Merryn's Blog

The bank born from a bribe

RBS was set up with money paid to persuade Scotland to enter a union with England after its Central American empire-building scheme failed.

I spent the very early hours of yesterday morning broadcasting from Edinburgh's tram depot* with Five Live's Wake Up To Money (you can listen to the programme here).

We talked about the size of Scotland's banking sector (12 times the Scottish economy) and the dangers that brings (Iceland's was under nine times before the crisis). We talked about the brilliance of the fund management sector up here (managing around £600bn and rising) and about what might happen to it if there is a yes' vote.

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I even managed to get in a snippet about how the money made from exporting jute for sandbags to be used in the American Civil War was the foundation for Scotland's fabulous investment trust business (it's all about Dundee).

But there was another little piece of history I was desperate to share with my audience, but never quite got in. It is that the Royal Bank of Scotland was founded with part of the money paid to Scotland's aristocrats and merchants in order to get the Acts of Union through in 1706 and 1707.

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In the 1690s, Scotland invested heavily in an attempt to become a trading nation by setting up a new colony in Panama (around a fifth of the wealth in Scotland went into the effort). It was a total disaster.

It was badly planned, and devastated by disease and death, but it also trod on the toes of the Spanish who had already claimed the land and eventually laid siege to the suffering settlement in 1699.

The project was abandoned, something that left pretty much everyone in Scotland who had once had any spare capital (from the aristocracy to small merchants) all but ruined.The best book on what happened next is The Price of Scotland by Douglas Watt.

In a nutshell, Scotland's elites appear to have decided that their best chance of getting some money back and of living in an economy with less precarious wealth-creating plans than sailing to Panama and hoping for the best was to join with England and its growing empire. The result was the Union and the payment of the Equivalent'.

The latter was technically a payment made to Scotland to compensate its taxpayers for taking on some of the servicing of English debt, but it was really an incentive scheme (or bribe) to encourage once-rich Scots to support the union some 58.6% of the money (which totalled £398,000 at the time) was paid out to shareholders and creditors of the Company of Scotland, the original vehicle for the Darien Scheme (or Darien Disaster).

Now to the even more interesting bit. Some of those compensated investors set up the Society of the Subscribed Equivalent Debt, later the Equivalent Company, to protect the cash.

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That company decided to move into banking. It was chartered in 1727 and £110,000 of the capital was used to create the Royal Bank of Scotland.

So there you have it. RBS, the bank that ended up being bailed out to the tune of £46bn by Britain, was founded on the capital the English paid to the Scots to bribe them into union in the wake of a previous great financial crisis. How's that for rhyming history?

* If you want to know what £500m-odd of spending looks like from the inside, I put a photo on Twitter.

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