Overdraft authorisation, 1728

This book, the first volume of directors’ minutes of the Royal Bank of Scotland, records how in May 1728 Edinburgh merchant William Hog and his bank came up with a new way to stabilise his working capital, by agreeing in advance that whenever he needed to do so, Hog could temporarily take more money from his account than he held in it. William Hog thus became the world’s first recipient of a cash credit, the forerunner of the modern overdraft.

Like many merchants, both before him and since, Hog found that he had a problem; his business finances were made up of payments received and payments made, but these two sides of the deal did not always happen in the most convenient order. Often, he would be required to pay bills before his own bills had been paid, leaving him out of pocket.

'one of the most ingenious ideas that has been executed in commerce'

In 1728, the Royal Bank of Scotland was uniquely well-placed to begin offering this new facility. Unlike its older rival Bank of Scotland, it was only a year old, and therefore held in its coffers large quantities of shareholder money that it had not yet had a chance to invest. Cash credits were a good way to get that money out into the community, helping customers while earning interest for the bank.

The new service was helpful for existing businessmen, but indispensable for those wishing to start up new enterprises. Conventional loans had to be backed by some kind of security, but the new cash credits required only the bond of the applicant and two or more men who were prepared to vouch for him. In the small business community of 1720s Edinburgh, it was easy enough for the bank to know who it was dealing with, and the risk of the applicant and his guarantors all letting down the bank was fairly small.

Many new businesses came into being thanks to the cash credit. Their success in turn made a huge contribution to the economic growth of Edinburgh and the whole of Scotland. Even the philosopher David Hume (1711-76), who was in general no fan of banking, appreciated the benefits the cash credit had brought to Scotland, describing it as 'one of the most ingenious ideas that has been executed in commerce'.

There was more at stake than just the economic development of Scotland. By the later years of the 18th century, a revolution was coming; the Industrial Revolution. Scotland was to be one of this transformational period’s most important hotspots, and the nation’s fitness for this role was due in no small part to its advanced facilities for financing new enterprise.