles was struggling to recruit an army and when he ‘raised his standard’ at Glenfinnan, in Inverness-shire, it looked as though hardly anyone would turn up. His rising might have been over before it had begun. And then, around the corner of the Glen, came Lochiel and the Camerons.

  As several thousand Jacobite rebels arrived in Edinburgh in mid-September, the leaders badly needed money to pay their troops and buy supplies.6 For the increasingly nervous directors of the Whig-backed Royal Bank of Scotland this posed a problem. Would they comply if the Prince asked them for funds by producing Royal Bank notes and demanding coins in return? The directors moved the bank’s cash, and gold reserves, into a vault in the safety of the government-controlled Edinburgh Castle, and waited. Just a month after landing, Prince Charlie had control of Scotland and Cameron of Lochiel was made Governor of the capital. He deployed guards on the approach to the castle, an impregnable stronghold from which the well-armed Hanoverian garrison held out, taking potshots at the Jacobites who held the City below.

  The small group of Royal Bank directors who remained in the Old Town to look after the bank’s affairs did not have all that long to wait for the knock on the door. A Jacobite returned from Glasgow with coins and notes for the war effort. Of £5500, £857 of it was in Royal Bank notes. On 1 October 1745, an emissary of the Prince gave the Royal Bank directors forty-eight hours to redeem the notes in coins. If they failed to cooperate, ‘the effects and estates of the directors and managers should be distress’d for the same’. In other words, if the bankers did not hand over the coins, the Prince’s men would take an equivalent sum by raiding the homes of those who ran the Royal Bank. Here, the bank was blessed to have John Campbell in charge. From relatively humble beginnings, ‘John of the Bank’ had joined as one of the first employees in 1727 and risen to the position of cashier, equivalent to general manager or chief executive.7

  Approac
hed by the Prince’s emissaries, Campbell initially played for time, explaining that it was difficult because he could not gain access to the Castle. The Jacobite leaders grew restless and the Prince’s demands on the Royal Bank rose to upwards of £3000. Campbell would have to get inside the Castle to retrieve what the Prince’s men wanted, without the commander of the government’s garrison realising he was aiding the rebels. Campbell met Cameron of Lochiel in a tavern, Mrs Clerks, and over drinks they made arrangements. In this way, the ancestor of Johnny Cameron – investment banker and a pivotal figure in Goodwin’s RBS – arranged safe passage for John Campbell through the Old Town on the way to the Castle at 9 a.m. Carrying a white flag, Campbell and his colleagues went to get the Prince’s coins.

  A meeting with the generals in command of the castle followed, at which Campbell explained vaguely that the Royal Bank needed access to the vaults to conduct essential business. They were permitted to enter. Campbell and several colleagues then spent six hours collecting the coins for Prince Charles and destroying piles of unissued banknotes so that they would not fall into the hands of the Jacobites later. All this happened against a backdrop of exchanges of fire between the Jacobites in the town down below and the government forces in the castle. On finishing their work, Campbell and his colleagues left the castle, passing back through Cameron of Lochiel’s guard and handing over the coins to the Prince’s waiting representative. It was a murky episode. The Bank of Scotland – with its Jacobite sympathies – had gone unmolested by the rebels whilst the Royal Bank had been pressurised by Bonnie Prince Charlie’s forces. Of course, John Campbell and his colleagues could have refused to help. Instead, they deceived the government’s generals in the Castle and provided the Jacobite leaders with some of the coin they needed for the attempted invasion of England that followed.